UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2010
Commission file number
000-28539
DRI CORPORATION
(Exact name of Registrant as
specified in its Charter)
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North Carolina
(State or other jurisdiction
of
incorporation or organization)
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56-1362926
(I.R.S. Employer
Identification Number)
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13760
Noel Road, Suite 830
Dallas, Texas 75240
(Address
of principal executive offices, Zip Code)
Registrants telephone number, including area code:
(214) 378-8992
Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, $0.10 Par Value
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The NASDAQ Capital
Market®
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Exchange Act of 1934:
Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act:
Yes o No þ
Indicate by check mark whether the Registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days:
Yes þ No o
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or such shorter period that the Registrant was
required to submit and post such files.)
Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
Yes o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act):
Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of
June 30, 2010 was approximately $18,769,005.
Indicate the number of shares outstanding of the
Registrants Common Stock as of March 31, 2011:
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Common Stock, par value $0.10 per share
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11,858,270
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(Class of Common Stock)
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Number of Shares
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DOCUMENTS
INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from
the Registrants definitive proxy statement, which will be
filed on or before April 30, 2011, for the Annual Meeting
of Shareholders to be held on or before June 17, 2011.
FORWARD-LOOKING
STATEMENTS
Forward-looking statements appear throughout this
Annual Report. We have based these forward-looking statements
upon our current expectations and projections about future
events. It is important to note our actual results could differ
materially from those contemplated in our forward-looking
statements as a result of various factors, including those
described in Item 1A Risk Factors as well as
all other cautionary language in this Annual Report. Readers
should be aware that the occurrence of the events described in
these considerations and elsewhere in this Annual Report could
have an adverse effect on the business, results of operations or
financial condition of the entity affected.
Forward-looking statements in this Annual Report may include,
without limitation, the following:
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Statements regarding our ability to meet our capital
requirements;
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Statements regarding our ability to meet and maintain our
existing debt obligations, including obligations to make
payments under such debt instruments;
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Statements regarding our future cash flow position;
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Statements regarding our ability to obtain lender financing
sufficient to meet our working capital requirements;
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Statements about our efforts to manage and effect certain cost
reductions;
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Statements regarding the timing or amount of future revenues;
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Statements regarding product sales in future periods;
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Statements regarding the effectiveness of any of
managements strategic objectives or initiatives or the
implications thereof on our shareholders, creditors, or other
constituencies;
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Statements regarding expected results;
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Statements regarding current trends and indicators;
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Statements regarding our ability to comply with Section 404
of the Sarbanes-Oxley Act of 2002;
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Statements regarding recent legislative action affecting the
transportation
and/or
security industry, including, without limitation, the Safe,
Accountable, Flexible, Efficient, Transportation Equity
Act A Legacy for Users, and any successor
legislation, and the American Recovery and Reinvestment Act of
2009 and their impact on the Companys results of
operations;
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Statements regarding changes in federal or state funding for
transportation
and/or
security-related funding;
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Statements regarding current conditions in the global capital
markets and the global economy and their impact on the
Companys results of operation;
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Statements regarding anticipated advancements in technology
related to our products and services;
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Statements regarding future product and service offerings;
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Statements regarding the success of product and service
introductions;
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Statements regarding the ability to include additional security
features to existing products and services;
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Statements regarding the potential positive effect such
additional security features may have on revenues;
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Statements regarding the expected contribution of sales of new
and modified security related products to our profitability;
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Statements regarding future events or expectations including the
expected timing of order deliveries;
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Statements regarding the expected customer acceptance of
products;
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Statements regarding the success of special alliances with
various product partners;
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Statements regarding the availability of alternate suppliers of
the component parts required to manufacture our products;
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Statements regarding our intellectual property rights and our
efforts to protect and defend such rights; and
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Statements that contain words like believe,
anticipate, expect and similar
expressions that are used to identify forward-looking statements.
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Readers should be aware that all of our forward-looking
statements are subject to a number of risks, assumptions and
uncertainties, such as but not limited to, (and in no particular
order):
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Risks that we may not be able to meet our capital requirements;
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Risks that we may not be able to meet and maintain our debt
obligations, including obligations to make payments under such
debt instruments;
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Risks regarding our future cash flow position;
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Risks that we may be unable to obtain lender financing
sufficient to meet our working capital requirements;
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Risks that we may not be able to effect desired and planned
reductions in certain costs;
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Risks that managements strategic objectives or initiatives
may not be effective;
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Risks that assumptions behind future revenue timing or amounts
may not prove accurate over time;
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Risks that current trends and indicators may not be indicative
of future results;
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Risks that we may lose customers or that customer demand for our
products and services may decline;
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Risks that there will be reductions in federal
and/or state
funding for the transportation
and/or
security industry;
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Risks that current legislative action affecting the
transportation
and/or
security industry may not have a favorable impact on the
Companys results of operations;
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Risks that future technological advances may not occur when
anticipated or that future technological advances will make our
current product and service offerings obsolete;
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Risks that potential benefits our security products may have for
our customers do not materialize;
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Risks that we will be unable to meet expected timing of order
deliveries;
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Risks that product and service offerings may not be accepted by
our customers;
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Risks that product and service introductions may not produce
desired revenue results;
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Risks regarding the uncertainties surrounding our anticipated
success of special alliances with various product partners;
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Risks that we may be unable to address and remediate any
deficiencies in our internal controls over financial reporting
and/or our
disclosure controls;
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Risks that insufficient internal controls over financial
reporting may cause us to fail to meet our reporting
obligations, result in material misstatements in our financial
statements, and negatively affect investor confidence;
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Risks that our efforts to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 could fail to be successful;
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Risks that we may be unable to obtain alternate suppliers of our
component parts if our current suppliers are no longer available
or cannot meet our future needs for such parts; and
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Risks that our efforts to protect and defend our intellectual
property rights will not be sufficient.
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This list is only an example of the risks that may affect the
forward-looking statements. If any of these risks or
uncertainties materialize (or if they fail to materialize), or
if the underlying assumptions are incorrect, then actual results
may differ materially from those projected in the
forward-looking statements.
Additional factors that could cause actual results to differ
materially from those reflected in the forward-looking
statements include, without limitation, those discussed
elsewhere in this Annual Report. Readers are cautioned not to
place undue reliance upon these forward-looking statements,
which reflect our analysis, judgment, belief or expectation only
as of the date of this Annual Report. We undertake no obligation
to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date of this Annual
Report.
WHERE YOU
MAY FIND ADDITIONAL INFORMATION
We make publicly available free of charge on our internet
website (www.digrec.com) our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act), as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission (the SEC). Information contained on our
website is not a part of this Annual Report.
You may read and copy any materials we file with the SEC at the
SECs Public Reference Room, 100 F Street, NE,
Washington, D.C.
20549-0102.
You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the Securities and Exchange Commission.
4
PART I
General
In this Annual Report on
Form 10-K,
we refer to DRI Corporation as DRI, the
Company, us, we and
our. DRI was incorporated in March 1983 as Digital
Recorders, Inc. and became a public company through an initial
public offering in November 1994. In June 2007, our shareholders
approved changing the Companys name to DRI Corporation.
DRIs common stock, $0.10 par value per share
(Common Stock), trades on the NASDAQ Capital
Market®
under the symbol TBUS.
Prior to 2007, DRI had historically operated within two major
business segments: (1) the transportation communications
segment and (2) the law enforcement and surveillance
segment. In April 2007, the Companys Digital Audio
Corporation subsidiary, which comprised all of the operations of
the law enforcement and surveillance segment, was divested.
Accordingly, the Company currently operates within one major
business segment.
Through its business units and wholly-owned subsidiaries, DRI
designs, manufactures, sells, and services information
technology products either directly or through
manufacturers representatives or distributors. DRI
produces passenger information communication products under the
Talking
Bus®,
TwinVision®,
VacTelltm
and
Mobitec®
brand names, which are sold to transportation vehicle equipment
customers worldwide. The Talking
Bus®,
VacTelltm
and
TwinVision®
brands are sold by our business units in the United States
(U.S.) primarily to the U.S and Canadian markets.
Net sales by our U.S. business units represent 38% of total
net sales split 94% in the U.S. market and 6% in the
Canadian market. Long-lived assets within the U.S. include
50% of all long-lived assets and are all owned by our
U.S. businesses. The
Mobitec®
brand, which represents 62% of total net sales, is sold in the
Nordic market in Sweden, Norway, Denmark, and Finland, in
several countries in the European market including Germany,
France, Poland, United Kingdom, Spain, and Hungary, in the South
American market, primarily in Brazil, and in the Asia-Pacific
and Middle-East markets. Long-lived assets within the Nordic
market include 32% of all long-lived assets and are all owned by
our subsidiaries in Europe. All other long-lived assets within
the remaining markets account for approximately 18% of the total
long-lived assets. See the accompanying consolidated financial
statements and notes to consolidated financial statements for
geographical information regarding the Companys sales and
long-lived assets.
DRIs customers generally fall into one of two broad
categories: end-user customers or original equipment
manufacturers (OEM). DRIs end-user customers
include municipalities; regional transportation districts;
state, and local departments of transportation; transit
agencies; public, private, or commercial operators of bus and
van vehicles; and rental car agencies. DRIs OEM customers
are the manufacturers of transportation rail, bus and van
vehicles. The relative percentage of sales to end-user customers
compared to OEM customers varies widely and frequently from
quarter-to-quarter
and
year-to-year,
and within products and product lines comprising DRIs mix
of total sales in any given period.
U.S.
Operations
Our current
U.S.-based
operations serve markets primarily in the U.S. and Canada
and are comprised of the following subsidiaries:
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Digital Recorders, Inc. (DR), based in the Research
Triangle Park area of North Carolina, was established in
September 1983. DR operated as a business unit of the Company
under the name Digital Recorders until August 2007,
at which time it was incorporated as a wholly-owned subsidiary
of the Company. DRs primary products include: Global
Positioning Satellite (GPS) tracking; automatic
vehicle location (AVL) systems;
VacTelltm
video surveillance security systems; automatic vehicle
monitoring (AVM) systems; and Talking
Bus®
automatic voice announcement systems, and OTvia off board
passenger information systems. DRs customers include
transit operating agencies, commercial transportation vehicle
operators, and manufacturers of those vehicles primarily in the
U.S. and Canada.
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TwinVision of North America, Inc. (TVna), a
wholly-owned subsidiary of DRI based in the Research Triangle
Park area of North Carolina, was established in May 1996. TVna
designs, manufactures, sells, and services electronic
destination sign systems used on transit and transportation
rail, bus and van vehicles. TVnas customers include
transit operating agencies, commercial transportation vehicle
operators, and manufacturers of those vehicles primarily in the
U.S. and Canada.
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Robinson Turney International, Inc. (RTI), a
wholly-owned subsidiary of DRI based in Dallas, Texas, was
established in August 1994 and acquired by DRI in July 1998.
With the acquisition of RTI, DRI also acquired
TwinVision®
business development and marketing capabilities, as well as an
exclusive license to Lite Vision Corporations display
technology, which at the time was the primary display technology
in use. RTI was a marketing consulting and business development
firm devoted to the public transit industrys needs,
primarily those of European-based businesses. RTI presently
generates no revenue.
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International
Operations
Our current international operations serve markets in Europe,
the Far East, the Middle East, South America, Australia,
Asia-Pacific and generally all addressed markets throughout the
world outside the U.S. and Canada. Our current
international operations are comprised of the following
subsidiaries:
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DRI-Europa AB, based in Göteborg, Sweden, is a wholly-owned
subsidiary of DRI that serves as the umbrella organizational
structure for DRIs international operations.
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Mobitec GmbH, based in Ettlingen, Germany, is a wholly-owned
subsidiary of DRI-Europa AB. Mobitec GmbH primarily sells and
services
Mobitec®
products. Mobitec GmbHs customers include transit
operating agencies, commercial transportation vehicle operators,
and the manufacturers of those vehicles in select markets in
Europe, Asia-Pacific, and the Middle-East.
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Mobitec AB is a wholly-owned subsidiary of DRI-Europa AB based
in Herrljunga, Sweden. Based upon our internal market share
calculations, we believe Mobitec AB holds the largest market
share of electronic destination sign systems in the Nordic
markets. In addition to serving the Nordic markets, Mobitec AB
also has sales and service offices in Germany, operated by
Mobitec GmbH, and Australia, operated by its wholly-owned
subsidiary Mobitec Pty Ltd. Mobitec ABs customers include
transit operating agencies, commercial transportation vehicle
operators, and the manufacturers of those vehicles in the Nordic
and other select European markets.
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Mobitec Pty Ltd (Mobitec Pty) is a wholly-owned
subsidiary of Mobitec AB based in Peakhurst NSW, Australia.
Mobitec Pty Ltd imports and sells complete
Mobitec®
electronic destination sign systems primarily within the
Australian market. Based upon our internal market share
calculations, we believe Mobitec Pty Ltd holds a majority market
share in the Australian market.
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Mobitec Empreendimientos e Participações Ltda.
(Mobitec EP), based in São Paulo, Brazil, was
established in May 2009 as a holding company to facilitate the
July 2009 acquisition of the remaining 50% ownership interest of
Mobitec Brazil Ltda then not owned by the Company. Mobitec EP
was originally established as a wholly-owned subsidiary of
Mobitec AB. To meet Brazilian legal requirements of at least two
shareholders in a limited liability company, in June 2009, 1% of
the ownership interest of Mobitec EP was transferred from
Mobitec AB to Mobitec GmbH. Mobitec EP presently generates no
revenue.
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Mobitec Brazil Ltda. (Mobitec Brazil), based in
Caxias do Sul, Brazil, is engaged in manufacturing, selling and
servicing electronic destination sign systems to OEMs and
some end-user customers and operating authority customers,
primarily in South America. Its products are also shipped
throughout Mexico and the Caribbean. Through May 2009, Mobitec
Brazil was a 50%-owned subsidiary of Mobitec AB. In June 2009,
to facilitate the acquisition of the remaining 50% ownership
interest of Mobitec Brazil then not owned by the Company,
Mobitec AB transferred its 50% ownership interest in
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Mobitec Brazil to Mobitec EP. In July 2009, Mobitec EP acquired
the remaining 50% interest of Mobitec Brazil that was then not
owned by the Company. As a result of the acquisition, which is
more fully described in Note 2 to the accompanying
consolidated financial statements, Mobitec Brazil became a
wholly-owned subsidiary of Mobitec EP. To meet Brazilian legal
requirements of at least two shareholders in a limited liability
company, on January 1, 2010, 1% of the ownership interest
of Mobitec Brazil was transferred from Mobitec EP to Mobitec
GmbH.
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Castmaster Mobitec India Private Limited (Castmaster
Mobitec), which began operations in the fourth quarter of
2007, is a joint venture between Mobitec AB and Castmaster
Enterprises Private Limited, a company incorporated in India.
Mobitec AB owns 51% of Castmaster Mobitec, which is based in
Delhi, India. Castmaster Mobitec has exclusive rights to
produce, sell and service
Mobitec®
destination sign systems in India and selected markets in that
region.
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Mobitec Far East Pte. Ltd. (Mobitec Far East), based
in Singapore, was established in October 2009 as a wholly-owned
subsidiary of DRI to more efficiently facilitate sales and
service of
Mobitec®
products in select Asia-Pacific markets, primarily Singapore.
Mobitec Far East currently has no operations and currently
generates no revenue.
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Divestiture
of Digital Audio Corporation
On April 30, 2007 (the Closing Date), the
Company and its wholly-owned subsidiary Digital Audio
Corporation (DAC) entered into a Share Purchase
Agreement with Dolphin Direct Equity Partners, LP
(Dolphin), a Delaware limited partnership, pursuant
to which Dolphin acquired all of DACs issued and
outstanding shares of common stock. DAC comprised all of the
operations of the law enforcement and surveillance segment
reported by the Company prior to divestiture. Accordingly, the
Companys continuing operations consist of only one
operating segment, the transportation communications segment.
Mobitec
Brazil Acquisition
Pursuant to terms of a Quota Purchase Agreement entered into on
July 22, 2009 and amended September 17, 2009, Mobitec
EP acquired the remaining fifty percent (50%) of the issued and
outstanding equity interests of Mobitec Brazil for an aggregate
consideration of US$2.95 million. The acquisition by
Mobitec EP of the remaining fifty percent (50%) of the interests
of Mobitec Brazil was effective July 1, 2009, the date upon
which the Company assumed full control of the business. This
acquisition is more fully described in Note 2 to the
accompanying consolidated financial statements.
Industry
and Market Overview
The digital communications technology market in transit and
transportation applications, as served by DRI, developed because
of several factors. In the earliest stages, the digital
destination signs market developed due to the quest for lower
operating expenses and greater fleet flexibility. Later the
market was influenced by the Americans With Disabilities Act
(ADA), the Clean Air Act, the Intermodal Surface
Transportation Efficiency Act and prior, related or follow-on
legislation, intelligent transportation systems initiatives, as
well as the need to enhance fleet flexibility. The ADA initially
accelerated the trend toward systems for automatic next-stop
announcements by requiring that fixed-route transit systems
announce major stops and transfer points to assist visually
challenged passengers. However, a more fundamental and
longer-term impetus for the development of this market is the
need to provide improved information and services to operators
and riders of public and private transit and transportation
vehicles as well as to provide fleet efficiency, management and
security services. DRIs electronic information display
systems, automatic voice announcement and vehicle locating
systems provide transit systems customers with next stop,
transfer point, route and destination information, vehicle
location and operational condition information, and public
service announcements, as well as security-related functionality
in certain instances. On the U.S. public side of this
market, in addition to state, local, and regional grants,
fare-box income, and other locally-generated income,
transit operating authorities can normally apply to the
U.S. Federal Transit Administration for grants covering up
to approximately 80% of funding for certain equipment purchases
with the remainder of product acquisition
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funding being provided by state, regional and local sources.
Additionally, more recently, funds were allocated in the
American Recovery and Reinvestment Act of 2009 to assist transit
system operators in securing additional equipment such as that
which we supply. This funding was available at 100% of the
procured item contracted value. In the international markets,
funding comes from a variety of sources including federal,
local, and regional grants as well as local operating
fare-box income and other locally-generated income.
Privately funded users of DRIs transit communications
sector products include rental car shuttle vehicles and tourist
vehicle operators.
The Safe, Accountable, Flexible, Efficient, Transportation
Equity Act A Legacy for Users
(SAFETEA-LU) was the primary program funding at the
federal level through federal fiscal year 2009 in our
U.S. served market segment. SAFETEA-LU promoted the
development of modern, expanded, intermodal public transit
systems nationwide and also designated a wide range of tools,
services, and programs intended to increase the capacity of the
nations mobility systems. SAFETEA-LU guaranteed a record
level $52.6 billion in funding for public transportation
through federal fiscal year 2009. Additionally, economic
stimulus legislation under the American Recovery and
Reinvestment Act of 2009 (the ARRA) included
approximately $8.4 billion reserved for U.S. public
transportation infrastructure projects, of which approximately
$6.9 billion was authorized for use in our served market.
We believe funding under SAFETEA-LU and the ARRA have in the
past led to a favorable market for most of our products in the
U.S. segment of our served market.
SAFETEA-LU expired at September 30, 2009. Continuation of
the expired legislation has been made possible through specific
legislated extensions. Other legislative initiatives have led to
additional funding for the Highway Trust Fund,
a source for a substantial portion of funding to transit
projects under SAFETEA-LU in the Companys served
U.S. market. Additionally, appropriation legislation has
provided continuation of funding, in the previously-mentioned
short term mode and at the record high levels.
New authorizing legislation has been prepared by the
U.S. House Committee on Transportation &
Infrastructure, which released its proposal for the next surface
transportation authorization bill to replace SAFETEA-LU. The
proposal, A Blueprint for Investment and Reform,
recommends a $450 billion investment in surface
transportation programs over a six-year period, including
$99.8 billion for public transportation programs that, if
enacted, would approximate a 90 percent increase over
SAFETEA-LU funding levels. The bill recommends an additional
$50 billion to create a national high speed rail network.
Funding ways and means for the proposed legislation, or its
alternate as the case may be, must still be addressed and the
funding levels authorized are also under debate. However, in our
opinion, final passage of any form of new longer-term
legislation (up to six years as in the past) will not occur
until our fiscal year 2012 or later. Extensions of the expired
legislation are expected to be available until ways and means to
finance a new longer-term legislation can be determined.
Weaknesses in the economy at the local level further adversely
impact this situation. While funding at record high levels is
available under present continuation and extension legislation
and is expected to remain available through similar actions,
unless redirected under presently ongoing federal budget and
deficit debates, these funding and economic difficulties have
impacted our U.S. market. We believe that such overall
U.S. market funding difficulties may depress our market
opportunities and increase the likelihood of orders being
delayed or rescheduled until the U.S. economys
recovery is more apparent and a longer term funding legislation
is passed. Our management strategy to deal with this is twofold:
(1) carefully manage expenses and (2) increase our
focus on certain
sub-segments
of our domestic market which are less impacted by these
legislative uncertainties. The Companys senior management
is involved in U.S. initiatives to develop and pass new
legislation and extensions of the expired legislation through
active participation in the American Public Transportation
Association (APTA) and continues to closely monitor
this situation.
U.S. market federal funding issues described herein do not
impact the larger, international market which we serve. Further,
funding in various markets outside the U.S. is managed in
many different ways in the many different international markets
which we serve, and there is not a one pattern
approach like in the U.S. We continued to seek new
opportunities to expand our presence internationally, both in
currently served markets and in new markets around the globe,
particularly in the BRIC markets Brazil,
Russia, India, China which are frequently cited as
having growth opportunities despite the economic weaknesses
encountered around the globe. However, the well-publicized
unemployment, credit and economic issues experienced in our
other served markets outside the U.S., especially in Europe,
have had an adverse impact on the Company. Like
9
in the U.S., that impact, while widely varying from market to
market, is causing schedule disruptions, slow-down in
procurements, and instability in order flow as well as having an
overall depressing impact on order opportunities. Again, as was
noted herein related to the U.S. market, the depth and
duration of the overall weakness in many countries has now
impacted the Company. Actions to mitigate this impact are being
taken by the Company and include holding-down and managing
expenses and increasing our focus on certain
sub-segments
of our international market which are less impacted by the
economic weaknesses.
Notwithstanding the short-term market disruptions discussed
herein, we believe that long-term market drivers for the global
transit industry, which include traffic grid-lock, fuel prices,
environmental issues, economic issues and the need to provide
safe and secure mobility through viable mass transportation
systems, continue to suggest a favorable overall longer-term
market environment for DRI.
While as much as 80% of certain major capital expenditures in
the U.S. can be funded federally in most instances, federal
funding accounts for less than 20% of all funding in the
U.S. market. The remainder comes from a combination of
state, regional and local public funds and passenger
fare-box revenue as well as other locally-generated
income. However, even though federal funding is a relatively low
share of the total, its presence, absence or uncertainty, in our
opinion, has a larger impact on the market than the 20% might
imply. Funding for markets outside of the U.S. comes from a
variety of sources. These sources vary widely from
region-to-region
and from
period-to-period
but include combinations of local, regional, municipal, federal,
and private entities or funding mechanisms as well as funds
generated by collection of fares.
The automatic voice announcement systems market served by
DRIs DR subsidiary emerged primarily because of ADA
legislation. DR was among the pioneers to develop automatic
voice announcement technology including GPS tracking and
triggering of voice announcements. DRs Talking
Bus®
system met favorable acceptance in terms of concept, design, and
technology, and is ADA compliant. That regulatory-driven
acceptance has evolved and grown into a basic customer service
consideration. We believe that over 65% of all new bus vehicles
in North America contained automatic voice announcement systems
in recent years. We expect this percentage to increase over time
as automatic voice announcement systems reduce cost, decrease in
maintenance cost and complexity, integrate to deliver other
features and services, and become more distinctly perceived as a
form of customer service. To date, our DR subsidiary has had
minimal international sales. Management believes DR holds a
significant U.S. market share in stand-alone (as opposed to
similar functionality included in larger integrated information
system installations) automatic voice announcement systems.
Enhancement and expansion of the AVL and AVM capabilities of
DRs DR-600 Talking
Bus®
system has enabled DRI to expand the market it serves to include
fleet management (Engineered Systems) services for
operators and users of transit vehicle systems. An outcome of
this is the ability to provide more and better information to
the users of transit systems by placing real-time current
vehicle location information at passenger boarding locations and
vehicle operating efficiency and vehicle health information at
operational headquarters and other strategic locations.
Additionally, this capability is emerging as a form of security
risk mitigation for our customers. It is in this area of our
business that we form alliances with others in order to enhance
our market capability and access. Furthering security features
and security related transit products, DR sells
VacTelltm
video actionable intelligence video solutions, as partially made
possible through alignment with a supplier of such equipment,
which combines well-established Digital
Recorders®
on- and off-vehicle location and monitoring products with
advanced digital video recording and wireless communications
technologies to deliver the ability to enhance management of
security events.
The electronic destination sign system market served by our
U.S. and international operations is highly competitive.
Aside from the very significant growth that is driven by opening
new international market segments, growth of this business is
closely tied to overall market growth, increased market share,
or technological advances. We estimate that approximately 98% of
destination sign systems in the U.S. are electronic. The
percentage of buses with electronic destination sign systems
varies greatly among international markets, with some markets as
high as 98% and some markets as low as 5%. We estimate
approximately 50% of destination sign systems in our overall
international markets are electronic and believe this percentage
is trending upward. We believe that TVna holds a significant
market share in the U.S., while Mobitec AB holds
10
a majority market share in the Nordic market and Mobitec AB,
through subsidiaries, holds significant, and in some cases,
majority market share in most of its primary geographic served
markets world-wide.
Key
Competitors
Most of the markets in which we participate are highly
competitive and are subject to technological advances, as well
as evolving industry and regulatory standards. We believe the
principal competitive factors in all markets we serve include
ease of use, after-sales service and support, local presence and
support on a multi-national basis, price, the ability to
integrate products with other technologies, maintaining leading
edge technology, and responding to governmental regulation.
In DRIs electronic destination sign systems market,
management views Luminator and its sister company LLE of
Germany, as its principal competitor. Clever Devices Ltd. is the
most significant competitor in the domestic automatic voice
announcement systems market. In the engineered systems market,
management considers INIT GmbH, and the former TMS subsidiary of
Orbital Sciences, now owned by ACS (now a Xerox company), to be
DRIs most significant competitors. Numerous other
competitors exist, particularly in the international markets,
and most tend to serve discrete regions or territories rather
than the global market as served by DRI. Of the international
competitors, those comprising the majority of competitive market
shareholdings are LLE, Luminator, Hanover Displays, Gorba, INIT
and ACS. All of these except ACS, Luminator, and Hanover
Displays are based in Central Europe. Hanover Displays is based
in the United Kingdom with significant market share there,
as well as sales in selected regions of the continental European
market and minimal market share in the US. ACS and Luminator are
based in the U.S.
Products
and Product Design
DRIs current products include:
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DR600tm,
a vehicle logic unit for buses that provides automatic vehicle
monitoring, automatic vehicle location, and automatic vehicle
schedule adherence communication systems and programs, generally
including GPS triggering of product features;
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GPS tracking of vehicles;
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Talking
Bus®
next stop automatic voice announcement system and next stop
internal signage;
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A Software Suite that provides modules for customized transit
applications including computer-aided dispatch, automatic
vehicle location, vehicle monitoring, wireless data exchange,
and Central Recording Station;
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Transit Arrival Signs and software;
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Airport Shuttle Automatic Vehicle Location products and Arrival
Signs;
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Integration of and with vehicle
sub-systems
including destination signs, fare collection, automatic
passenger counters, engine controllers, transmission,
multiplexer, etc.;
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TwinVision®
all-LED (light-emitting diode) electronic destination sign
systems;
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TwinVision®
Chromatic Series color electronic destination sign systems;
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TwinVision®
Smart Series electronic destination sign systems;
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TwinVision®
Silver Smart Series electronic destination sign systems;
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ELYSÉ®
and Central Recording Station software;
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Mobitec®
electronic destination sign systems and electronic information
display systems; and
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VacTelltm video
surveillance, recording and actionable intelligence products.
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The Digital Recorders systems enable voice-announced transit
vehicle stops, GPS-based automatic vehicle location, automatic
vehicle monitoring, and other passenger information, such as
next stop, transfer point,
11
arrival, route and destination information, and public service
announcements. The vehicle locating and monitoring aspect of
this product further provides security-related capabilities.
These systems can be used in transit buses and vans, light rail
vehicles, trains, subway cars, people movers, monorails, airport
vehicles and tour buses, as well as other private and commercial
vehicles. Compliant with industry-recognized standards, the
system uses an open architecture, computer-based microprocessor
electronics system design including interoperability with
third-party equipment. The open architecture design permits
expansion to customer size requirements and integration with
other electronic systems. Wireless 802.11x data exchange is
available. This system, as well as all of DRIs products,
is designed to meet the severe operating demands of temperature,
humidity, shock, vibration, and other environmental conditions
found in typical transit applications.
DRIs electronic destination sign system products, which
are generally known by the
TwinVision®
and
Mobitec®
brand names, represent technologically advanced products
pioneered by our Mobitec GmbH, TVna, and Mobitec AB
subsidiaries. The product line includes various models covering
a vast majority of all popular applications. Where applicable,
these products adhere to ADA requirements and function under
industry-recognized standards. They each possess an open
architecture, microprocessor-based design. In 2000, TVna and
Mobitec GmbH introduced an all-LED, solid-state product. The
all-LED product dominates sales of destination sign systems in
North America and in the international markets, while prior
generation, mechanical flip-dot or
flip-dot/LED products, accounts for a declining
percentage of sales by DRIs international subsidiaries. As
the name implies, the all-LED product eliminates
moving parts, thereby delivering better readability and lowered
maintenance expenses, all while providing improved illumination
of the message.
In 2001, TVna and Mobitec GmbH introduced the
TwinVision®
Chromatic Series, including
TwinVision®
Chroma I and
TwinVision®
Chroma IV, which offered DRIs customers greater color
route identification flexibility and message display
options for electronic destination signage. These products
incorporate colorized route capabilities while retaining
electronic destination sign system message display advantages
for the color-vision impaired. In 2008, TVna introduced the
TwinVision®
All-LED Smart Series and
TwinVision®
Chromatic Smart Series. The Smart Series products feature a more
advanced processing system that has been integrated with the
Companys all-LED and Chromatic Series electronic
destination sign systems. In 2009, TVna introduced the Silver
Smart Series destination sign system which features
high-intensity sterling LEDs providing
significantly better and brighter image features. Utilizing
state-of-the-art
processors to monitor system health and solid-state LED devices
to provide extremely bright messages with wide-angle visibility
both day and night, these products help reduce fleet maintenance
costs and system diagnostic times, as well as deliver improved
message displays.
Message programming for all electronic destination sign system
products is accomplished via proprietary
ELYSÉ®
software developed by Mobitec GmbH and refined by TVna, or
similar companion software developed by Mobitec AB. Programming
is accomplished through such means as PCMCIA memory card
download, USB devices and certain wireless capabilities.
Under terms of a license agreement with the University of
Washington, DR uses certain technology developed by the
Intelligent Transportation Systems Research program at the
University under the names BusView and
MyBus. The technology, some of which we have
integrated with the Talking
Bus®
system, enables transit system users to access information about
the vehicle they wish to board, such as schedule data, via the
internet. This technology, combined with DRIs internal
developments, is helping extend DRs product offerings into
automatic vehicle location, fleet management, automatic vehicle
monitoring, and off-vehicle passenger information markets and
security. Under the license agreement with the University of
Washington, the Company pays royalties for use of the
technology. The royalties paid are not significant to the
Companys results of operations.
Marketing
and Sales Organization
DRIs products are marketed by in-house sales and marketing
personnel, commissioned independent sales representatives, and
by distributors or dealers in selected circumstances as
appropriate for each business unit and market segment. Marketing
and sales activities include database marketing; selective
advertising; direct
12
contact selling; publication of customer newsletters;
participation in trade shows and industry conventions; and
cooperative activities with systems integrators and alliance
partners on a selective basis.
Management regularly evaluates alternative methods of promoting
and marketing DRIs products and services. Web site and
internet-based marketing techniques currently serve to assist
marketing and sales efforts, but the custom-specification,
request-for-quote
nature of DRIs markets does not lend itself to full-scale,
internet-driven marketing and sales efforts.
Customers
We had one major customer (defined as those customers to which
we made sales greater than 10% of DRIs total sales) in
2010 and continue to generate a significant portion of our sales
from a relatively small number of key customers. In 2010, 2009
and 2008, our top five customers accounted for 35.1%, 36.0%, and
33.4%, respectively, of total annual sales. These key customers,
the composition of which may vary from year to year, are
primarily transit bus OEMs. We sell our products to a
limited set of customers and can experience concentration of
revenue with related risks. Loss of one or more of these key
customers could have an adverse material impact on the Company.
Seasonality
and Fluctuation in Results
DRIs sales are not generally seasonal in
nature. However, a significant portion of sales for each product
line is made, either directly or indirectly, to entities that
are either directly or indirectly government or publicly funded.
In addition, many sales to transit OEMs are themselves
related to sales by those manufacturers to government or
publicly funded entities. In general, due to project funding
availability considerations being somewhat tied to governmental
agencies in some instances, we may occasionally experience the
appearance of seasonality-like movement in revenue. In the U.S.,
the federal government and many state and local governments
operate on an October to September fiscal year. Several key
international government customers operate on an April to March
fiscal year. In addition, government related agencies
occasionally have a tendency to purchase infrequently and in
large quantities, creating uneven demand cycles throughout the
year. These cycles generate periods of relatively low order
activity as well as periods of intense order activity. This
fluctuation in ordering tends to make sales patterns uneven and
to make it difficult to forecast
quarter-to-quarter
and
year-to-year
results.
Sales to DRI customers are characterized by relatively larger
contracts and lengthy sales cycles that generally extend for a
period of two months to 24 months. The majority of revenue
from sales of the Companys products and services is
recognized upon physical shipment of products and completion of
the service, provided all accounting criteria for recognition
have been met. Sales and revenues for projects involving
multiple elements (i.e., products, services, installation and
other services) are recognized under specific accounting
criteria based on the products and services delivered to the
customer and the customers acceptance of such products and
services. Sales and revenues from more complex or time-spanning
projects within which there are multiple deliverables including
products, services, and software are recognized based upon the
facts and circumstances unique to each project. This generally
involves recognizing sales and revenue over the life of the
project based upon meeting specific delivery or performance
criteria. See discussion of DRIs revenue recognition
policies in Item 7 below.
DRIs sales tend to be made pursuant to larger contracts,
requiring deliveries over several months. Purchases by a
majority of DRIs customers are frequently dependent,
directly or indirectly, on federal, state, regional and local
funding. Manufacturers of transportation equipment, who, in
turn, sell to agencies or entities dependent on government
funding, are the principal customers for DRIs products.
Further, governmental-like purchasers generally are required to
make acquisitions through a public bidding process. The fact
that much of DRIs sales are derived from relatively large
contracts with a small number of customers can result in
fluctuations in DRIs sales and, thus, operating results,
from
quarter-to-quarter,
period-over-period
and
year-to-year.
13
Due to DRIs business dealings in foreign countries, the
Company may experience foreign currency transaction gains and
losses in relation to the changes in foreign currency rates,
which can result in variances from
quarter-to-quarter
and
year-to-year.
The Company does not engage in currency hedging at this time.
Backlog
DRIs backlog as of December 31, 2010 was
$14.8 million compared to $26.3 million as of
December 31, 2009, and $9.9 million as of December 31,
2008. Fluctuations in backlog can occur and generally are due
to: (1) timing of the receipt of orders; (2) order
cycle fluctuations arising from the factors described under the
heading Seasonality and Fluctuation in Results; and
(3) the extent of long-term orders in the marketplace. We
believe backlog is not a trend indicator for the Company due to
the fact that some of our larger customers depend on the Company
to monitor their production and anticipate when Company products
will be needed and then follow with a short lead time order. As
a result, customer purchase orders classified as
backlog may not materialize until relatively close
to the necessary delivery date. DRI currently anticipates that
it will deliver all, or substantially all, of the backlog as of
December 31, 2010 during fiscal year 2011.
Research
and Development
DRI is committed to the continued technological enhancement of
all its products and to the development or acquisition of
products having advanced technological features. However,
continued development of any individual product is dependent
upon product acceptance in the marketplace. DRIs objective
is to develop products that are considered high quality,
technologically advanced, cost competitive, and capable of
capturing a significant share of the addressable market. Product
development based upon advanced technologies is one of the
primary means by which management differentiates DRI from its
competitors.
Management anticipates that technological enhancements to the
Talking
Bus®
automatic voice announcement system, AVL products,
VacTelltm
video surveillance security products, and
TwinVision®
and
Mobitec®
electronic destination sign system products will continue in the
future. Such technological enhancements are designed to offer
new features to the market as well as to enhance DRIs
ability to integrate these products with other technologies,
reduce unit cost of production, capture market share and advance
the
state-of-the-art
technologies in DRIs ongoing efforts to improve profit
margins. The enhancements should increase available marketable
product features as well as aid in increasing market share,
product profit margins and market penetration. In addition to
enhancing existing products, DRI generally has new generations
of products under various stages of development or under
development refinement of U.S. products to make ready for
the international market.
Research and development activities continued in all product
areas during 2010. Research and development expenses were
$612,000 in 2010, $552,000 in 2009, and $974,000 in 2008. During
2010, as in prior years, salaries of certain engineering
personnel who were used in the development of software and other
related costs met the capitalization criteria of Accounting
Standards Codification (ASC) Topic
985-20,
Costs of Computer Software to be Sold, Leased or
Marketed. The total amount of personnel and other expense
capitalized in 2010 was $2.4 million as compared to
capitalization of $2.1 million and $1.5 million for
such costs for the years ended December 31, 2009 and 2008,
respectively. We believe the technological advances to our
products resulting from these capitalized development projects
will generate increased revenues for us in future periods. In
aggregate, research and development expenditures in 2010 were
$3.1 million as compared to aggregate expenditures of
$2.6 million and $2.5 million in 2009 and 2008,
respectively. This increase in aggregate research and
development expenditures is attributable to the Companys
continued efforts to pursue technological enhancements to
existing products and to develop new, technologically advanced
products that will meet our customers needs.
We believe technological advances are necessary to maintain and
improve product lines and, thus, market position. We expect to
continue to invest in research and development activities in
future periods. Due to our research and development spending, we
may experience fluctuations in operating results since costs may
be incurred in periods prior to the related or resulting sales.
Additionally, technological advances increase the
14
potential for existing products to become obsolete. The Company
takes technological advances into consideration when evaluating
the carrying amount of its inventory on a
period-to-period
basis.
Manufacturing
Operations
Our principal suppliers generally are International Organization
for Standardization certified (or substantial equivalent
thereof) contract-manufacturing firms that produce DRI-designed
equipment. DR performs part of its assembly work in-house
purchasing major components and services from several suppliers
in the U.S.
TVna purchases display components and assemblies for electronic
destination sign systems from multiple companies in the U.S.,
Europe, and Asia. We generally assemble these products, and some
related subassemblies, in-house. Domestic production is
compliant with
Buy-America
regulations.
Mobitec AB produces in Herrljunga, Sweden the majority of the
products it sells, and also produces products for sale by
Mobitec GmbH, Mobitec Pty, and Castmaster Mobitec. It purchases
raw materials, components, and assemblies primarily from
suppliers located in the Nordic, Asian and European markets.
In 2009, to a limited extent, and more substantially in 2010,
Castmaster Mobitec started local production work in India.
Though some products sold in India will continue to be produced
by Mobitec AB, we plan for a majority of such products to be
produced in India in 2011 and beyond. We believe localization of
production in India will allow us to lower costs through
purchase of components for electronic destination sign systems
from local vendors in India.
Mobitec Brazil Ltda produces its products in Caxias do Sul,
Brazil. It purchases raw materials, components and assemblies
from companies in Europe, LEDs from DRIs other
subsidiaries and suppliers in Asia, and the remainder primarily
from various local suppliers in Brazil.
Customer
Service
We believe our commitment to customer service has enhanced the
customers opinion of DRI compared to our competitors. Our
plan is to continue defining and refining our service-oriented
organization as a sustainable competitive advantage.
Proprietary
Rights
We presently own one U.S. Design Patent, four
U.S. Patents, and 13 international patents. In addition, we
presently own the following registered trademarks:
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Digital
Recorders®,
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DR500C+®,
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DR600®,
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ELYSE®,
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LiveLook-In®,
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MobiLite®,
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Mobitec®,
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OTvia®,
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OTvia2®,
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Talking
Bus®,
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TwinVision®, and
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VacTell®.
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15
These trademarks have been registered with the U.S. Patent
and Trademark Office and, where appropriate, with similar
governmental agencies abroad. Other of our intellectual
properties, including additional trademarks, service marks
and/or
copyrights for various trade names, slogans and taglines, have
been registered or are pending registration with the
U.S. Patent and Trademark Office and, where appropriate,
with similar governmental agencies abroad. In addition to the
aforementioned intellectual properties, we also have in place
various alliances, trade secrets, nondisclosure agreements, and
licensing agreements that establish and protect our ownership
of, and access to, other proprietary rights, intellectual
property rights, and patent applications. Our attempts to keep
confidential
and/or
proprietary the results of our research and development efforts
may not be sufficient to prevent others from using some or all
of our information
and/or
technologies. By designing around our intellectual
property rights, our competitors may be able to offer products
and/or tools
with similar functionalities that do not violate our
intellectual property rights.
We intend to pursue new patents and other intellectual property
rights protection methods covering technology and developments
on an on-going basis. We also intend to use our best efforts to
maintain the integrity of our trademarks, logos, slogans,
taglines, trade names, and other proprietary names, as well as
to protect them from unauthorized use, infringement, and unfair
competition.
Employees
As of December 31, 2010, DRI employed 275 people, of
which 110 were employed domestically and 165 were employed
internationally. Of the 110 domestic employees, 6 were employed
in our Dallas corporate administrative office. Although European
subsidiaries include some limited work-place agreements, DRI
employees are not covered by any collective bargaining
agreements and management believes its employee relations are
good. We believe future success will depend, in part, on our
continued ability to attract, hire, and retain qualified
personnel.
Many of the risks discussed below have affected our business in
the past, and many are likely to continue to do so. These risks
may materially adversely affect our business, financial
condition, operating results or cash flows, or the market price
of our Common Stock.
Risks
Related to Indebtedness, Financial Condition and Results of
Operations
Our substantial debt could adversely affect our financial
position, operations and ability to grow. As of
December 31, 2010, we had total debt of approximately
$16.1 million. Included in this debt is $8.5 million
under our domestic and European revolving credit facilities, a
$4.8 million term loan with a maturity date that has been
extended to April 30, 2012, a $277,000 loan due on
March 31, 2012, a $1.5 million loan due on
October 30, 2012, a $90,000 loan due on September 7,
2012, a $19,000 loan due on November 7, 2014, a $44,000
loan due on May 31, 2013, a $92,000 loan due May 3,
2011, two loans with an aggregate balance of $200,000 due
April 29, 2011, and a $150,000 loan due October 21,
2011. Our domestic revolving credit facility had an outstanding
balance of $2.8 million as of December 31, 2010 and
has a maturity date that has been extended to the earlier of
(a) April 30, 2012 or (b) five days prior the
maturity date of the $4.8 million term loan. Our European
revolving credit facilities have outstanding balances of
$4.9 million as of December 31, 2010 under agreements
with a Swedish bank with an expiration date of December 31,
2011 and an outstanding balance of $737,000 as of
December 31, 2010 under an agreement with a Swedish bank
with an open-ended term. Our substantial indebtedness could have
adverse consequences in the future, including without limitation:
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we could be required to dedicate a substantial portion of our
cash flow from operations to payments on our debt, which would
reduce amounts available for working capital, capital
expenditures, research and development and other general
corporate purposes;
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our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate could be limited;
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we may be more vulnerable to general adverse economic and
industry conditions;
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we may be at a disadvantage compared to our competitors that may
have less debt than we do;
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it may be more difficult for us to obtain additional financing
that may be necessary in connection with our business;
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it may be more difficult for us to implement our business and
growth strategies;
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we may have to pay higher interest rates on future
borrowings; and
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we may not comply with financial loan covenants, which could
require us to incur additional expenses to obtain waivers from
lenders or could restrict the availability of financing we can
obtain to support our working capital requirements.
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We may be unable to repay the indebtedness under our BHC and
PNC Agreements on or before their maturity date of
April 30, 2012. We may not have sufficient
working capital or expected revenue to repay the indebtedness
under our BHC and PNC Agreements upon maturity on April 30,
2012. We may be unable to secure further extensions of the BHC
Agreement
and/or the
PNC Agreement or to enter into new credit facilities, and even
if we are able to secure adequate re-financing, we can offer no
assurances that we can do so under terms and conditions that are
favorable to, or even acceptable, by the Company. While we have
in the past obtained financing through offerings of our equity
securities, we believe any such equity offering might result in
significant dilution to our shareholders in order to provide the
amount of capital required to repay our outstanding BHC and PNC
debt at maturity. If we are unable to enter into one or more
transactions to provide sufficient capital, we would likely be
required to significantly curtail our business operations.
Some of our debt bears interest at variable
rates. If interest rates increase, or if we incur
additional debt, the potential adverse consequences, including
those described above, may be intensified. If our cash flow and
capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay planned
expansion and capital expenditures, sell assets, obtain
additional equity financing or restructure our debt. Some of our
existing credit facilities contain covenants that, among other
things, limit our ability to incur additional debt.
Future cash requirements or restrictions on cash could
adversely affect our financial position, and an event of default
under our outstanding debt instruments could impair our ability
to conduct business operations. The following
items, among others, could require unexpected future cash
payments, limit our ability to generate cash or restrict our use
of cash:
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triggering of certain payment obligations, or acceleration of
payment obligations, under our revolving credit facilities and
loan agreements;
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costs associated with unanticipated litigation relating to our
intellectual property or other matters;
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taxes due upon the transfer of cash held in foreign
locations; and
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taxes assessed by local authorities where we conduct business.
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In the event we are unable to avoid an event of default under
one or more of our existing credit facilities, it may be
necessary or advisable to retire and terminate one or more of
the facilities and pay all remaining balances borrowed. Any such
payment would further limit our available cash and cash
equivalents. Furthermore, it is unlikely we would have adequate
resources available when necessary to avoid an event of default
or if we do not have adequate time to retire the credit
facilities. The consequences of an event of default under one or
more of our credit facilities or other debt instruments may
prevent us from continuing normal business operations.
The above cash requirements or restrictions could lead to an
inadequate level of cash for operations or for capital
requirements, which could have a material negative impact on our
financial position and significantly harm our ability to operate
the business.
17
Our operating results may continue to
fluctuate. Our operating results may fluctuate
from period to period and period over period depending upon
numerous factors, including: (1) customer demand and market
acceptance of our products and solutions; (2) new product
introductions; (3) variations in product mix;
(4) delivery due-date changes; and (5) other factors.
We operate in a market characterized by long and occasionally
erratic sales cycles. The time from first contact to order
delivery may be a period of two years 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 and governmental funding conditions and other factors
beyond our control. Moreover, we derive sales primarily from
significant orders from a limited number of customers. For that
reason, a delay in delivery of our products in connection with a
single order may significantly affect the timing of our
recognition of sales between periods. Moreover, sales lost due
to the cancellation of, or our inability to fill, an order in
one period may not be necessarily made up by sales in any future
period.
Risks
Related to Our Operations and Product Development
A significant portion of our sales is derived from sales to a
small number of customers. If we are not able to obtain new
customers or obtain significant repeat business from existing
customers, our business could be seriously
harmed. We sell our products to a limited and
largely fixed set of customers and potential customers. We sell
primarily to OEMs and to end users such as municipalities,
regional transportation districts, transit agencies, federal,
state and local departments of transportation, and rental car
agencies. In 2010, 2009 and 2008, our top five customers
accounted for 35.1%, 36.0%, and 33.4%, respectively, of total
annual sales. The identity of the customers who generate the
most significant portions of our sales may vary from year to
year. If any of our major customers stopped purchasing products
from us, and we were not able to obtain new customers to replace
the lost business, our business and financial condition would be
materially adversely affected. Many factors affect whether
customers reduce or delay their investments in products such as
those we offer, including decisions regarding spending levels
and general economic conditions in the countries and specific
markets where the customers are located.
We depend on third parties to supply components we need to
produce our products. 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 our products), a shortage of components and reduced control
over delivery schedules (which can adversely affect our
manufacturing efficiencies and timing of deliveries to
customers) and increases in component costs (which can adversely
affect our profitability).
We have some single-sourced supplier relationships, because
either alternative sources are not readily or economically
available or the relationship is advantageous due to
performance, quality, support, delivery, and 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 adversely affect
operating results.
Many of our customers rely, to some extent, on government
funding, which subjects us to risks associated with governmental
budgeting and authorization processes. A majority
of our domestic U.S. sales, either directly or indirectly
through OEMs, are to 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
on us. SAFETEA-LU, which was the primary program funding the
U.S. public surface transit market at the federal level
expired in September 2009. Extension of the expired legislation
has been implemented under continuing resolutions while new
legislation to replace SAFETEA-LU is being developed. It is
uncertain when new legislation will be developed and enacted, if
at all, and at what levels
18
federal funding for public transportation programs will be
available if new legislation is enacted. These funding
difficulties and uncertainties have impacted our
U.S. market. Such funding uncertainties may further depress
our U.S. market opportunities, result in further downturn
in demand for our products,
and/or
increase the likelihood of orders being delayed or rescheduled
and, as a result, materially affect our financial position and
results of operations until, among other things, longer term
U.S. transit funding legislation has been enacted.
In addition to federal funding to the public transit side of our
domestic market, a majority of our customers rely on state and
local funding, which tends to be affected by general economic
conditions. A decrease in state and local funding in our
domestic markets can have a depressing effect on sales of our
products. It is not possible to precisely quantify or forecast
this type of impact. Any unfavorable change in any of these
factors and considerations could have a material adverse effect
upon us.
We must continually improve our technology to remain
competitive. 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. We cannot assure you that we
will be able to continue to achieve or sustain the technological
leadership that is necessary for success in our industry. In
addition, our competitors may develop new technologies that give
them a competitive advantage, and we may not be able to develop
or obtain a right to use those or equal technologies at a
reasonable cost, if at all, or to develop alternative solutions
that enable us to compete effectively. A failure on our part to
manage effectively the 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 anticipate or address these technological
changes, our business may be adversely impacted.
We cannot assure you that any new products we develop will be
accepted by customers. Even if we are able to
continue to enhance our technology and offer improved products
and solutions, we cannot assure you we will be able to deliver
commercial quantities of new products in a timely manner or that
our 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.
Risks
Related to Our International Operations
There are numerous risks associated with international
operations, which represent a significant part of our
business. Our international operations generated
approximately 62% of our sales in 2010. Our sales outside the
U.S. were primarily in Europe (particularly the Nordic
countries), South America, the Middle East, India, and
Australia. 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 bought and sold. Any unfavorable
change in one or more of these factors could have a material
adverse effect on us.
Complying with foreign tax laws can be complicated, and we
may incur unexpected tax obligations in some
jurisdictions. We maintain cash deposits in
foreign locations and many countries impose taxes or fees upon
removal from the country of cash earned in that country. While
we believe our tax positions in the foreign jurisdictions in
which we operate are proper and defensible, tax authorities in
those jurisdictions may nevertheless assess taxes and render
judgments against us. In such an event, we could be required to
make unexpected cash payments in satisfaction of such
assessments or judgments or incur additional expenses to defend
our position.
We operate in several international locations and, in India,
with less than full ownership control. Not all
countries are subject to or consequently familiar with the full
scope of regulatory requirements placed on U.S. public
companies and their foreign affiliated entities. Operating under
those circumstances can be a challenge for us to supervise,
manage, and detect any non-compliance issues as quickly as we
would like.
19
The future of Castmaster Mobitec, our relatively new
51%-owned joint venture in India, is
uncertain. As of the date of this Annual Report,
there are several significant issues facing the operations of
our 51%-owned Indian joint venture, Castmaster Mobitec,
including, without limitation, issues related to cash flow,
accounts receivable collections, and delayed governmental
funding for customer transit expenditures. In addition, there
may be unforeseen adverse consequences related to the obligation
of Castmaster Mobitec in connection with the non-monetary
exchange transaction, as described in Note 23 to the
accompanying consolidated financial statements. While we intend
to support Castmaster Mobitecs efforts to address these
issues, we can offer no assurance that any one or more of these
issues can be successfully addressed. If these issues cannot be
successfully addressed our business and results of operations
could be adversely impacted.
Risks
Related to Internal Controls
Efforts to maintain effective internal controls may not be
successful. In accordance with Section 404
of the Sarbanes-Oxley Act, we report on the effectiveness of our
internal controls over financial reporting in each Annual
Report. It should be noted that any system of controls, however
well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met.
The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Because of inherent limitations in internal control
systems, misstatements due to error or fraud may occur and not
be detected.
Risks
Related to Intellectual Property
We may not be able to defend successfully against claims of
infringement against the intellectual property rights of others,
and such defense could be costly. Third parties,
including our competitors, individual inventors or others, may
have patents or other proprietary rights that may cover
technologies that are relevant to our business. Claims of
infringement have been asserted against us in the past. Even if
we believe a claim asserted against us is not valid, defending
against the claim may be costly. Intellectual property
litigation can be complex, protracted, and highly disruptive to
business operations by diverting the attention and energies of
management and key technical personnel. Further, plaintiffs in
intellectual property cases often seek injunctive relief and the
measures of damages in intellectual property litigation are
complex and often subjective or uncertain. In some cases, we may
decide that it is not economically feasible to pursue a vigorous
and protracted defense and decide instead to negotiate licenses
or cross-licenses authorizing us to use a third partys
technology in our products or to abandon a product. If we are
unable to defend successfully against litigation of this type,
or to obtain and maintain licenses on favorable terms, we could
be prevented from manufacturing or selling any of our products
that were found to be infringing, which would cause severe
disruptions to our operations. For these reasons, intellectual
property litigation could have a material adverse effect on our
business or financial condition.
Risks
Related to Our Equity Securities
The public market for our Common Stock may be volatile,
especially since market prices for technology stocks often have
been unrelated to operating performance. We
cannot assure you that an active trading market will be
sustained or that the market price of our Common Stock will not
decline. The market price of our Common Stock is likely to
continue to be highly volatile and could be subject to wide
fluctuations in response to factors such as:
|
|
|
|
|
Actual or anticipated variations in our quarterly operating
results;
|
|
|
|
Historical and anticipated operating results;
|
|
|
|
Announcements of new product or service offerings;
|
|
|
|
Technological innovations;
|
|
|
|
Competitive developments in the public transit industry;
|
|
|
|
Changes in financial estimates by securities analysts;
|
20
|
|
|
|
|
Conditions and trends in the public transit industry;
|
|
|
|
Funding initiatives and other legislative developments affecting
the transit industry;
|
|
|
|
Adoption of new accounting standards affecting the technology
industry or the public transit industry; and
|
|
|
|
General market and economic conditions and other factors.
|
These broad market factors have had and may continue to have an
adverse affect on the market price of our Common Stock.
Our preferred stock has preferential rights over our Common
Stock. At December 31, 2010 we had
outstanding shares of Series AAA Redeemable, Nonvoting,
Convertible Preferred Stock, Series E Redeemable,
Nonvoting, Convertible Preferred Stock, Series G
Redeemable, Convertible Preferred Stock, Series H
Redeemable, Convertible Preferred Stock, and Series K
Redeemable, Convertible Preferred Stock, all of which have
rights in preference to holders of our Common Stock in
connection with any liquidation of the Company. The aggregate
liquidation preference is $830,000 for the Series AAA
Preferred, $400,000 for the Series E Preferred,
$2.7 million for the Series G Preferred, $380,000 for
the Series H Preferred, $2.2 million for the
Series K Preferred and, in each case, plus accrued but
unpaid dividends. Holders of the Series AAA Preferred,
Series E Preferred, Series G Preferred, Series H
Preferred, and Series K Preferred are entitled to receive
cumulative quarterly dividends at the rate of five percent
(5.0%) per annum, seven percent (7.0%) per annum, fourteen
percent (14.0%) per annum, fourteen percent (14.0%) per annum,
and nine and one-half percent (9.5%) per annum, respectively, on
the liquidation value of those shares. Dividends on the
Series G Preferred, Series H Preferred and
Series K Preferred are payable in kind in additional shares
of Series G Preferred, Series H Preferred and
Series K Preferred, respectively, or in cash, at the option
of the holder. The agreement under which we secured our domestic
senior credit facility prohibits the payment of dividends to
holders of our Common Stock. The preferential rights of the
holders of our preferred stock could substantially limit the
amount, if any, that the holders of our Common Stock would
receive upon any liquidation of the Company.
Risks
Related to Anti-Takeover Provisions
Our articles of incorporation, bylaws and North Carolina law
contain provisions that may make takeovers more difficult or
limit the price third parties are willing to pay for our
stock. Our articles of incorporation authorize
the issuance of shares of blank check preferred
stock, which would have the designations, rights and preferences
as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered,
without shareholder approval (but subject to applicable
regulatory restrictions), to issue additional preferred stock
with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of
the holders of the Common Stock. Our board of directors could
also use the issuance of preferred stock, under certain
circumstances, as a method of discouraging, delaying or
preventing a change in control of our company. In addition, our
bylaws require that certain shareholder proposals, including
proposals for the nomination of directors, be submitted within
specified periods of time in advance of our annual
shareholders meetings. These provisions could make it more
difficult for shareholders to effect corporate actions such as a
merger, asset sale or other change of control of the Company.
These provisions could limit the price that certain investors
might be willing to pay in the future for shares of our Common
Stock, and they may have the effect of delaying or preventing a
change in control.
We are also subject to two North Carolina statutes that may have
anti-takeover effects. The North Carolina Shareholder
Protection Act generally requires, unless certain fair
price and procedural requirements are satisfied, the
affirmative vote of 95% of our voting shares to approve certain
business combination transactions with an entity that is the
beneficial owner, directly or indirectly, of more than 20% of
our voting shares, or with one of our affiliates if that
affiliate has previously been a beneficial owner of more than
20% of our voting shares. The North Carolina Control Share
Acquisition Act, which applies to public companies that have
substantial operations and significant shareholders in the state
of North Carolina, eliminates the voting rights of shares
acquired in transactions (referred to as control share
acquisitions) that cause the acquiring person to own a
number of our voting securities that exceeds certain threshold
amounts, specifically, one-fifth, one-
21
third and one-half of our total outstanding voting securities.
There are certain exceptions. For example, this statute does not
apply to shares that an acquiring person acquires directly from
us. The holders of a majority of our outstanding voting stock
(other than such acquiring person, our officers and our employee
directors) may elect to restore voting rights that would be
eliminated by this statute. If voting rights are restored to a
shareholder that has made a control share acquisition and holds
a majority of all voting power in the election of our directors,
then our other shareholders may require us to redeem their
shares at fair value. These statutes could discourage a third
party from making a partial tender offer or otherwise attempting
to obtain a substantial position in our equity securities or
seeking to obtain control of us. They also might limit the price
that certain investors might be willing to pay in the future for
shares of our Common Stock, and they may have the effect of
delaying or preventing a change of control.
Provisions of our bylaws limit the ability of shareholders to
call special meetings of shareholders and therefore could
discourage, delay or prevent a merger, acquisition or other
change in control of our company. Under the
Companys Amended and Restated Bylaws, special meetings of
the shareholders may be called by the Chairman of the Board, the
President, the Board of Directors or any shareholder or
shareholders holding in the aggregate 51% of the voting power of
all the shareholders. The effect of this provision of our
Amended and Restated Bylaws could delay or prevent a third party
from acquiring the Company or replacing members of the Board of
Directors, even if the acquisition or the replacements would be
beneficial to our shareholders. These factors could also reduce
the price that certain investors might be willing to pay for
shares of the Common Stock and result in the market price being
lower than it might be without these provisions.
Risks
Associated with Potential Growth
We may not be able to obtain the financing we will need to
implement our operating strategy. We cannot
assure you that our revolving credit facilities and cash flow
from operations will be sufficient to fund our current business
operations nor can we assure you that we will not require
additional sources of financing to fund our operations.
Additional financing may not be available to us on terms we
consider acceptable, if available at all. If we cannot raise
funds on acceptable terms, we may not be able to develop
next-generation products, take advantage of future opportunities
or respond to competitive pressures or unanticipated
requirements, any of which could have a material adverse effect
on our ability to grow our business. Further, if we issue equity
securities, holders of our Common Stock may experience dilution
of their ownership percentage, and the new equity securities
could have rights, preferences or privileges senior to those of
our Common Stock.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
We do not own any real estate. Instead, we lease properties both
in the U.S. and abroad. Following are our locations:
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Monthly
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City and State
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Country
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Area
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Use
|
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Rent
|
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Expiration
|
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Durham, NC
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USA
|
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49,864 sf
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Office, service and repair, warehouse and assembly
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$
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26,054
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December 2018
|
Dallas, TX
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USA
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3,994 sf
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Office(a)
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$
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6,490
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November 2015
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Sydney
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Australia
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1,055 sm
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Office, service and repair, warehouse
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$
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6,077
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September 2012
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Caxias do Sul
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Brazil
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880 sm
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Office, service and repair, warehouse and assembly
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$
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4,520
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June 2014
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Herrljunga
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Sweden
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3,251 sm
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Office, service and repair, warehouse and assembly (b)
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$
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18,906
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March 2020
|
Herrljunga
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Sweden
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200 sm
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Warehouse
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$
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590
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December 2011
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Ettlingen
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Germany
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470 sm
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Office, service and repair, warehouse
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$
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4,870
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December 2017
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Ettlingen
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Germany
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250 sm
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Warehouse
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$
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679
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Open ended
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Filderstadt-Bonlanden
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Germany
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136 sm
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Office (b)
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$
|
1,817
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|
|
October 2013
|
New Delhi
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India
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920 sy
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|
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Office, service and repair, warehouse and assembly
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$
|
8,111
|
|
|
June 2014
|
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(a) |
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Used by administration U.S. Corporate |
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(b) |
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Used by administration international |
22
We believe our current facilities will be adequate and suitable
for current and foreseeable needs, absent future possible
acquisitions. We further believe additional office and
manufacturing space will be available in, or near, existing
facilities at a cost approximately equivalent to, or slightly
higher than, rates currently paid to accommodate further
internal growth as necessary.
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Item 3.
|
Legal
Proceedings
|
The Company, in the normal course of its operations, is involved
in legal actions incidental to the business. In
managements 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.
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Item 4.
|
(Removed
and Reserved)
|
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters, and Issuer Purchases of Equity Securities
|
The following table sets forth the range of high and low sales
prices for our Common Stock, as reported by the NASDAQ Capital
Market®,
from January 1, 2009 through December 31, 2010. The
prices set forth reflect inter-dealer quotations, without retail
markups, markdowns, or commissions, and do not necessarily
represent actual transactions.
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High
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Low
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First Quarter
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$
|
1.19
|
|
|
$
|
0.72
|
|
Second Quarter
|
|
|
1.81
|
|
|
|
0.89
|
|
Third Quarter
|
|
|
2.55
|
|
|
|
1.24
|
|
Fourth Quarter
|
|
|
2.62
|
|
|
|
1.30
|
|
Year Ended December 31, 2010
|
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|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.97
|
|
|
$
|
1.39
|
|
Second Quarter
|
|
|
2.20
|
|
|
|
1.68
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|
Third Quarter
|
|
|
1.82
|
|
|
|
1.41
|
|
Fourth Quarter
|
|
|
1.74
|
|
|
|
1.04
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|
As of March 31, 2011, there were approximately 1,961
holders of our Common Stock. Of that number, 1,843 were
non-objecting beneficial owners and 118 were registered owners.
We have not paid dividends on our Common Stock nor do we
anticipate doing so in the near future. Our prior and current
credit facilities restrict the payment of dividends upon any
class of stock except on our Preferred Stock. We also have five
classes of outstanding Preferred Stock with dividend rights that
have priority over any dividends payable to holders of Common
Stock.
23
Equity
Compensation Plan Information
The following table provides information, as of the end of
fiscal year 2010, with respect to all compensation plans and
individual compensation arrangements of DRI under which equity
securities are authorized for issuance to employees or
non-employees:
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Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column a)
|
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Plan Category
|
|
(a)
|
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(b)
|
|
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(c)
|
|
|
1993 Incentive Stock Option Plan
|
|
|
79,000
|
|
|
$
|
2.47
|
|
|
|
None
|
|
2003 Stock Option Plan
|
|
|
1,436,220
|
|
|
$
|
2.24
|
|
|
|
600,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,515,220
|
|
|
$
|
2.25
|
|
|
|
600,333
|
|
|
|
|
|
|
|
|
|
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|
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* |
|
All options issued under the 1993 Incentive Stock Option Plan
and the 2003 Stock Option Plan have been approved by the
Companys shareholders. |
The Company has in place a shareholder-approved, equity-based
stock compensation plan for members of the Board of Directors
and certain key executive managers of the Company (the
Stock Compensation Plan). The Stock Compensation
Plan partially compensates members of the Board of Directors and
certain key executive management of the Company in the form of
stock of the Company in lieu of cash compensation. The Stock
Compensation Plan is made available on a fully voluntary basis.
The number of shares payable under the Stock Compensation Plan
is determined by dividing the cash value of stock compensation
by the higher of (1) the actual closing price on the last
trading day of each month or (2) the book value of the
Company on the last day of each month. Fractional shares are
rounded up to the next full share amount.
|
|
Item 6.
|
Selected
Financial Data
|
Not Applicable
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES THAT ARE IN ITEM 8 OF THIS DOCUMENT.
Business
General
We, directly or through contractors, design, manufacture, sell
and service information technology products. Prior to 2007, DRI
had historically operated within two major business segments:
(1) the transportation communications segment and
(2) the law enforcement and surveillance segment. In April
2007, the Companys DAC subsidiary, which comprised all of
the operations of the law enforcement and surveillance segment,
was divested. Accordingly, the Company currently operates within
one major business segment. While service is a significant
aspect of DRIs marketing strategy, it is not yet a
significant generator of revenue for the Company.
DRIs products are sold worldwide within the passenger
information communication industry and market. We sell to
transportation vehicle equipment customers generally in two
broad categories: end customers and OEMs of transportation
vehicles. End customers include municipalities, regional
transportation districts, federal, state and local departments
of transportation, transit agencies, public, private, or
commercial operators of vehicles, and rental car agencies. The
relative percentage of sales to end customers as compared to OEM
customers varies widely and frequently from
quarter-to-quarter
and
year-to-year
and within products and product lines comprising DRIs mix
of total sales in any given period.
24
Sales to DRIs customers are characterized by a lengthy
sales cycle that generally extends for a period of two to
24 months. In addition, purchases by a majority of
DRIs customers are dependent upon federal, state and local
funding that may vary from year to year and quarter to quarter.
Revenue from the majority of sales of the Companys
products and services are recognized upon physical shipment of
products and completion of the service, provided all accounting
criteria for recognition have been met. Sales and revenues for
projects involving multiple elements (i.e., products, services,
installation and other services) are recognized under specific
accounting criteria based on the products and services delivered
to the customer and the customers acceptance of such
products and services. Because DRIs operations are
characterized by significant research and development expenses
preceding product introduction, net sales and certain related
expenses may not be recorded in the same period, thereby
producing fluctuations in operating results. DRIs
dependence upon large contracts and orders, as well as upon a
small number of relatively large customers or projects,
increases the magnitude of fluctuations in operating results
particularly on a
period-to-period,
or
period-over-period,
comparison basis. For a more complete description of DRIs
business, including a description of DRIs products, sales
cycle and research and development, see Item 1.
Business in this Annual Report.
Results
of Operations
The following discussion provides an analysis of DRIs
results of operations and liquidity and capital resources. This
should be read in conjunction with DRIs consolidated
financial statements and related notes thereto. The operating
results of the years presented were not significantly affected
by inflation.
The following table sets forth the percentage of DRIs
sales represented by certain items included in DRIs
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
70.7
|
|
|
|
69.9
|
|
|
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29.3
|
|
|
|
30.1
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
28.3
|
|
|
|
24.8
|
|
|
|
26.9
|
|
Research and development
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28.9
|
|
|
|
25.4
|
|
|
|
28.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
0.4
|
|
|
|
4.7
|
|
|
|
5.6
|
|
Total other income and expense
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1.6
|
)
|
|
|
3.4
|
|
|
|
4.6
|
|
Income tax expense
|
|
|
(0.3
|
)
|
|
|
(1.0
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1.9
|
)
|
|
|
2.4
|
|
|
|
3.0
|
|
Less: Net income attributable to noncontrolling interests, net
of tax
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to DRI Corporation
|
|
|
(2.0
|
) %
|
|
|
2.2
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Results for the Years Ended December 31, 2010 and
2009
Net
Sales and Gross Profit
Due to commonality of customers, products, technology, and
management, we manage and report our U.S and foreign operations
as a single reporting segment. For discussion purposes, we
differentiate between sales and gross profit for the
U.S. market and the foreign markets to better provide our
investors with useful information.
25
For 2010, sales increased $5.0 million, or 6.1%, from
$82.3 million for 2009 to $87.3 million for 2010. The
increase resulted from higher sales of $230,000 by our
U.S. subsidiaries and higher sales of $4.8 million
from our foreign subsidiaries.
The increase in U.S. sales for the year ended
December 31, 2010 as compared to the year ended
December 31, 2009 is primarily attributable to the timing
of order receipts from and delivery to our OEM and end-user
customers. We reported higher sales of engineered systems and
related products and services in 2010 due primarily to
fulfillment of a large order to an OEM. Partially offsetting the
increase in engineered systems and related product sales were
decreased sales of electronic information display systems and
related products in 2010 due primarily to fulfillment of a large
order to an OEM in 2009.
The increase in international sales is inclusive of an increase
due to foreign currency fluctuations for the year ended
December 31, 2010 of approximately $3.1 million.
Exclusive of this increase resulting from foreign currency
fluctuations, sales by our foreign subsidiaries increased
approximately $1.7 million in 2010 compared to 2009. The
increase in sales by our foreign subsidiaries resulted primarily
from increased sales in the
Asia-Pacific
market, particularly in India, where fulfillment of significant
orders received in 2009 occurred in 2010, and in the South
America market, particularly in Brazil and in Colombia, where
fulfillment of a significant order from an OEM was completed.
The increase in sales in the Asia-Pacific and South America
markets were partially offset by decreased sales in Europe,
where fulfillment of large orders for end-users in Dubai in 2009
resulted in higher sales in the prior year and where credit and
economic issues have had an adverse impact on our business. DRI
does not use currency hedging tools. Each of our foreign
subsidiaries primarily conducts business in their respective
functional currencies thereby reducing the impact of foreign
currency transaction differences. If the U.S. dollar
strengthens compared to the foreign currencies converted, it is
possible the total sales reported in U.S. dollars could
decline.
Expected sales growth will be dependent upon the expansion of
new product offerings and technology, fundamental market growth,
and expansion into new geographic areas. We believe our
relatively high market share positions in some markets preclude
significant sales growth from increased market share.
Our gross profit increased $744,000 or 3.0%, from
$24.8 million in 2009 to $25.5 million in 2010. As a
percentage of sales, gross profit was 30.1% of net sales in 2009
as compared to 29.3% in 2010. Of the $744,000 net increase
in gross profit, a $256,000 increase was attributable to
U.S. operations and a $488,000 increase was attributable to
international operations.
The U.S. gross profit as a percentage of sales for 2010 was
30.4% as compared to 29.8% for 2009. Increased sales of
engineered systems and related products and decreased sales of
electronic information display systems and related products
contributed to the increase in gross profit as a percentage of
sales in 2010, as engineered systems sales generally yield
higher gross profit percentages than electronic information
display systems sales. Additionally, gross profit as a
percentage of sales increased in 2010 due to (1) a
reduction of material costs on certain engineered system
products achieved through a change in suppliers and
(2) price increases in selected instances in 2010.
The international gross profit as a percentage of sales for 2010
was 28.5% as compared to 30.3% for 2009. The decrease in
international margins is reflective of a variation in product
and customer mix and a variation in geographical dispersion of
product sales that resulted in lower margins in 2010 compared to
2009. In addition, the following factors contributed to the
decrease in international gross margin as a percentage of sales
in 2010 compared to 2009: (1) increased sales in India,
where gross profit percentages are generally lower than those we
typically realize on similar product sales in other markets
(2) increased pricing on shipping which resulted in higher
freight-out costs, and (3) unfavorable changes in currency
exchange rates on billings to certain customers in currencies
other than the local currency.
Though we may experience continued pricing pressure, we expect
improvements in gross margins through more frequent sales of a
combination of products and services offering a broader
project solution, and through the introduction of
technology improvements. However,
period-to-period,
overall gross margins will still reflect the variations in sales
mix and geographical dispersion of product sales.
26
Selling,
General and Administrative
Selling, general, and administrative (SG&A)
expenses for 2010 increased $4.3 million, or 21.1%, from
$20.4 million for 2009 to $24.7 million for 2010.
Excluding $581,000 due to the change in foreign currency
exchange rates from 2009 to 2010, SG&A expenses increased
approximately $3.7 million from 2009 to 2010. Exclusive of
the increase due to foreign currency exchange fluctuations,
SG&A expenses have increased primarily due to:
(1) increased personnel-related expenses of approximately
$1.30 million resulting from an increase in personnel as
well as salary and wage increases for current employees
throughout 2010 and which is inclusive of incremental employee
severance costs of approximately $201,000, (2) increased
audit fees of approximately $275,000 resulting primarily from
additional services provided by our independent auditors during
the 2009 year-end financial statement audit,
(3) increased travel expenses of approximately $64,000 and
increased promotion and marketing expenses of approximately
$224,000 as the Company continues to market and grow the
business on a global basis, (4) increased public company
costs of $222,000 related to increased SEC filing costs,
increased board of director fees, and investor relations
expenses, (5) increased consulting expenses of
approximately $403,000 primarily related to consulting services
provided by the former managing director of Mobitec Brazil
Ltda., the engagement of an investment banker, the engagement of
a revenue accounting consultant, increased fees incurred for
outside consultants engaged to assist management in internal
control reviews for compliance with Sarbanes-Oxley requirements,
and consultants engaged in 2010 to assist in development of an
incentive compensation plan, (6) increased bank fees of
approximately $107,000 primarily for additional fees incurred in
connection with amendments and waivers to loan agreements in the
last half of 2009 and in 2010 which were capitalized and
amortized to expense in 2010, (7) a charge of approximately
$1.0 million in 2010 to record a full valuation allowance
against the value of advertising rights obtained in a barter
transaction, and (8) a reduction of expenses of $242,000 in
the prior year in connection with a reduction of Mobitec Brazil
Ltdas foreign tax settlement recorded to SG&A
expenses in 2009.
Research
and Development
Research and development expenses for 2010 increased $60,000, or
10.9%, from $552,000 for 2009 to $612,000 for 2010. This
category of expense includes internal engineering personnel and
outside engineering expense for software and hardware
development, sustaining product engineering, and new product
development. During 2010, salaries and related costs of certain
engineering personnel who were used in the development of
software met the capitalization criteria of ASC Topic
985-20,
Costs of Computer Software to be Sold, Leased or
Marketed. The total amount of personnel and other expense
capitalized in 2010 was $2.4 million as compared to
$2.1 million for 2009. In aggregate, research and
development expenditures in 2010 were $3.1 million as
compared to aggregate expenditures of $2.6 million in 2009.
This increase in research and development expenditures is
attributable to the Companys continued efforts to pursue
technological enhancements to existing products and to develop
new, technologically advanced products that will meet our
customers needs. Product development based upon advanced
technologies is one of the primary means by which management
believes DRI differentiates itself from its competitors.
Operating
Income (Loss)
The net change in our operating income was a decrease of
$3.6 million from net operating income of $3.8 million
in 2009 to net operating income of $226,000 in 2010. The
decrease in operating income is due to higher SG&A expenses
and higher research and development costs, offset in part by
higher sales and gross profit as previously described.
Other
Income and Expense
Other income and expense increased $704,000 from
($1.0 million) in 2009 to ($1.7 million) in 2010 due
to an increase in interest expense of $28,000, an increase in
other income (loss) of $131,000, and a decrease in foreign
currency gain (loss) of $807,000. The increase in other income
(loss) expense is primarily due to expense recorded in 2009 to
reflect the increase in value of outstanding warrants that were
classified as liabilities under a new accounting standard that
went into effect in 2009. The warrant agreement pursuant to
27
which these warrants had been issued was amended such that the
warrants were no longer classified as liabilities effective
July 1, 2009.
Income
Tax Expense
Income tax expense was $245,000 in 2010 as compared with an
income tax expense of $836,000 in 2009. Income tax expense as a
percentage of income (loss) before income taxes was
approximately (16.3)% and 29.7% for 2010 and 2009, respectively.
Variations in the tax jurisdictions in which pre-tax income
(loss) is recognized and various discrete income tax expenses or
benefits that may need to be recorded from time to time can
cause the effective tax rate and the income tax expense or
benefit we record to vary significantly from period to period.
The significant variance in the effective tax rates in 2010 and
2009 is primarily related to changes in the mix of income (loss)
before income taxes between countries whose income taxes are
offset by full valuation allowances and those that are not. A
reconciliation of the effective tax rates for 2010 and 2009 to
the expected U.S. statutory rate of 34% is provided in
Note 15 to the accompanying consolidated financial
statements.
Net
Income (Loss) Applicable to Common Shareholders of DRI
Corporation
Net income (loss) applicable to common shareholders of DRI
Corporation decreased $3.9 million from net income of
approximately $1.5 million in 2009 to net loss of
approximately $2.4 million in 2010. This decrease is due to
the factors previously addressed, as well as a $234,000 increase
in preferred stock dividends.
Comparison
of Results for the Years Ended December 31, 2009 and
2008
Net
Sales and Gross Profit
For 2009, sales increased $11.7 million, or 16.6%, from
$70.6 million for 2008 to $82.3 million for 2009. The
increase resulted from higher sales of $4.1 million by our
U.S. subsidiaries and higher sales of $7.6 million
from our foreign subsidiaries.
The increase in U.S. sales for the year ended
December 31, 2009 as compared to the year ended
December 31, 2008 continued a trend we had seen in prior
periods which we believe was due to the favorable impact of
increased transit funding under SAFETEA-LU and, to some extent,
funding under the American Recovery and Reinvestment Act of
2009, as well as the favorable influence of high fuel prices on
transit ridership. We believe the enactment of SAFETEA-LU and
the record-high funding increases for transit, in addition to
higher fuel prices, had a favorable impact on our business and
contributed to increased sales opportunities in the
U.S. market for many of our products.
The increase in international sales is inclusive of a decrease
due to foreign currency fluctuations for the year ended
December 31, 2009 of approximately $5.3 million.
Exclusive of this decrease resulting from foreign currency
fluctuations, sales by our foreign subsidiaries increased
approximately $12.9 million in 2009 compared to 2008. The
most significant increase in international sales occurred in
India where, in the third and fourth quarter of 2009, Castmaster
Mobitec began fulfillment of large orders received earlier in
fiscal year 2009 from OEMs and large transit system
operators in that market. Increased sales also occurred in the
European market, primarily resulting from our European
subsidiaries fulfilling orders from OEMs for delivery to
end-users in Dubai and in the Asia-Pacific market, primarily in
Australia. Increased sales in these markets were partially
offset by decreased sales in the South America market, primarily
in Brazil, where some order scale-back was experienced in the
first half of 2009 due to economic issues in that market.
Our gross profit increased $908,000 or 3.8%, from
$23.9 million in 2008 to $24.8 million in 2009. As a
percentage of sales, gross profit was 33.9% of net sales in 2008
as compared to 30.1% in 2009. Of the $908,000 net increase
in gross profit, an ($86,000) decrease was attributable to
U.S. operations and a $994,000 increase was attributable to
international operations.
The U.S. gross profit as a percentage of sales for 2009 was
29.8% as compared to 34.3% for 2008. Substantially all of the
increase in sales in the U.S. in 2009 when compared to 2008
resulted from increased
28
sales of electronic destination sign systems and related
products, which yield lower margins than other products sold by
the Company. Additionally, the following factors were primary
contributors to the decrease in U.S. gross profit
percentage in 2009 as compared to 2008: (1) a variation in
sales mix on multiple deliverable engineered systems projects
resulted in lower gross margins in 2009. As certain elements of
these projects are delivered, gross margins on these projects
can vary depending on the product or service delivered. In 2009,
more deliveries of lower-margin elements were completed,
resulting in lower than usual margins for these engineered
systems projects; and (2) higher labor absorption costs in
2009 resulting from increased sustained engineering work
performed on engineered system products recently introduced into
the market. All of these factors contributed to a decreased
U.S. gross profit percentage in 2009 when compared to 2008.
The international gross profit as a percentage of sales for 2009
was 30.3% as compared to 33.5% for 2008. The decrease in
international margins is reflective of a variation in product
and customer mix and a variation in geographical dispersion of
product sales that resulted in lower margins in 2009 compared to
2008. Decreases in international gross margins in 2009 compared
to 2008 resulted primarily from (1) margins on fulfillment
of previously-mentioned orders from OEMs for delivery to
end-users in Dubai being lower than margins typically realized
on sales of similar products, (2) margins on fulfillment of
the large orders in India previously mentioned being lower than
margins typically realized as a result of strong competition in
that market, and (3) higher labor absorption costs due to
an increase in temporary production employees to meet increased
production demands of the increased sales previously mentioned.
Selling,
General and Administrative
Selling, general, and administrative (SG&A)
expenses for 2009 increased $1.4 million, or 7.4%, from
$19.0 million for 2008 to $20.4 million for 2009.
Excluding a decrease of $1.5 million due to the change in
foreign currency exchange rates from 2008 to 2009, SG&A
expenses increased approximately $2.9 million from 2008 to
2009. Exclusive of the decrease due to foreign currency exchange
fluctuations, SG&A expenses increased primarily due to
(1) increased personnel-related expenses of approximately
$1.6 million resulting from an increase in personnel as
well as salary and wage increases for current employees
throughout 2009, (2) increased travel expenses of
approximately $223,000 and increased promotion, advertising, and
business development costs of approximately $294,000, as the
Company continued its efforts to market the Company on a global
basis, (3) increased bank-related fees of approximately
$300,000 due to (a) increased amortization of deferred
finance costs resulting from the domestic debt agreements
entered into in June 2008 and from additional deferred finance
costs incurred in connection with amendments to those domestic
debt agreements in 2009 and (b) having a full year of
loan-related fees in 2009 on our domestic debt agreements
entered into in June 2008 compared to having only 6 months
of such fees in 2008, (4) increased compensation expense of
approximately $160,000 recorded under ASC Topic
718-20 as a
result of stock options issued in the third quarter of 2008 and
the second quarter of 2009, (5) increased audit, accounting
and tax fees of approximately $162,000 resulting primarily from
the engagement of outside firms to provide due diligence and
audit services in connection with the acquisition of the
remaining 50% interest of Mobitec Brazil and the engagement of
an outside firm to provide global tax planning consulting
services, (6) an increase of approximately $370,000 in
outside consulting fees resulting primarily from
(a) consultants engaged in 2009 to assist the Company with
product customization and (b) increased fees to consultants
engaged to assist the Company in generating and maintaining
sales in select North American markets, (7) increased
operating taxes of approximately $304,000 resulting from
estimated tax liabilities accrued in 2009, and
(8) increased income tax penalties of $125,000 recorded in
2009 related to uncertain tax positions. These increases were
partially offset by (1) a reduction in expenses in
connection with a legal settlement in Australia of $184,000
recorded to SG&A expenses in 2008, (2) a reduction of
expenses in connection with a reduction of Mobitec Brazils
foreign tax settlement of $266,000 recorded to SG&A
expenses in 2009, and (3) a reduction of $364,000 in
expenses incurred in 2008 related to the Companys
participation in the tri-annual APTA Expo in 2008.
Research
and Development
Research and development expenses for 2009 decreased $422,000,
or 43.3%, from $974,000 for 2008 to $552,000 for 2009. This
category of expense includes internal engineering personnel and
outside engineering
29
expense for software and hardware development, sustaining
product engineering, and new product development. During 2009,
salaries and related costs of certain engineering personnel who
were used in the development of software met the capitalization
criteria of ASC Topic
985-20,
Costs of Computer Software to be Sold, Leased or
Marketed. The total amount of personnel and other expense
capitalized in 2009 was $2.1 million as compared to
$1.5 million for 2008. In aggregate, research and
development expenditures in 2009 were $2.6 million as
compared to aggregate expenditures of $2.5 million in 2008.
This increase in research and development expenditures is
attributable to the Companys continued efforts to pursue
technological enhancements to existing products and to develop
new, technologically advanced products that will meet our
customers needs. Product development based upon advanced
technologies is one of the primary means by which management
believes DRI differentiates itself from its competitors.
Operating
Income (Loss)
The net change in our operating income was a decrease of $72,000
from net operating income of $3.9 million in 2008 to net
operating income of $3.8 million in 2009. The decrease in
operating income was due to higher sales and gross profit and
lower research and development costs offset by higher selling,
general and administrative expenses as previously described.
Other
Income, Foreign Currency Gain (Loss) and Interest
Expense
Other income, foreign currency gain (loss), and interest expense
decreased $343,000 from ($687,000) in 2008 to
($1.0 million) in 2009 due to an increase in interest
expense of $27,000, a decrease in other income (loss) of
$289,000, and a decrease in foreign currency gain of $27,000. In
2008, interest expense of $54,000 was recorded to amortize the
fair value of a beneficial conversion feature of a debenture
that was converted to Common Stock; this resulted in a decrease
in interest expense in 2009 as compared to 2008. Interest
expense was also lower in 2009 due to lower borrowings on
international lines of credit and loans throughout most of 2009
as compared to 2008. These decreases were partially offset by
increased interest expense resulting from increased borrowings
on our domestic lines of credit and loans.
Income
Tax Expense
Income tax expense was $836,000 in 2009 as compared with an
income tax expense of $1.1 million in 2008. The
Companys effective tax rate was 29.7% and 36.3% in 2009
and 2008, respectively. The Companys 29.7% effective tax
rate in 2009 differed from the expected U.S. statutory rate
of 34% due primarily to a correcting increase to the prior year
net operating loss carryforward, lower rates on income reported
in foreign tax jurisdictions, a reduction of tax liabilities for
uncertain tax positions, and a decrease in the valuation
allowance recorded against deferred tax assets. The
Companys 36.3% effective tax rate in 2008 differed from
the expected U.S. statutory rate of 34% due primarily to
higher rates on income reported in foreign tax jurisdictions and
an increase in the valuation allowance recorded against deferred
tax assets, partially offset by a correcting increase to the
prior year net operating loss carryforward. A reconciliation of
the effective tax rates for 2009 and 2008 to the expected
U.S. statutory rate of 34% is provided in Note 15 to
the accompanying consolidated financial statements.
Net
Income (Loss) Applicable to Common Shareholders of DRI
Corporation
Net income applicable to common shareholders of DRI Corporation
increased $318,000 from net income of $1.2 million in 2008
to net income of $1.5 million in 2009. This increase is due
to the factors previously addressed, as well as a $16,000
increase in preferred stock dividends.
Liquidity
and Capital Resources
Cash
Flows
The Companys net working capital as of December 31,
2010, was $9.1 million compared to $11.8 million as of
December 31, 2009. Our principal sources of liquidity from
current assets included cash and cash equivalents of
$1.4 million, trade and other receivables of
$16.0 million and inventories of $15.1 million, and
30
prepaids and other current assets of $1.4 million. The most
significant current liabilities at December 31, 2010,
included asset-based borrowings of $8.5 million, accounts
payable of $8.7 million, accrued expenses and other current
liabilities of $6.4 million, and the current portion of
long-term debt of $944,000. The asset-based lending agreements,
both foreign and domestic, are directly related to sales and
customer account collections and inventory. Our domestic
asset-based lending agreement was negotiated with the intent
that borrowings on the revolving credit facility would be
long-term debt. However, ASC Topic
470-10-45-5,
Classification of Revolving Credit Agreements Subject to
Lock-Box Arrangement and Subjective Acceleration Clauses,
requires the Company to classify all of our outstanding debt
under this agreement as a current liability. The agreement has a
subjective acceleration clause, which could enable the lender to
call the loan, but such language is customary in asset-based
lending agreements and management does not expect the lender to
use this particular clause to inhibit the Company from making
borrowings as provided under the loan agreement.
Our operating activities provided net cash of $1.9 million
for the year ended December 31, 2010. Sources of cash from
operations primarily resulted from a decrease in trade accounts
receivable of $2.6 million, a decrease in prepaids and
other current assets of $1.0 million, a $89,000 increase in
accrued expenses and other current liabilities, a $189,000
decrease in other receivables, a $13,000 decrease in other
assets, and our net loss of $1.8 million offset by non-cash
expenses of $4.4 million. Non-cash expenses were primarily
related to depreciation and amortization, bad debt expense,
Common Stock issued in lieu of cash compensation, stock based
compensation expense, loan termination fees, inventory
obsolescence charges, and impairment of other current assets
(see Note 23 to the accompanying consolidated financial
statements for further discussion of this impairment). Cash used
in operating activities primarily resulted from an increase in
inventories of $2.9 million, a decrease in accounts payable
of $1.5 million, and a decrease in the foreign tax
settlement of $324,000. The decrease in trade accounts
receivable primarily results from lower sales in the fourth
quarter of 2010 compared to the fourth quarter of 2009. The
increase in inventories resulted from international customer
order cancellations and delays. The additional on-hand inventory
which resulted from the order cancellations includes component
parts and
sub-assemblies
that can be sold to other customers at prices above cost and
would not be considered excess or obsolete or require an
adjustment from the current carrying value. The decrease in
accounts payable is due to higher inventory purchases at the end
of 2009 to support higher sales during the fourth quarter of
2009. The decrease in prepaids and other current assets is
primarily due to a refund of advance payments to suppliers
partially offset by higher excise tax credits. We consider the
changes incurred in our operating assets and liabilities
routine, given the number and size of orders relative to our
industry and our size. We expect working capital requirements to
continue to increase with growth in sales, primarily due to the
timing between when we must pay suppliers and the time we
receive payment from our customers.
Our investing activities used cash of $3.2 million for the
year ended December 31, 2010. The primary uses of cash were
for expenditures relating to internally developed software and
purchases of computer, test, and office equipment. We do not
anticipate any significant expenditures for, or sales of,
capital equipment in the near future.
Our financing activities provided net cash of $830,000 for the
year ended December 31, 2010. Sources of cash primarily
resulted from net borrowings under asset-based lending
agreements for both our U.S and our foreign subsidiaries as well
as proceeds from the issuance of Series K Preferred stock,
including collection of stock subscription receivable in January
2010. Our primary uses of cash for financing activities were
payment of financing costs related to amendments of the BHC
agreement and payment of dividends.
Significant
Financing Arrangements
The Companys primary source of liquidity and capital
resources has been from financing activities. The Company has
agreements with lenders under which revolving lines of credit
have been established to support the working capital needs of
our current operations. These lines of credit are as follows:
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DR and TVna (collectively, the Borrowers) have in
place an asset-based lending agreement (the PNC
Agreement) with PNC Bank, National Association
(PNC) which has a maturity date that, effective
March 31, 2011, has been extended to the earlier of
(a) April 30, 2012 or (b) five days prior
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31
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to the maturity date of our domestic term loan with BHC Interim
Funding III. DRI has agreed to guarantee the obligations of the
Borrowers under the PNC Agreement. The PNC Agreement provides up
to $8.0 million in borrowings under a revolving credit
facility. Borrowing availability under the PNC Agreement is
based upon an advance rate equal to 85% of eligible domestic
accounts receivable of the Borrowers plus 75% of eligible
foreign receivables of the Borrowers, limited to the lesser of
$2.5 million or the amount of coverage under acceptable
credit insurance policies of the Borrowers, as determined by PNC
in its reasonable discretion, plus 85% of the appraised net
orderly liquidation value of inventory of the Borrowers, limited
to $750,000. At December 31, 2010, the outstanding
principal balance on the revolving credit facility was
approximately $2.8 million and remaining borrowing
availability under the revolving credit facility was
approximately $1.6 million.
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Mobitec AB has credit facilities in place under agreements with
Svenska Handelsbanken AB (Handelsbanken) pursuant to
which it may currently borrow up to a maximum of
38.0 million krona, or approximately US$5.6 million
(based on exchange rates at December 31, 2010) through
May 31, 2011, on which date, under terms of the credit
agreements, the maximum borrowing capacity will be reduced by
7.0 million krona, or approximately US$1.0 million
(based on exchange rates at December 31, 2010). At
December 31, 2010, borrowings due and outstanding under
these credit facilities totaled 33.0 million krona
(approximately US$4.9 million, based on exchange rates at
December 31, 2010). Additional borrowing availability under
these agreements at December 31, 2010 amounted to
approximately US$733,000. These credit agreements renew annually
on a calendar-year basis.
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Mobitec GmbH has a credit facility in place under an agreement
with Handelsbanken pursuant to which it may borrow up to a
maximum of approximately 912,000 Euro (approximately
US$1.2 million, based on exchange rates at
December 31, 2010). At December 31, 2010, borrowings
due and outstanding under this credit facility totaled 556,000
Euro (approximately US$737,000, based on exchange rates at
December 31, 2010). Additional borrowing availability under
this credit facility at December 31, 2010 amounted to
approximately US$472,000. The agreement under which this credit
facility is extended has an open-ended term.
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In addition to the revolving lines of credit described herein,
the Company has agreements under which additional loans and
credit facilities have been established to provide working
capital to our domestic and foreign operations as follows:
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At December 31, 2010, pursuant to terms of a loan agreement
(the BHC Agreement) with BHC Interim Funding III,
L.P. (BHC), the Borrowers had an outstanding
principal balance of approximately $4.8 million due on a
term loan (the Term Loan) which had an original
principal balance of a $5.0 million. The Term Loan has a
maturity date that, effective April 6, 2011, has been
extended to April 30, 2012.
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At December 31, 2010, Mobitec AB had an outstanding
principal balance of approximately 1.9 million krona
(approximately US$277,000, based on exchange rates at
December 31, 2010) due on an additional term loan
under a credit agreement with Handelsbanken (the Mobitec
Loan). The Mobitec Loan is payable in quarterly principal
installments of 375,000 krona (approximately US$55,000, based on
exchange rates at December 31, 2010) and matures
March 31, 2012.
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At December 31, 2010, Mobitec Brazil has outstanding
borrowings from a bank in Brazil of approximately 583,000
Brazilian Real (BRL) (approximately US$350,000,
based on exchange rates at December 31, 2010). The
borrowings are secured by accounts receivable on certain export
sales by Mobitec Brazil Ltda and have a term of 180 days.
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At December 31, 2010, Mobitec Brazil had two loans payable
to two banks in Brazil with an aggregate outstanding principal
balance of approximately 228,000 BRL (approximately US$136,000,
based on exchange rates as of December 31, 2010). One loan
has a principal balance of approximately 154,000 BRL
(approximately US$92,000, based on exchange rates as of
December 31, 2010) and matures May 3, 2011. The
other loan has an outstanding principal balance of approximately
74,000 BRL
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(approximately US$44,000, based on exchange rates as of
December 31, 2010) and has a maturity date of
May 31, 2013.
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At December 31, 2010, Castmaster Mobitec had two loans
payable to a bank in India with an aggregate outstanding
principal balance of approximately 5.0 million Indian
Rupees (INR) (approximately US$109,000, based on
exchange rates as of December 31, 2010). One loan has a
principal balance of approximately 4.1 million INR
(approximately US$90,000, based on exchange rates as of
December 31, 2010) and matures September 7, 2012.
The second loan has a principal balance of approximately 880,000
INR (approximately US$19,000, based on exchange rates as of
December 31, 2010) and matures November 7, 2014.
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The Companys outstanding lines of credit and loans, and
the agreements under which these credit facilities were
established, are more fully described in Note 8 and
Note 9 to the accompanying consolidated financial
statements.
The PNC Agreement and the BHC Agreement contain certain
financial covenants with which we and our subsidiaries must
comply. Among the covenants contained in the PNC Agreement and
BHC Agreement are requirements that we and our domestic
subsidiaries maintain certain fixed charge coverage ratios,
leverage ratios and EBITDA amounts as of the end of each fiscal
quarter for the twelve-month period then ending. For the quarter
ended September 30, 2010, we were not in compliance with
the fixed charge coverage ratio or the EBITDA amount required to
be maintained under terms of the PNC Agreement and the BHC
Agreement. PNC and BHC agreed to amend the PNC Agreement and the
BHC Agreement, respectively, to revise the fixed charge coverage
ratio required to be maintained for the quarter ended
September 30, 2010 to 0.70 to 1.00 and agreed to revise the
trailing-twelve-month EBITDA amount required to be maintained
for the quarter ended September 30, 2010 to $4,750,000. On
November 12, 2010, the PNC Agreement and BHC Agreement were
each amended to revise the minimum fixed charge coverage ratio,
leverage ratio and EBITDA amounts required to be maintained as
of the end of each of the fiscal quarters ending
September 30, 2010, December 31, 2010, March 31,
2011 and June 30, 2011 as set forth below:
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Fixed Charge
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Fiscal Quarter Ending:
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Coverage Ratio:
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Leverage Ratio:
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EBITDA:
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September 30, 2010
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0.70 to 1.00
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8.85 to 1.00
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$
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4,750,000
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December 31, 2010
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0.85 to 1.00
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8.25 to 1.00
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$
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4,250,000
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March 31, 2011
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1.00 to 1.00
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7.25 to 1.00
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$
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5,000,000
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June 30, 2011
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1.05 to 1.00
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7.00 to 1.00
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$
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5,000,000
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For the quarter ended September 30, 2010, we were in
compliance with each of the amended financial covenants set
forth above. For the quarter ended December 31, 2010, we
were not in compliance with the fixed charge coverage ratio,
leverage ratio or EBITDA amount required to be maintained as set
forth above. PNC and BHC agreed to waive each of the covenant
violations for the quarter ended December 31, 2010.
33
On March 31, 2011 and April 6, 2011, the PNC Agreement
and BHC Agreement, respectively, were each amended to, among
other things, extend the maturity date of those agreements. The
maturity date of the PNC Agreement was extended to the earlier
of (a) April 30, 2012 or (b) five days prior to
the maturity date of the BHC Agreement. The maturity date of the
BHC Agreement was extended to April 30, 2012. These
amendments to the PNC Agreement and BHC Agreement also revised
certain of the financial covenants with which we and our
subsidiaries must comply to:
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Establish the fixed charge coverage ratio required to be
maintained as of the end of each of the fiscal quarters ending
March 31, 2011, June 30, 2011, September 30,
2011, December 31, 2011 and each fiscal quarter ending
thereafter as set forth below:
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Fixed Charge
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Fiscal Quarter Ending:
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Coverage Ratio:
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March 31, 2011
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No Test
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June 30, 2011
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No Test
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September 30, 2011
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No Test
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December 31, 2011 and each fiscal quarter ending thereafter
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1.25 to 1.00
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Establish the leverage ratio required to be maintained as of the
end of each of the fiscal quarters ending March 31, 2011,
June 30, 2011, September 30, 2011, December 31,
2011 and each fiscal quarter ending thereafter as set forth
below;:
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Fiscal Quarter Ending:
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Leverage Ratio:
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March 31, 2011
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17.50 to 1.00
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June 30, 2011
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16.50 to 1.00
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September 30, 2011
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10.25 to 1.00
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December 31, 2011 and each fiscal quarter ending thereafter
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4.00 to 1.00
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Establish the minimum, trailing-twelve-month EBITDA that must be
maintained by DRI Corporation on a consolidated basis as of the
end of each of the fiscal quarters ending March 31, 2011,
June 30, 2011, September 30, 2011, December 31,
2011 and each fiscal quarter ending thereafter as set forth
below:
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Fiscal Quarter Ending:
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EBITDA:
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March 31, 2011
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$
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2,750,000
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June 30, 2011
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$
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3,000,000
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September 30, 2011
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$
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5,000,000
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December 31, 2011 and each fiscal quarter ending thereafter
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$
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7,000,000
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The amendment to the PNC Agreement also (a) reduced the
early termination fee to $40,000 and (b) established a
minimum domestic EBITDA amount that we and the Borrowers must
maintain on a trailing-twelve-month basis as of the end of each
of the fiscal quarters ending March 31, 2011, June 30,
2011, September 30, 2011, December 31, 2011 and each
fiscal quarter ending thereafter as set forth below:
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Fiscal Quarter Ending:
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EBITDA:
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March 31, 2011
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$
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525,000
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June 30, 2011
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$
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625,000
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September 30, 2011
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$
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900,000
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December 31, 2011 and each fiscal quarter ending thereafter
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No Test
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34
The amendment to the BHC Agreement also (a) revised the
minimum Net Worth, as defined in the BHC Agreement, that we and
the Borrowers must maintain, at all times during and at the end
of each fiscal quarter, to $12,500,000 and (b) revised the
termination fee required to be paid on each date on which any
payment or prepayment of principal on the Term Loan occurs as
set forth below:
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Then the Amount of the
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If the Payment Date is:
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Termination Fee Shall Equal:
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On or before June 30, 2011
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$
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800,000
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After June 30, 2011, but on or before September 30,
2011
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$
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1,000,000
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After September 30, 2011, but on or before
December 30, 2011
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$
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1,300,000
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January 1, 2012 and thereafter
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$
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1,700,000
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Additionally, the amendments to the PNC Agreement and BHC
Agreement (1) allow us to pay non-cash dividends consisting
of additional shares of our capital stock and (2) prohibit
us from paying cash dividends on any series of preferred stock
until such time that we can demonstrate pro forma compliance
with the fixed charge coverage ratio covenant, as amended and
set forth above, for the fiscal quarter most recently ended;
provided, however, if the fixed charge coverage ratio was not
tested in such fiscal quarter, no such payments shall be
permitted. Series K Preferred (as defined below) dividends
have preference to the payment of all other dividends. Currently
all Series K Preferred dividends are designated as cash
dividends. With the restrictions of the PNC Agreement and BHC
Agreement, as amended and described herein, the Company is
effectively restricted from paying any cash or non-cash
dividends on any series of preferred stock during the prohibited
period defined in the preceding clause (2) because of the
Series K Preferred preference. Therefore, dividends on all
series of preferred stock shall be accrued in the future and not
paid or issued until such prohibition under the PNC Agreement
and BHC Agreement no longer exists.
We believe we will be able to comply with the financial
covenants of the PNC Agreement and BHC Agreement, as amended and
set forth above, but can give no assurance of such compliance.
Series K
Preferred Stock
On August 16, 2010, the Company sold an aggregate of
120 shares of the Companys Series K Senior
Redeemable Convertible Preferred Stock (Series K
Preferred) to multiple outside investors. Gross proceeds
from the sale of the Series K Preferred of $600,000 were
used to make a recallable equity investment in Mobitec AB.
Management
Conclusion
Our liquidity is primarily measured by the borrowing
availability on our domestic and international working capital
lines of credit and is determined, at any point in time, by
comparing our borrowing base (generally, eligible accounts
receivable and inventory) to the balances of our outstanding
lines of credit. Borrowing availability on our domestic and
international lines of credit is driven by several factors,
including the timing and amount of orders received from
customers, the timing and amount of customer billings, the
timing of collections on such billings, lead times and amounts
of inventory purchases, and the timing of payments to vendors,
primarily on payments to vendors from whom we purchase
inventory. We believe the Companys liquidity and capital
resources will be sufficient to support the working capital and
capital expenditure needs of our operations during fiscal year
2011.
As described herein, certain of our loan agreements contain
covenants with which we and our subsidiaries must comply on a
quarterly basis. We believe we will be able to comply with such
loan covenants in each quarter of fiscal year 2011, though we
can give no assurance of such compliance.
35
Critical
Accounting Policies and Estimates
DRIs significant accounting policies and estimates used in
the preparation of the Consolidated Financial Statements are
discussed in Note 1 of the Notes to Consolidated Financial
Statements. The following is a listing of DRIs critical
accounting policies and estimates and a brief description of
each:
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Allowance for doubtful accounts;
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Inventory valuation
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Warranty reserve;
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Intangible assets and goodwill;
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Income taxes, including deferred tax assets;
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Revenue recognition; and
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Stock-based compensation
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Allowance
for Doubtful Accounts
Our allowance for doubtful accounts relates to trade accounts
receivable. It reflects our estimate of the amount of our
outstanding accounts receivable that are not likely to be
collected. A significant portion of the Companys sales are
to large OEMs or to state or local governmental units or
authorities, so management expects low losses resulting from
insolvency or actual inability to pay. The allowance for
doubtful accounts is a periodic estimate prepared by management
based upon identification of the collections of specific
accounts and the overall condition of the receivable portfolios.
When evaluating the adequacy of the allowance for doubtful
accounts, we analyze our trade receivables, the customer
relationships underlying the receivables, historical bad debts,
customer concentrations, customer creditworthiness, current
economic trends, and changes in customer payment terms.
Inventory
Valuation and Warranty Reserve
We periodically evaluate the carrying amount of inventory based
upon current shipping forecasts and warranty and post-warranty
component requirements. As a part of the sale, the Company
typically extends a warranty term generally ranging from one to
five years. We account for this liability through a warranty
reserve on the balance sheet. Additionally, in special
situations, we may, solely at our discretion, use extended or
post-warranty services as a marketing tool. In these instances,
such future warranty costs have previously been included in the
established warranty reserves. Many of our customers have
contractual or legal requirements, which dictate an extended
period of time for us to maintain replacement parts. Our
evaluation of inventory reserves involves an approach that
incorporates both recent historical information and management
estimates of trends. Our approach is intended to take into
consideration potential excess and obsolescence in relation to
our installed base, engineering changes, uses for components in
other products, return rights with vendors and
end-of-life
manufacture. Estimating sales prices, establishing markdown
percentages and evaluating the condition of the inventories
require judgments and estimates, which may impact the inventory
valuation and gross profits. We believe, based on our prior
experience of managing and evaluating the recoverability of our
slow moving or obsolete inventory, that such established
reserves are materially adequate. If actual market conditions
and product sales were less favorable than we have projected,
additional inventory write-downs may be necessary. The inventory
write-down calculations are reviewed periodically and additional
write-downs are recorded as deemed necessary.
Intangible
Assets and Goodwill
Goodwill is assigned to our reporting units, which are defined
as the domestic and international operating segments. We test
goodwill for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired. The impairment test compares the fair value of the
reporting unit with its carrying amount. If the carrying amount
exceeds its fair value, impairment is indicated. If an
36
impairment is indicated, the impairment is measured as the
excess of the recorded goodwill over its fair value, which could
materially adversely impact our consolidated financial position
and results of operations.
We performed a goodwill impairment test as of December 31,
2010. We estimated fair value for each reporting unit utilizing
two valuation approaches: (1) the income approach and
(2) the market approach. The income approach measures the
present worth of anticipated future net cash flows generated by
the reporting unit. Net cash flows are forecast for an
appropriate period and then discounted to present value using an
appropriate discount rate. Net cash flow forecasts require
analysis of the significant variables influencing revenues,
expenses, working capital and capital investment and involves a
number of significant assumptions and estimates. The market
approach is performed by observing the price at which companies
comparable to the reporting unit, or shares of those guideline
companies, are bought and sold. Adjustments are made to the data
to account for operational and other relevant differences
between the reporting unit and the guideline companies. To
arrive at estimated fair value of each reporting unit, we
assigned an appropriate weighting to the value of the reporting
unit calculated under of each of the two valuation approaches.
The aggregate weighted fair value under the two valuation
approaches is the estimated fair value of the reporting unit.
Additional judgments and assumptions are made in allocating
assets and liabilities to determine the carrying values for each
of our reporting units. We believe the assumptions we use in
estimating fair value and in determining the carrying value of
our reporting units are reasonable, but are also unpredictable
and inherently uncertain. At December 31, 2010, our
estimated fair value of the reporting units exceeded carrying
value of our reporting units thereby indicating no impairment
existed. However, for our Mobitec reporting unit, the concluded
fair value was only marginally higher than the carrying value.
If our estimated fair value of the reporting units declines at
some point in the future, the Company may be required to record
an impairment charge. Actual future results may differ from
those estimates.
Income
Taxes
We are required to pay income taxes in each of the jurisdictions
in which we operate. These jurisdictions include the
U.S. Government and several states, and a number of foreign
countries. Each of these jurisdictions has its own laws and
regulations, some of which are quite complex and some of which
are the subject of disagreement among experts and authorities as
to interpretation and application. The estimation process for
preparation of our financial statements involves estimating our
actual current tax expense together with assessing temporary
differences resulting from differing treatment of items for
income tax and accounting purposes. We review our operations and
the application of applicable laws and rules to our
circumstances. To the extent we believe necessary, we also seek
the advice of professional advisers in various jurisdictions.
We record an income tax valuation allowance when, based on the
weight of the evidence, it is more likely than not that some
portion, or all, of the deferred tax asset will not be realized.
The ultimate realization of the deferred tax asset depends on
our ability to generate sufficient taxable income of the
appropriate character in the future and in the appropriate
taxing jurisdictions. In assessing the realization of the
deferred tax assets, consideration is given to, among other
factors, the trend of historical and projected future taxable
income, the scheduled reversal of deferred tax liabilities, the
carryforward period for net operating losses and tax credits, as
well as tax planning strategies available to us. Certain
judgments, assumptions and estimates are required in assessing
such factors and significant changes in such judgments and
estimates may materially affect the carrying value of the
valuation allowance and deferred income tax expense or benefit
recognized in our consolidated financial statements.
We account for uncertain tax positions in accordance with ASC
Topic
740-10-25.
The application of income tax law is inherently complex. As
such, we are required to make certain assumptions and judgments
regarding our income tax positions and the likelihood whether
such tax positions would be sustained if challenged. Penalties
related to uncertain tax positions are recorded as a component
of operations. There is no interest charged for underpayment of
taxes in the jurisdiction to which our uncertain tax positions
relate. Interpretations and guidance surrounding income tax laws
and regulations change over time. As such, changes in our
assumptions and judgments can materially affect amounts
recognized in our consolidated balance sheets and statement of
operations.
37
Revenue
Recognition
The Company recognizes revenue when all of the following
criteria are met: persuasive evidence that an arrangement
exists; delivery of the products or services has occurred; the
selling price is fixed or determinable and collectability is
reasonably assured. The Companys transactions sometimes
involve multiple element arrangements in which significant
deliverables typically include hardware, installation services,
and other services. Under a typical multiple element
arrangement, the Company delivers the hardware to the customer
first, then provides services for the installation of the
hardware, followed by system
set-up
and/or data
services. Revenue under multiple element arrangements is
recognized in accordance with Accounting Standards Update
(ASU)
No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which amends
FASB Accounting Standards Codification (ASC) Topic
605, Revenue Recognition. ASU
2009-13
amends FASB ASC Topic 605 to eliminate the residual method of
allocation for multiple-deliverable revenue arrangements and
requires that arrangement consideration be allocated at the
inception of an arrangement to all deliverables using the
relative selling price method. ASU
2009-13 also
establishes a selling price hierarchy for determining the
selling price of a deliverable, which includes
(1) vendor-specific objective evidence, if available,
(2) third-party evidence, if vendor-specific objective
evidence is not available, and (3) estimated selling price,
if neither vendor-specific nor third-party evidence is available.
Each deliverable within a multiple-deliverable revenue
arrangement is accounted for as a separate unit of accounting
under the guidance of ASU
2009-13 if
both of the following criteria are met: (1) the delivered
item or items have value to the customer on a standalone basis
and (2) for an arrangement that includes a general right of
return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered probable
and substantially in our control. We consider a deliverable to
have standalone value if we sell this item separately or if the
item is sold by another vendor or could be resold by the
customer. Deliverables not meeting the criteria for being a
separate unit of accounting are combined with a deliverable that
does meet that criteria. The appropriate allocation of
arrangement consideration and recognition of revenue is then
determined for the combined unit of accounting. Our revenue
arrangements generally do not include a general right of return
relative to delivered products.
Certain of our multiple-deliverable revenue arrangements include
sales of software and software related services, and may include
post-contract support (PCS) for the software
products. We account for software sales in accordance with ASC
Topic
985-605,
Software Revenue Recognition (ASC
985-605)
whereby the revenue from software and related services is
recognized over the PCS period if PCS is the only undelivered
element and we do not have vendor specific objective evidence
for PCS.
Prior to fiscal year 2009 when we adopted ASU
2009-13, we
accounted for multiple element arrangements in accordance with
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. When
more than one element was contained in a single arrangement, we
allocated revenue between the elements based on acceptable
fair-value-allocation methodologies, so long as each element met
the criteria for treatment as a separate unit of accounting. An
item was considered a separate unit of accounting if it had
value to the customer on a stand-alone basis and there was
objective and reliable evidence of the fair value of the
undelivered items. The fair value of each undelivered element
was determined, if sold separately, by the price charged or, if
not sold separately, by other acceptable objective evidence. In
the absence of acceptable objective evidence of the undelivered
items, revenue was deferred until all items were delivered.
Service revenues are recognized upon completion of the services
and include product repair not under warranty, city route
mapping, product installation, training, consulting to transit
authorities and funded research and development projects.
Service revenues were less than 3% of total revenue for 2010,
2009, and 2008.
Stock-based
Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic
718-20,
Stock Compensation Awards Classified as Equity. Under ASC
Topic
718-20, the
Company estimates the fair value of stock options granted using
the Black-Scholes option pricing model and the fair value of
restricted stock granted using the market price of our Common
Stock on the date of grant. The fair value is then amortized on
38
a straight-line basis over the requisite service period of the
award, which is generally the vesting term. This stock option
pricing model requires the input of highly subjective
assumptions, including an options expected life and the
expected volatility of the Companys Common Stock.
Off-Balance
Sheet Arrangements
DRI does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on
its financial condition, changes in financial condition, sales
or expenses, results of operations, liquidity, capital
expenditures or capital resources that would be material to
investors. We do, however, have warrants to acquire shares of
our Common Stock outstanding at varied exercise prices. 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.
Recent
Accounting Pronouncements
In January 2010, the FASB issued ASU
2010-01,
Equity (Topic 505) Accounting for Distributions
to Shareholders with Components of Stock and Cash. ASU
2010-01
clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or shares
with a potential limitation on the amount of cash that all
shareholders can elect to receive is considered a share
issuance. ASU
2010-01 is
effective for interim and annual periods ending on or after
December 15, 2009 and should be applied on a retrospective
basis. The adoption of ASU
2010-01 did
not have a material impact on the Companys consolidated
financial statements.
In December 2010, the FASB issued ASU
2010-28,
Intangibles Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts. ASU
2010-28
modified Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. For public entities, the amendments
in ASU
2010-28 are
effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. We believe the
adoption of ASU
2010-28 will
not have a material impact on the Companys consolidated
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, 2010. However, there
can be no assurance that future inflation will not have an
adverse impact upon our operating results and financial
condition.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Not Applicable
39
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
DRI
CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Section
|
|
Page
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
40
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
DRI Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of
DRI Corporation (a North Carolina Corporation) and Subsidiaries
as of December 31, 2010 and 2009 and the related
consolidated statements of operations, shareholders equity
and cash flows for each of the three years in the period ended
December 31, 2010. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 DRI Corporation and Subsidiaries as of
December 31, 2010 and 2009 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
As disclosed in Note 1 to the consolidated financial
statements, effective January 1, 2009, the Company adopted
new accounting guidance related to the accounting for and
financial statement presentation of multiple element revenue
arrangements and financial instruments indexed to the
Companys own stock.
/s/ GRANT THORNTON LLP
Charlotte, North Carolina
April 15, 2011
41
DRI
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except shares and per share amounts)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,391
|
|
|
$
|
1,800
|
|
Trade accounts receivable, net
|
|
|
15,678
|
|
|
|
18,192
|
|
Current portion of note receivable
|
|
|
86
|
|
|
|
86
|
|
Stock subscription receivable
|
|
|
|
|
|
|
670
|
|
Other receivables
|
|
|
300
|
|
|
|
559
|
|
Inventories, net
|
|
|
15,134
|
|
|
|
13,042
|
|
Prepaids and other current assets
|
|
|
1,389
|
|
|
|
2,930
|
|
Deferred tax assets, net
|
|
|
613
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,591
|
|
|
|
37,529
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,145
|
|
|
|
5,266
|
|
Long-term portion of note receivable
|
|
|
|
|
|
|
86
|
|
Goodwill
|
|
|
10,398
|
|
|
|
9,793
|
|
Intangible assets, net
|
|
|
651
|
|
|
|
728
|
|
Other assets
|
|
|
1,045
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,830
|
|
|
$
|
54,292
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
$
|
8,454
|
|
|
$
|
7,200
|
|
Loans payable
|
|
|
442
|
|
|
|
463
|
|
Current portion of long-term debt
|
|
|
944
|
|
|
|
960
|
|
Current portion of foreign tax settlement
|
|
|
550
|
|
|
|
561
|
|
Accounts payable
|
|
|
8,703
|
|
|
|
10,099
|
|
Accrued expenses and other current liabilities
|
|
|
6,354
|
|
|
|
6,459
|
|
Preferred stock dividends payable
|
|
|
19
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
25,466
|
|
|
|
25,762
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, net
|
|
|
6,239
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
Foreign tax settlement, long-term
|
|
|
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, net
|
|
|
84
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
Liability for uncertain tax positions
|
|
|
723
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 7, 8, 9, 18, and 19)
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Series K redeemable, convertible preferred stock,
$.10 par value, liquidation preference of $5,000 per share;
475 shares authorized; 439 and 299 shares issued and
outstanding at December 31, 2010, and December 31,
2009, respectively; redeemable at the discretion of the Company
at any time
|
|
|
1,957
|
|
|
|
1,341
|
|
Series E redeemable, nonvoting, convertible preferred
stock, $.10 par value, liquidation preference of $5,000 per
share; 80 shares authorized; 80 shares issued and
outstanding at December 31, 2010, and December 31,
2009; redeemable at the discretion of the Company at any time
|
|
|
337
|
|
|
|
337
|
|
Series G redeemable, convertible preferred stock,
$.10 par value, liquidation preference of $5,000 per share;
725 shares authorized; 536 and 480 shares issued and
outstanding at December 31, 2010, and December 31,
2009, respectively; redeemable at the discretion of the Company
at any time
|
|
|
2,398
|
|
|
|
2,118
|
|
Series H redeemable, convertible preferred stock,
$.10 par value, liquidation preference of $5,000 per share;
125 shares authorized; 69 shares issued and
outstanding at December 31, 2010, and December 31,
2009, respectively; redeemable at the discretion of the Company
at any time
|
|
|
332
|
|
|
|
297
|
|
Series AAA redeemable, nonvoting, convertible preferred
stock, $.10 par value, liquidation preference of $5,000 per
share; 166 shares authorized; 166 shares issued and
outstanding at December 31, 2010, and December 31,
2009; redeemable at the discretion of the Company at any time
|
|
|
830
|
|
|
|
830
|
|
Common stock, $.10 par value, 25,000,000 shares
authorized; 11,838,873 and 11,746,327 shares issued and
outstanding at December 31, 2010 and December 31,
2009, respectively.
|
|
|
1,184
|
|
|
|
1,175
|
|
Additional paid-in capital
|
|
|
30,374
|
|
|
|
30,393
|
|
Accumulated other comprehensive income foreign
currency translation
|
|
|
3,180
|
|
|
|
1,976
|
|
Accumulated deficit
|
|
|
(20,121
|
)
|
|
|
(18,276
|
)
|
|
|
|
|
|
|
|
|
|
Total DRI shareholders equity
|
|
|
20,471
|
|
|
|
20,191
|
|
Noncontrolling interests Castmaster Mobitec India
Private Limited
|
|
|
847
|
|
|
|
755
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
21,318
|
|
|
|
20,946
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
53,830
|
|
|
$
|
54,292
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
DRI
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Net sales
|
|
$
|
87,301
|
|
|
$
|
82,285
|
|
|
$
|
70,559
|
|
Cost of sales
|
|
|
61,761
|
|
|
|
57,489
|
|
|
|
46,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,540
|
|
|
|
24,796
|
|
|
|
23,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
24,702
|
|
|
|
20,402
|
|
|
|
19,000
|
|
Research and development
|
|
|
612
|
|
|
|
552
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
25,314
|
|
|
|
20,954
|
|
|
|
19,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
226
|
|
|
|
3,842
|
|
|
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
30
|
|
|
|
(101
|
)
|
|
|
188
|
|
Foreign currency gain (loss)
|
|
|
(276
|
)
|
|
|
531
|
|
|
|
558
|
|
Interest expense
|
|
|
(1,488
|
)
|
|
|
(1,460
|
)
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense
|
|
|
(1,734
|
)
|
|
|
(1,030
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1,508
|
)
|
|
|
2,812
|
|
|
|
3,227
|
|
Income tax expense
|
|
|
(245
|
)
|
|
|
(836
|
)
|
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,753
|
)
|
|
|
1,976
|
|
|
|
2,131
|
|
Less: Net income attributable to noncontrolling interests, net
of tax
|
|
|
(92
|
)
|
|
|
(146
|
)
|
|
|
(635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to DRI Corporation
|
|
|
(1,845
|
)
|
|
|
1,830
|
|
|
|
1,496
|
|
Provision for preferred stock dividends
|
|
|
(553
|
)
|
|
|
(319
|
)
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders of DRI
Corporation
|
|
$
|
(2,398
|
)
|
|
$
|
1,511
|
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share applicable to common shareholders of
DRI Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and common share
equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,804,189
|
|
|
|
11,548,403
|
|
|
|
11,333,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,804,189
|
|
|
|
11,715,807
|
|
|
|
11,492,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
DRI
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DRI Shareholders Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Additional
|
|
|
Accum-
|
|
|
Other
|
|
|
Total DRI
|
|
|
|
|
|
Total
|
|
|
|
of Shares
|
|
|
Book
|
|
|
of Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
ulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Issued
|
|
|
Value
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
|
|
(In thousands, except shares and per share amounts)
|
|
|
Balance as of December 31, 2007
|
|
|
816
|
|
|
$
|
3,618
|
|
|
|
11,187,993
|
|
|
$
|
1,119
|
|
|
$
|
32,079
|
|
|
$
|
(21,894
|
)
|
|
$
|
4,570
|
|
|
$
|
19,492
|
|
|
$
|
422
|
|
|
$
|
19,914
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
37,553
|
|
|
|
3
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
86
|
|
Issuance of Series G preferred stock dividend
|
|
|
34
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
|
170
|
|
Issuance of Series H preferred stock dividend
|
|
|
5
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Conversion of Series AAA preferred stock
|
|
|
(6
|
)
|
|
|
(30
|
)
|
|
|
5,454
|
|
|
|
1
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E preferred stock, net of issuance
costs
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
8,333
|
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible subordinated debenture
|
|
|
|
|
|
|
|
|
|
|
227,273
|
|
|
|
23
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
250
|
|
Amortization of convertible subordinated debenture beneficial
conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
333
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
(303
|
)
|
Dividends paid to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
|
|
(205
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
187
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,496
|
|
|
|
|
|
|
|
1,496
|
|
|
|
635
|
|
|
|
2,131
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,058
|
)
|
|
|
(4,058
|
)
|
|
|
|
|
|
|
(4,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
844
|
|
|
$
|
3,765
|
|
|
|
11,466,606
|
|
|
$
|
1,147
|
|
|
$
|
32,706
|
|
|
$
|
(20,398
|
)
|
|
$
|
512
|
|
|
$
|
17,732
|
|
|
$
|
852
|
|
|
$
|
18,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of reclassification of warrants as a result of
a new accounting requirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333
|
)
|
|
|
292
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009, as adjusted
|
|
|
844
|
|
|
$
|
3,765
|
|
|
|
11,466,606
|
|
|
$
|
1,147
|
|
|
$
|
32,373
|
|
|
$
|
(20,106
|
)
|
|
$
|
512
|
|
|
$
|
17,691
|
|
|
$
|
852
|
|
|
$
|
18,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
80,641
|
|
|
|
8
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
101
|
|
Issuance of Series G preferred stock dividend
|
|
|
36
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
180
|
|
Issuance of Series H preferred stock dividend
|
|
|
5
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Issuance of Series K preferred stock, net of issuance costs
|
|
|
299
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341
|
|
|
|
|
|
|
|
1,341
|
|
Conversion of Series J preferred stock, net of issuance
costs
|
|
|
(90
|
)
|
|
|
(388
|
)
|
|
|
199,080
|
|
|
|
20
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
207
|
|
Modification of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
31
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
|
|
(319
|
)
|
|
|
|
|
|
|
(319
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
347
|
|
Purchase of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,707
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,707
|
)
|
|
|
(243
|
)
|
|
|
(2,950
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,830
|
|
|
|
|
|
|
|
1,830
|
|
|
|
146
|
|
|
|
1,976
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
1,464
|
|
|
|
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
1,094
|
|
|
$
|
4,923
|
|
|
|
11,746,327
|
|
|
$
|
1,175
|
|
|
$
|
30,393
|
|
|
$
|
(18,276
|
)
|
|
$
|
1,976
|
|
|
$
|
20,191
|
|
|
$
|
755
|
|
|
$
|
20,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
49,689
|
|
|
|
5
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
Issuance of Series G preferred stock dividend
|
|
|
56
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
|
|
|
|
280
|
|
Issuance of Series H preferred stock dividend
|
|
|
7
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Issuance of Series K preferred stock, net of issuance costs
|
|
|
155
|
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683
|
|
|
|
|
|
|
|
683
|
|
Conversion of Series K preferred stock, net of issuance
costs
|
|
|
(15
|
)
|
|
|
(67
|
)
|
|
|
42,857
|
|
|
|
4
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
|
(553
|
)
|
|
|
|
|
|
|
(553
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
386
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,845
|
)
|
|
|
|
|
|
|
(1,845
|
)
|
|
|
92
|
|
|
|
(1,753
|
)
|
Translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204
|
|
|
|
1,204
|
|
|
|
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
1,297
|
|
|
$
|
5,854
|
|
|
|
11,838,873
|
|
|
$
|
1,184
|
|
|
$
|
30,374
|
|
|
$
|
(20,121
|
)
|
|
$
|
3,180
|
|
|
$
|
20,471
|
|
|
$
|
847
|
|
|
$
|
21,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
DRI
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,753
|
)
|
|
$
|
1,976
|
|
|
$
|
2,131
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(599
|
)
|
|
|
46
|
|
|
|
106
|
|
Change in liability for uncertain tax positions
|
|
|
270
|
|
|
|
37
|
|
|
|
63
|
|
Depreciation and amortization of property and equipment
|
|
|
1,442
|
|
|
|
1,054
|
|
|
|
933
|
|
Amortization of intangible assets
|
|
|
111
|
|
|
|
115
|
|
|
|
151
|
|
Amortization of deferred financing costs
|
|
|
586
|
|
|
|
478
|
|
|
|
344
|
|
Amortization of debt discount
|
|
|
111
|
|
|
|
111
|
|
|
|
170
|
|
Amortization of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
|
110
|
|
|
|
|
|
Loan termination fee accrual
|
|
|
235
|
|
|
|
243
|
|
|
|
123
|
|
Bad debt expense
|
|
|
302
|
|
|
|
180
|
|
|
|
176
|
|
Stock issued in lieu of cash compensation
|
|
|
90
|
|
|
|
101
|
|
|
|
86
|
|
Stock-based compensation expense
|
|
|
386
|
|
|
|
347
|
|
|
|
187
|
|
Write-down of inventory for obsolescence
|
|
|
275
|
|
|
|
197
|
|
|
|
156
|
|
Impairment of other current assets
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
83
|
|
|
|
20
|
|
|
|
15
|
|
Other, primarily effect of foreign currency (gain) loss and bank
fees
|
|
|
99
|
|
|
|
(324
|
)
|
|
|
(412
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in trade accounts receivable
|
|
|
2,618
|
|
|
|
(4,592
|
)
|
|
|
(2,454
|
)
|
(Increase) decrease in other receivables
|
|
|
189
|
|
|
|
(394
|
)
|
|
|
3
|
|
Increase in inventories
|
|
|
(2,914
|
)
|
|
|
(1,697
|
)
|
|
|
(2,330
|
)
|
(Increase) decrease in prepaids and other current assets
|
|
|
1,000
|
|
|
|
(1,350
|
)
|
|
|
39
|
|
(Increase) decrease in other assets
|
|
|
13
|
|
|
|
(6
|
)
|
|
|
(11
|
)
|
Increase (decrease) in accounts payable
|
|
|
(1,492
|
)
|
|
|
4,063
|
|
|
|
(416
|
)
|
Increase in accrued expenses and other current liabilities
|
|
|
89
|
|
|
|
1,184
|
|
|
|
1,231
|
|
Decrease in foreign tax settlement
|
|
|
(324
|
)
|
|
|
(334
|
)
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,855
|
|
|
|
1,565
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Purchases of property and equipment
|
|
|
(718
|
)
|
|
|
(218
|
)
|
|
|
(489
|
)
|
Investments in software development
|
|
|
(2,452
|
)
|
|
|
(2,123
|
)
|
|
|
(1,551
|
)
|
Acquisition of noncontrolling interest
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,170
|
)
|
|
|
(3,337
|
)
|
|
|
(2,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings and lines of credit
|
|
|
96,724
|
|
|
|
96,610
|
|
|
|
88,658
|
|
Principal payments on bank borrowings and lines of credit
|
|
|
(96,791
|
)
|
|
|
(94,435
|
)
|
|
|
(85,032
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Proceeds from issuance of preferred stock, net of costs
|
|
|
1,235
|
|
|
|
825
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(1,304
|
)
|
Payment of loan amendment fees
|
|
|
(99
|
)
|
|
|
(79
|
)
|
|
|
|
|
Payment of dividends to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
Payment of dividends on preferred stock
|
|
|
(239
|
)
|
|
|
(111
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
830
|
|
|
|
2,810
|
|
|
|
2,010
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
76
|
|
|
|
164
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(409
|
)
|
|
|
1,202
|
|
|
|
(131
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,800
|
|
|
|
598
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,391
|
|
|
$
|
1,800
|
|
|
$
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,236
|
|
|
$
|
1,108
|
|
|
$
|
896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
|
$
|
1,516
|
|
|
$
|
415
|
|
|
$
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
$
|
75
|
|
|
$
|
450
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issued for services
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with new term loan
|
|
$
|
|
|
|
$
|
|
|
|
$
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in fair value of warrants due to modification
|
|
$
|
|
|
|
$
|
88
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of noncontrolling interest under short and long-term
debt obligations
|
|
$
|
|
|
|
$
|
1,950
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible subordinated debenture
|
|
$
|
|
|
|
$
|
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of convertible subordinated debenture beneficial
conversion feature
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment under capital lease obligation
|
|
$
|
|
|
|
$
|
27
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of automobile under long-term debt obligation
|
|
$
|
49
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
$
|
315
|
|
|
$
|
205
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
(1)
|
Organization
and Summary of Significant Accounting Policies
|
Organization
and Liquidity
DRI Corporation (DRI, Company,
we, our, or us) was
incorporated in 1983 as Digital Recorders, Inc. and became a
public company through an initial public offering in November
1994. In June 2007, our shareholders approved changing the
Companys name to DRI Corporation. DRIs common stock,
$0.10 par value per share (the Common Stock),
trades on the NASDAQ Capital
Market®
under the symbol TBUS.
Through its business units and wholly-owned subsidiaries, DRI
designs, manufactures, sells, and services information
technology products either directly or through
manufacturers representatives or distributors. DRI
produces passenger information communication products under the
Talking
Bus®,
TwinVision®,
VacTell®
and
Mobitec®
brand names, which are sold to transportation vehicle equipment
customers worldwide. Customers include municipalities, regional
transportation districts, federal, state and local departments
of transportation, and bus manufacturers. The Company markets
primarily to customers located in North and South America, the
Far East, the Middle East, Asia, Australia, and Europe.
Our liquidity is primarily measured by the borrowing
availability on our domestic and international revolving lines
of credit and is determined, at any point in time, by comparing
our borrowing base (generally, eligible accounts receivable and
inventory) to the balances of our outstanding lines of credit.
Borrowing availability on our domestic and international lines
of credit is driven by several factors, including the timing and
amount of orders received from customers, the timing and amount
of customer billings, the timing of collections on such
billings, lead times and amounts of inventory purchases, and the
timing of payments to vendors, primarily on payments to vendors
from whom we purchase inventory. We believe the Companys
liquidity and capital resources will be sufficient to support
the working capital and capital expenditure needs of our
operations during fiscal year 2011.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) 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 Companys operations are affected by numerous factors
including, but not limited to, changes in laws, governmental
regulations, and technological advances. The Company cannot
predict if any of these factors might have a significant impact
upon the transportation communications industry in the future,
nor can it predict what impact, if any, the occurrence of these
or other events might have upon the Companys operations
and cash flows. Significant estimates and assumptions made by
management are used for, but not limited to, revenue
recognition, the allowance for doubtful accounts, the
obsolescence of certain 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 fair value of equity instruments and warrants, the
provision for income taxes, uncertain tax positions, valuation
allowances on deferred tax assets, and the allowance for
warranty claim reserves.
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
46
financial institutions in amounts that may be in excess of
Federal Deposit Insurance Corporation insurance limits. During
2010, temporary cash investments were as high as
$1.4 million.
Revenue
Recognition
The Company recognizes revenue when all of the following
criteria are met: persuasive evidence that an arrangement
exists; delivery of the products or services has occurred; the
selling price is fixed or determinable and collectability is
reasonably assured. The Companys transactions sometimes
involve multiple element arrangements in which significant
deliverables typically include hardware, installation services,
and other services. Under a typical multiple element
arrangement, the Company delivers the hardware to the customer
first, then provides services for the installation of the
hardware, followed by system
set-up
and/or data
services. Revenue under multiple element arrangements is
recognized in accordance with Accounting Standards Update
(ASU)
No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which amends
FASB Accounting Standards Codification (ASC) Topic
605, Revenue Recognition. ASU
2009-13
amends FASB ASC Topic 605 to eliminate the residual method of
allocation for multiple-deliverable revenue arrangements, and
requires that arrangement consideration be allocated at the
inception of an arrangement to all deliverables using the
relative selling price method. ASU
2009-13 also
establishes a selling price hierarchy for determining the
selling price of a deliverable, which includes
(1) vendor-specific objective evidence, if available,
(2) third-party evidence, if vendor-specific objective
evidence is not available, and (3) estimated selling price,
if neither vendor-specific nor third-party evidence is available.
Each deliverable within a multiple-deliverable revenue
arrangement is accounted for as a separate unit of accounting
under the guidance of ASU
2009-13 if
both of the following criteria are met: (1) the delivered
item or items have value to the customer on a standalone basis
and (2) for an arrangement that includes a general right of
return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered probable
and substantially in our control. We consider a deliverable to
have standalone value if we sell this item separately or if the
item is sold by another vendor or could be resold by the
customer. Deliverables not meeting the criteria for being a
separate unit of accounting are combined with a deliverable that
does meet that criteria. The appropriate allocation of
arrangement consideration and recognition of revenue is then
determined for the combined unit of accounting. Our revenue
arrangements generally do not include a general right of return
relative to delivered products.
Certain of our multiple-deliverable revenue arrangements include
sales of software and software related services, and may include
post-contract support (PCS) for the software
products. We account for software sales in accordance with ASC
Topic
985-605,
Software Revenue Recognition (ASC
985-605)
whereby the revenue from software and related services is
recognized over the PCS period if PCS is the only undelivered
element and we do not have vendor specific objective evidence
for PCS.
Prior to fiscal year 2009 when we adopted ASU
2009-13, we
accounted for multiple element arrangements in accordance with
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
When more than one element was contained in a single
arrangement, we allocated revenue between the elements based on
acceptable fair-value-allocation methodologies, so long as each
element met the criteria for treatment as a separate unit of
accounting. An item was considered a separate unit of accounting
if it had value to the customer on a stand-alone basis and there
was objective and reliable evidence of the fair value of the
undelivered items. The fair value of each undelivered element
was determined, if sold separately, by the price charged or, if
not sold separately, by other acceptable objective evidence. In
the absence of acceptable objective evidence of the undelivered
items, revenue was deferred until all items were delivered.
Service revenues are recognized upon completion of the services
and include product repair not under warranty, city route
mapping, product installation, training, consulting to transit
authorities, and funded research and development projects.
Service revenues were less than 3% of total revenue for 2010,
2009, and 2008.
We generate a significant portion of our sales from a relatively
small number of key customers, the composition of which may vary
from year to year. Historically, such key customers have been
transit bus
47
OEMs. In 2010, 2009 and 2008, our top five customers
accounted for 35.1%, 36.0%, and 33.4%, respectively, of total
annual sales. For the year ended December 31, 2010, there
was one customer, a transit bus original equipment manufacturer,
to whom net sales comprised 10.7% of consolidated net sales. The
same customer also held an accounts receivable balance that
comprised 10.8% of consolidated accounts receivable at
December 31, 2010. For the year ended December 31,
2009, there were no customers to whom net sales comprised at
least 10% of consolidated net sales or who had accounts
receivable balances greater than 10% of consolidated accounts
receivable. For the year ended December 31, 2008, there was
one customer to whom net sales comprised 10.8% of consolidated
net sales. Because we sell our products to a limited set of
customers, we can experience concentration of revenue with
related credit risk, both of which are a function of the orders
we receive in any given period of time. Loss of one or more of
these key customers could have an adverse impact, possibly
material, on the Company.
Sales
Taxes
Sales taxes and other taxes collected from customers and
remitted to governmental authorities are presented on a net
basis and, as such, are excluded from revenues.
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. An allowance for doubtful accounts
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 customers 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.
Inventories
Inventories are valued at the lower of cost or market, using
standard costs, which approximates the
first-in,
first-out (FIFO) method. Our evaluation of inventory
obsolescence involves an approach that incorporates both recent
historical information and management estimates of trends. Our
approach is intended to take into consideration potential excess
and obsolescence in relation to our installed base, engineering
changes, uses for components in other products, return rights
with vendors and
end-of-life
manufacture.
Property
and Equipment
Property and equipment are recorded at cost and depreciated over
their estimated useful lives using the straight-line method.
Property and equipment subject to capital leases are depreciated
over the lesser of the term of the lease or the estimated useful
life of the asset. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or
charged to income. Repair and maintenance costs are expensed as
incurred.
Goodwill
and Indefinite Life Intangible Assets
Goodwill is 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, other than goodwill.
For goodwill, the impairment evaluation includes a comparison of
the carrying value of the reporting unit (including goodwill) to
that reporting units fair value. If the reporting
units estimated fair value exceeds the reporting
units carrying value, no impairment of goodwill exists. If
the fair value of the reporting unit does not exceed the
units 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. If the implied fair
value of the reporting unit goodwill is less than the carrying
value of the
48
units goodwill, an impairment charge is recorded for the
difference. To date, management has determined that no
impairment of goodwill exists. However, for our Mobitec
reporting unit, the concluded fair value was only marginally
higher than the carrying value. If our estimated fair value of
the reporting units declines at some point in the future, the
Company may be required to record an impairment charge. Actual
future results may differ from those estimates.
Intangible
Assets
Intangible assets consist primarily of a listing of customer
relationships recorded as part of the acquisition of Mobitec.
Intangible assets are amortized using a straight-line method
over 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 expected to be generated, 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.
Research
and Development Costs
Research and development costs relating principally to product
development are charged to operations as incurred. Research and
development costs were $612,000, $552,000 and $974,000 in 2010,
2009, and 2008 respectively. Upon the establishment of
technological feasibility, the Company capitalizes salaries and
related costs of certain engineering personnel incurred in the
development of software. In addition, the Company capitalizes
material interest costs incurred during the period of software
development. The amounts capitalized were $2.4 million,
$2.1 million and $1.5 million in 2010, 2009 and 2008,
respectively. These amounts include interest costs of $103,000,
$71,000 and $77,000 in 2010, 2009 and 2008, respectively.
Advertising
Costs
Advertising costs are charged to operations as incurred.
Advertising costs were $719,000, $463,000 and $223,000 in 2010,
2009, and 2008, respectively.
Shipping
and Handling Fees and Costs
The Company includes in net sales all shipping and handling fees
billed to customers. Shipping and handling costs associated with
outbound freight are included in cost of sales and totaled
$2.2 million, $1.3 million and $1.1 million in
2010, 2009, and 2008, respectively.
Stock-Based
Compensation
Stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as
expense over the requisite service period, which is the vesting
period. Stock-based compensation costs for stock options and
restricted stock are recognized on a straight-line basis.
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 shareholders equity. Realized gains and losses on
foreign currency transactions, if any, are included in operating
results for the period.
Realized gains and losses generally result from trade and
intercompany accounts receivable and accounts payable
denominated in foreign currencies and foreign loans and notes
payable denominated in U.S. dollars. The amounts of
gains/(losses) for the years ended December 31, 2010, 2009,
and 2008 were ($276,000), $531,000, and $558,000, respectively.
49
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.
The Company recognizes a tax benefit associated with an
uncertain tax position when, in our judgment, it is more likely
than not that the position will be sustained upon examination by
a taxing authority. For a tax position that meets the
more-likely-than-not recognition threshold, management initially
and subsequently measure the tax benefit as the largest amount
that they judge to have a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority. The
liability associated with unrecognized tax benefits is adjusted
periodically due to changing circumstances, such as the progress
of tax audits, case law developments and new or emerging
legislation. Such adjustments are recognized entirely in the
period in which they are identified. The effective tax rate
includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as
considered appropriate by management.
Fair
Value of Assets and Liabilities
The Company adopted ASC Topic
820-10,
Fair Value Measurements and Disclosures, as it relates to
non-financial assets and liabilities on January 1, 2009.
ASC Topic
820-10,
among other things, establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels which distinguish between
assumptions based on market data (observable inputs) and the
Companys assumptions (unobservable inputs). The level in
the fair value hierarchy within which the respective fair value
measurement falls is determined based on the lowest level input
that is significant to the measurement in its entirety.
Level 1 inputs are quoted market prices in active markets
for identical assets or liabilities, Level 2 inputs are
other than quotable market prices included in Level 1 that
are observable for the asset or liability either directly or
indirectly through corroboration with observable market data.
Level 3 inputs are unobservable inputs for the assets or
liabilities that reflect managements own assumptions about
the assumptions market participants would use in pricing the
asset or liability.
The Company does not engage in hedging activities and
historically has not used derivative instruments. In conjunction
with a loan agreement pursuant to which a $5.0 million term
loan was obtained in June 2008, the Company issued the lender
warrants to purchase up to 350,000 shares of the
Companys Common Stock. These warrants were determined to
be a derivative instrument based on the definition within ASC
Topic
815-40,
Derivatives and Hedging Contracts in
Entitys own Equity. Pursuant to the adoption of new
accounting requirements, as of January 1, 2009, the fair
value of these warrants was reclassified from equity to a
current liability and a cumulative effect adjustment to retained
earnings of $292,000 was recorded for the change in the fair
value of the warrants. Through June 30, 2009, the fair
value of the warrants were periodically remeasured using a
Black-Scholes valuation model with Level 1 and Level 2
inputs and changes in fair value of the warrants were recognized
in other income (loss) in the consolidated financial statements.
Effective July 1, 2009, at which time the warrants had a
fair value of $207,000, an amendment was executed to the warrant
agreement (see Note 13 for further discussion of this
amendment) which resulted in the classification of these
warrants changing from a derivative instrument to an equity
instrument. Accordingly, at July 1, 2009, the fair value of
these warrants was reclassified from accrued expenses and other
current liabilities to additional paid-in capital in the
accompanying consolidated balance sheet and, as of July 1,
2009, periodic remeasurement of the fair value of the warrants
was no longer required. For the year ended December 31,
2009, other income (loss) of approximately ($110,000) was
recorded to recognize the change in fair value of these
warrants. As of December 31, 2010, the Company had no
derivative instruments.
The Companys only non-financial asset evaluated using fair
value measurements on a recurring basis is goodwill. This
non-financial asset is evaluated for impairment annually on the
Companys measurement date
50
at the reporting unit level using Level 3 inputs. For most
assets, including goodwill, ASC Topic
820-10
requires that the impact of changes resulting from its
application be applied prospectively in the year in which the
statement is initially applied. The Companys measurement
date for its goodwill is December 31, 2010. As of that
date, it was determined no impairment existed and no events have
occurred subsequent to December 31, 2010 that would
indicate an impairment of goodwill has occurred.
Fair
Value of Financial Instruments
The fair value of a financial instrument is the amount at which
the instrument could be exchanged between willing parties other
than in a forced sale or liquidation. We believe the carrying
values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current
liabilities approximate their estimated fair values at
December 31, 2010 due to their short maturities. We believe
the carrying value of our lines of credit and loans payable
approximate the estimated fair value for debt with similar
terms, interest rates, and remaining maturities currently
available to companies with credit ratings similar to the
Company at December 31, 2010. As of December 31, 2010,
the carrying value and estimated fair value of our long-term
debt were $6.6 million and $5.9 million, respectively.
The estimate of fair value of our long-term debt is based on
debt with similar terms, interest rates, and remaining
maturities currently available to companies with similar credit
ratings at December 31, 2010.
Product
Warranties
The Company provides a limited warranty for its products,
generally for periods of one to five years. The Companys
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 sales are recognized.
Factors that affect the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
$
|
805
|
|
|
$
|
495
|
|
|
$
|
491
|
|
Additions charged to costs and expenses
|
|
|
256
|
|
|
|
399
|
|
|
|
236
|
|
Deductions
|
|
|
(292
|
)
|
|
|
(156
|
)
|
|
|
(164
|
)
|
Foreign exchange translation (gain) loss
|
|
|
40
|
|
|
|
67
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
809
|
|
|
$
|
805
|
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In January 2010, the FASB issued ASU
2010-01,
Equity (Topic 505) Accounting for Distributions
to Shareholders with Components of Stock and Cash. ASU
2010-01
clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or shares
with a potential limitation on the amount of cash that all
shareholders can elect to receive is considered a share
issuance. ASU
2010-01 is
effective for interim and annual periods ending on or after
December 15, 2009 and should be applied on a retrospective
basis. The adoption of ASU
2010-01 did
not have a material impact on the Companys consolidated
financial statements.
In December 2010, the FASB issued ASU
2010-28,
Intangibles Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts. ASU
2010-28
modified Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. For public entities, the amendments
in ASU
2010-28 are
effective for fiscal years, and interim periods within those
years, beginning
51
after December 15, 2010. We believe the adoption of ASU
2010-28 will
not have a material impact on the Companys consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the 2009 financial
statements to conform to the presentation used in the 2010
financial statements. These reclassifications have no effect on
net income or stockholders equity as previously presented.
Pursuant to terms of a Quota Purchase Agreement entered into on
July 22, 2009 and amended September 17, 2009 (the
Purchase Agreement), Mobitec EP acquired the
remaining fifty percent (50%) of the issued and outstanding
interests of Mobitec Brazil for an aggregate consideration of
US$2.95 million. Payment of the consideration was separated
into (a) US$1.0 million payable within 10 days of
the official registration of the transfer of interests to
Mobitec EP with the Brazilian governmental Board of Trade and
(b) a promissory note for US$1.95 million (the
Promissory Note). Per terms of the Purchase
Agreement, as amended, the acquisition by Mobitec EP of the
remaining fifty percent (50%) of the interests of Mobitec Brazil
was effective July 1, 2009, the date upon which the Company
assumed full control of the business. The official registration
of the transfer of interests with the governmental Board of
Trade occurred on November 16, 2009 and payment of
US$1.0 million under terms of the Purchase Agreement was
made on November 19, 2009.
The Promissory Note is unsecured and obligates Mobitec EP to
make twelve (12) successive fixed quarterly principal
payments of $162,500 within thirty (30) days after the
close of each calendar quarter with the last quarterly principal
payment due within thirty (30) days after the close of the
quarter ending September 30, 2012. The unpaid principal
balance of the Promissory Note bears simple interest at a rate
of five percent (5%) per annum, which will be payable quarterly
on each date on which a quarterly principal payment is due.
Mobitec EP will have the right, at its discretion, with certain
interest rate provisions applied, to not make up to two such
quarterly principal payments, provided such two quarterly
principal payments are not consecutive (with such amounts to
bear interest therefrom at a rate of nine percent (9%) per
annum) and to defer such quarterly principal payments to the end
date of the Promissory Note. Mobitec EP elected to not make the
quarterly principal payment that was due July 30, 2010. The
missed principal payment will be deferred until the end date of
the Promissory Note and will bear interest at an annual rate of
9%. Mobitec EP has made all other quarterly principal payments
that are due under the terms of the Promissory Note. The
principal balance of approximately $1.5 million outstanding
on the Promissory Note at December 31, 2010 is included in
long-term debt in the accompanying consolidated balance sheet.
In accordance with ASC Topic
810-10-65,
Non-Controlling Interests in Consolidated Financial
Statements, effective July 1, 2009, we recorded the
acquisition of the 50% interests in Mobitec Brazil, as described
herein, as an equity transaction, whereby the difference between
the aggregate consideration of $2.95 million and the
carrying value of non-controlling interests in Mobitec Brazil as
of July 1, 2009 of $243,000 was recorded as additional
paid-in capital.
|
|
(3)
|
Goodwill
and Other Intangible Assets
|
The Company recorded goodwill in connection with its acquisition
of Mobitec. The Company completed its annual goodwill impairment
evaluations as of December 31, 2010 and has concluded that
no impairment exists. Therefore, as a result of this impairment
evaluation and impairment evaluations as of December 31,
2009 and 2008 completed in prior years, no impairment charges
were recorded during the years ended December 31, 2010,
2009, and 2008.
52
The change in the carrying amount of goodwill for the years
ended December 31, 2010, 2009, and 2008 is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance as of January 1, 2008
|
|
$
|
11,033
|
|
Effect of exchange rates
|
|
|
(1,999
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
9,034
|
|
Effect of exchange rates
|
|
|
759
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
9,793
|
|
Effect of exchange rates
|
|
|
605
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
10,398
|
|
|
|
|
|
|
The composition of the Companys intangible assets and the
associated accumulated amortization as of December 31, 2010
and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Remaining Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
5.55
|
|
|
$
|
1,759
|
|
|
$
|
1,108
|
|
|
$
|
651
|
|
|
$
|
1,666
|
|
|
$
|
938
|
|
|
$
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of amortization expense for the years ended
December 31, 2010, 2009, and 2008 was $111,000, $115,000,
and $151,000, respectively. Amortization expense for the five
succeeding years is estimated to be $117,000 for each of the
years ending December 31, 2011 through December 31,
2015.
The difference in the gross carrying amount from 2009 to 2010 is
due to fluctuations in foreign currencies.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Trade accounts receivable
|
|
$
|
15,985
|
|
|
$
|
18,465
|
|
Less: allowance for doubtful accounts
|
|
|
(307
|
)
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,678
|
|
|
$
|
18,192
|
|
|
|
|
|
|
|
|
|
|
53
|
|
(5)
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Depreciable
|
|
December 31,
|
|
|
|
Lives (Years)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(In thousands)
|
|
|
Leasehold improvements
|
|
3 - 10
|
|
$
|
370
|
|
|
$
|
306
|
|
Automobiles
|
|
4 - 6
|
|
|
382
|
|
|
|
387
|
|
Computer and telecommunications equipment
|
|
2 - 5
|
|
|
1,223
|
|
|
|
1,137
|
|
Software
|
|
5
|
|
|
9,335
|
|
|
|
7,163
|
|
Test equipment
|
|
3 - 7
|
|
|
180
|
|
|
|
144
|
|
Furniture and fixtures
|
|
2 - 10
|
|
|
2,939
|
|
|
|
2,331
|
|
Software projects in progress
|
|
|
|
|
1,732
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,161
|
|
|
|
12,713
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(9,016
|
)
|
|
|
(7,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
$
|
7,145
|
|
|
$
|
5,266
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of depreciation and amortization expense
for the years ended December 31, 2010, 2009, and 2008 was
$1.4 million, $1.1 million, and $933,000, respectively.
The Company has $4.0 million and $3.0 million in
unamortized computer software costs as of December 31, 2010
and 2009, respectively. The expense related to the amortization
of capitalized computer software costs for the years ended
December 31, 2010, 2009, and 2008, which is included in the
depreciation and amortization amount above, was
$1.0 million, $679,000, and $524,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Raw materials and system components
|
|
$
|
11,962
|
|
|
$
|
8,924
|
|
Work in process
|
|
|
17
|
|
|
|
35
|
|
Finished goods
|
|
|
3,155
|
|
|
|
4,083
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
15,134
|
|
|
$
|
13,042
|
|
|
|
|
|
|
|
|
|
|
The Company leases its premises and certain office equipment
under various operating leases that expire at various times
through 2020. Rent and lease expense under these operating
leases was $1.3 million, $994,000, and $881,000 for 2010,
2009, and 2008, respectively. Three agreements under which the
Company leases office space and warehouse facilities require
escalating payments over the term of the leases. The Company
records rent expense under these leases on a straight-line basis.
The Company has capital lease obligations for a truck that
expires in 2013 and a copier that expires in 2012. Assets under
capital lease included in property and equipment consisted of
$59,000 and $55,000 of cost less accumulated depreciation of
$29,000 and $15,000 as of December 31, 2010 and 2009,
respectively.
54
At December 31, 2010, future minimum lease payments under
the non-cancelable operating leases and the future minimum lease
payments and present value of the capital leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
19
|
|
|
$
|
1,140
|
|
2012
|
|
|
14
|
|
|
|
1,160
|
|
2013
|
|
|
2
|
|
|
|
1,017
|
|
2014
|
|
|
|
|
|
|
774
|
|
2015
|
|
|
|
|
|
|
615
|
|
Thereafter
|
|
|
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
35
|
|
|
$
|
6,318
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest (9% interest)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of future minimum capital lease payments
|
|
|
31
|
|
|
|
|
|
Less current portion
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
Lines of
Credit and Loans Payable
|
|
|
a)
|
Domestic
lines of credit and loan payable
|
Our wholly-owned subsidiaries Digital Recorders, Inc. and
TwinVision of North America, Inc. (collectively, the
Borrowers) have in place an asset-based lending
agreement (the PNC Agreement) with PNC Bank,
National Association (PNC), which provides up to
$8.0 million in borrowings under a revolving credit
facility. DRI has agreed to guarantee the obligations of the
Borrowers under the PNC Agreement. Borrowing availability under
the PNC Agreement is based upon an advance rate equal to 85% of
eligible domestic accounts receivable of the Borrowers, plus 75%
of eligible foreign receivables of the Borrowers, limited to the
lesser of $2.5 million or the amount of coverage under
Acceptable Credit Insurance Policies (as defined in the PNC
Agreement, as amended) that the Borrowers have with respect to
eligible foreign receivables, as determined by PNC in its
reasonable discretion, plus 85% of the appraised net orderly
liquidation value of inventory of the Borrowers, limited to
$750,000. The PNC Agreement provides for one of two possible
interest rates on borrowings: (1) an interest rate based on
the rate (the Eurodollar Rate) at which
U.S. dollar deposits are offered by leading banks in the
London interbank deposit market (a Eurodollar Rate
Loan) or (2) interest at a rate (the Domestic
Rate) based on either (a) the base commercial lending
rate of PNC, or (b) the open rate for federal funds
transactions among members of the Federal Reserve System, as
determined by PNC (a Domestic Rate Loan). The actual
annual interest rate for borrowings under the PNC Agreement is
(a) the Eurodollar Rate plus 3.25% for a Eurodollar Rate
Loan and (b) the Domestic Rate plus 1.75% for Domestic Rate
Loans. Interest is calculated on the principal amount of
borrowings outstanding, subject to a minimum principal amount of
$3.5 million. The PNC Agreement contains certain covenants
and provisions with which we and the Borrowers must comply on a
quarterly basis. If all outstanding obligations under the PNC
Agreement are paid before the maturity date, the Borrowers will
be obligated to pay an early termination fee. At
December 31, 2010, the outstanding principal balance on the
revolving credit facility was approximately $2.8 million
and are reflected as lines of credit in the accompanying
consolidated balance sheet. Remaining borrowing availability
under the revolving credit facility was approximately
$1.6 million. See Note 24 for disclosure of an
amendment to the PNC Agreement which was executed subsequent to
December 31, 2010.
Pursuant to terms of a loan agreement (the BHC
Agreement) with BHC Interim Funding III, L.P.
(BHC), the Borrowers have outstanding a
$4.8 million term loan (the Term Loan) and are
reflected as long-term debt in the accompanying consolidated
balance sheet. DRI agreed to guarantee the Borrowers
obligations under the BHC Agreement. The Term Loan bears
interest at an annual rate of 12.75% and is
55
secured by substantially all tangible and intangible assets of
the Company. Additionally, the Term Loan is secured by a pledge
of all outstanding common stock of the Borrowers and Robinson
Turney International, Inc. and a pledge of 65% of the
outstanding common stock of all foreign subsidiaries other than
Mobitec Pty, Castmaster Mobitec and Mobitec Far East. The BHC
Agreement contains certain covenants and provisions with which
we and the Borrowers must comply on a quarterly basis and
subjects the Borrowers to a termination fee that escalates over
time, the amount of which is dependent upon the date of
repayment of the outstanding principal balance. We are accruing
the termination fee that would be due at maturity ratably over
the term of the BHC Agreement. At December 31, 2010, the
balance of the termination fee accrual was approximately
$581,000 and is included in long-term debt in the accompanying
consolidated balance sheets. See Note 24 for disclosure of
an amendment to the BHC Agreement which was executed subsequent
to December 31, 2010.
The PNC Agreement and the BHC Agreement contain certain
financial covenants with which we and our subsidiaries must
comply. Among the covenants contained in the PNC Agreement and
BHC Agreement are requirements that we and our domestic
subsidiaries maintain certain fixed charge coverage ratios,
leverage ratios and EBITDA amounts as of the end of each fiscal
quarter for the twelve-month period then ending. For the quarter
ended September 30, 2010, we were not in compliance with
the fixed charge coverage ratio or the EBITDA amount required to
be maintained under terms of the PNC Agreement and the BHC
Agreement. PNC and BHC agreed to amend the PNC Agreement and the
BHC Agreement, respectively, to revise the fixed charge coverage
ratio required to be maintained for the quarter ended
September 30, 2010 to 0.70 to 1.00 and agreed to revise the
trailing-twelve-month EBITDA amount required to be maintained
for the quarter ended September 30, 2010 to $4,750,000. On
November 12, 2010, the PNC Agreement and BHC Agreement were
each amended to revise the minimum fixed charge coverage ratio,
leverage ratio and EBITDA amounts required to be maintained as
of the end of each of the fiscal quarters ending
September 30, 2010, December 31, 2010, March 31,
2011 and June 30, 2011 as set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge
|
|
|
|
|
Fiscal Quarter Ending:
|
|
Coverage Ratio:
|
|
Leverage Ratio:
|
|
EBITDA:
|
|
September 30, 2010
|
|
|
0.70 to 1.0
|
|
|
|
8.85 to 1.0
|
|
|
$
|
4,750,000
|
|
December 31, 2010
|
|
|
0.85 to 1.0
|
|
|
|
8.25 to 1.0
|
|
|
$
|
4,250,000
|
|
March 31, 2011
|
|
|
1.00 to 1.0
|
|
|
|
7.25 to 1.0
|
|
|
$
|
5,000,000
|
|
June 30, 2011
|
|
|
1.05 to 1.0
|
|
|
|
7.00 to 1.0
|
|
|
$
|
5,000,000
|
|
For the quarter ended September 30, 2010, we were in
compliance with each of the amended financial covenants set
forth above. For the quarter ended December 31, 2010, we
were not in compliance with the fixed charge coverage ratio,
leverage ratio or EBITDA amount required to be maintained as set
forth above. PNC and BHC agreed to waive each of the covenant
violations for the quarter ended December 31, 2010. See
Note 24 for further disclosure of these waivers and
amendments to the PNC Agreement and BHC Agreement which were
executed subsequent to December 31, 2010 and which, among
other things, revised certain of the financial covenants with
which we must comply.
|
|
b)
|
International
lines of credit and loans payable
|
Mobitec AB, the Companys wholly-owned Swedish subsidiary,
has in place agreements with Svenska Handelsbanken AB
(Handelsbanken) under which working capital credit
facilities have been established. At December 31, 2010,
borrowing capacity on these credit facilities amounted to
38.0 million Swedish Krona (SEK) (approximately
US$5.6 million, based on exchange rates at
December 31, 2010). The annual interest rate on these
credit facilities is Tomorrow Next Stockholm Interbank Offered
Rate (T/N STIBOR) plus 4.20%. At December 31,
2010, borrowings due and outstanding under these credit
facilities totaled 33.0 million SEK (approximately
US$4.9 million, based on exchange rates at
December 31, 2010) and are reflected as lines of
credit in the accompanying consolidated balance sheet.
Additional borrowing availability under these agreements at
December 31, 2010, amounted to approximately US$733,000.
These credit agreements renew annually on a calendar-year basis.
See Note 24 for disclosure of amendments to certain of
these credit agreements.
56
At December 31, 2010, Mobitec AB had an outstanding
principal balance of 1.9 million SEK (approximately
US$277,000, based on exchange rates at December 31,
2010) due on a term loan (the Mobitec Term
Loan) under a credit agreement with Handelsbanken which
matures March 31, 2012. The outstanding principal balance
due on the Mobitec Term Loan is reflected as long-term debt in
the accompanying consolidated balance sheet.
Mobitec GmbH, the Companys wholly-owned subsidiary in
Germany, has a credit facility in place under an agreement with
Handelsbanken pursuant to which a maximum of 912,000 Euro
(EUR) (approximately US$1.2 million, based on
exchange rates at December 31, 2010) can be borrowed.
At December 31, 2010, borrowings due and outstanding under
this credit facility totaled 556,000 EUR (approximately
US$737,000, based on exchange rates at December 31,
2010) and are reflected as lines of credit in the
accompanying consolidated balance sheet. Additional borrowing
availability under this credit facility at December 31,
2010, amounted to approximately US$472,000. The agreement under
which this credit facility is extended has an open-ended term
and allows Handelsbanken to terminate the credit facility at any
time.
At December 31, 2010, Mobitec Brazil has outstanding
borrowings from Banco do Brasil S.A. of approximately 583,000
Brazilian Real (BRL) (approximately US$350,000,
based on exchange rates at December 31, 2010). The
borrowings are secured by accounts receivable on certain export
sales by Mobitec Brazil, bear interest at 4.98%, and have a term
of 180 days. These borrowings are included in loans payable
on the accompanying consolidated balance sheet.
At December 31, 2010, Mobitec Brazil had two additional
loans payable to two banks in Brazil with an aggregate
outstanding principal balance of approximately 228,000 BRL
(approximately US$136,000, based on exchange rates at
December 31, 2010). One loan, payable to Banco do Brasil
S.A., has a principal balance of approximately 154,000 BRL
(approximately US$92,000, based on exchange rates at
December 31, 2010), bears interest at 4.26% and matures
May 3, 2011. The outstanding principal balance due on this
loan is included in loans payable in the accompanying
consolidated balance sheet. The other loan, payable to Banco
Finasa, has an outstanding principal balance of approximately
74,000 BRL (approximately US$44,000, based on exchange rates at
December 31, 2010), bears interest at 20.10% and has a
maturity date of May 31, 2013. The outstanding principal
balance due on this loan is included in long-term debt in the
accompanying consolidated balance sheet.
At December 31, 2010, Mobitec EP had an outstanding balance
of approximately $1.5 million due on a promissory note
entered into in connection with the execution of the Purchase
Agreement for the 2009 acquisition of the remaining fifty
percent (50%) of the issued and outstanding interests of Mobitec
Brazil. See Note 2 for disclosure of the terms of this
promissory note. The outstanding principal balance due on this
loan is included in long-term debt in the accompanying
consolidated balance sheet.
At December 31, 2010, Castmaster Mobitec had two loans
payable to HDFC Bank in India with an aggregate outstanding
principal balance of approximately 5.0 million Indian
rupees (INR) (approximately US$109,000, based on
exchanges rates at December 31, 2010). One loan has a
principal balance of approximately 4.1 million INR
(approximately US$90,000, based on exchange rates as of
December 31, 2010), bears interest at an annual rate of
8.0%, and matures on September 7, 2012. The second loan has
a principal balance of approximately 880,000 INR (approximately
US$19,000, based on exchange rates as of December 31,
2010), bears interest at an annual rate of 9.51%, and matures on
November 7, 2014. The outstanding principal balance due on
these loans is included in long-term debt in the accompanying
consolidated balance sheet.
57
Domestic and international lines of credit consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Line of credit with PNC Bank, National Association dated
June 30, 2008; secured by all tangible and intangible U.S.
assets of the Company; bears average interest rate of 5.00% and
5.00% in 2010 and 2009, respectively (see Note 24 for
additional disclosure)
|
|
$
|
2,841
|
|
|
$
|
3,786
|
|
Line of credit with Svenska Handelsbanken AB; renews annually on
a calendar- year basis; secured by certain assets of the Swedish
subsidiary, Mobitec AB; bears average interest rate of 4.48% and
3.53% in 2010 and 2009, respectively
|
|
|
2,301
|
|
|
|
|
|
Line of credit with Svenska Handelsbanken AB; renews annually on
a calendar- year basis; secured by accounts receivable of the
Swedish subsidiary, Mobitec AB; bears average interest rate of
4.59% and 4.83% in 2010 and 2009, respectively
|
|
|
2,575
|
|
|
|
2,047
|
|
Line of credit with Svenska Handelsbanken AB dated June 23,
2004; open-ended term; secured by accounts receivable and
inventory of the German subsidiary, Mobitec GmbH; bears average
interest rate of 4.39% and 3.48% in 2010 and 2009, respectively
|
|
|
737
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Total lines of credit
|
|
$
|
8,454
|
|
|
$
|
7,200
|
|
|
|
|
|
|
|
|
|
|
Long-term debt at December 31, 2010, and 2009 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Term loan with BHC Interim Funding III, L.P., dated
June 30, 2008; secured by substantially all tangible and
intangible assets of the Company; bears interest rate of 12.75%.
(see Note 24 for additional disclosure)
|
|
$
|
4,750
|
|
|
$
|
4,750
|
|
Term loan with Svenska Handelsbanken AB, dated June 30,
2008; payable in quarterly installments of $55,350; secured by
accounts receivable and inventory of the Swedish subsidiary,
Mobitec AB; bears average interest rate of 6.24% and 7.32% in
2010 and 2009, respectively
|
|
|
277
|
|
|
|
470
|
|
Term loan with Roberto Demore, dated August 31, 2009;
payable in quarterly installments of $162,500; unsecured; bears
interest rate of 5.0%
|
|
|
1,463
|
|
|
|
1,950
|
|
Term loan with HDFC Bank, dated October 5, 2009; payable in
monthly installments of $4,603, inclusive of interest at 8.0%
|
|
|
90
|
|
|
|
132
|
|
Term loan with HDFC Bank, dated November 14, 2009; payable
in monthly installments of $497, inclusive of interest at 9.51%
|
|
|
19
|
|
|
|
22
|
|
Term loan with Banco Finesa, dated May 28, 2010; payable in
monthly installments of $1,912, inclusive of interest at 20.10%
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
6,643
|
|
|
|
7,324
|
|
Term loan termination fee accrual
|
|
|
581
|
|
|
|
346
|
|
Less current portion
|
|
|
(944
|
)
|
|
|
(960
|
)
|
Less debt discount
|
|
|
(55
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
6,225
|
|
|
|
6,544
|
|
Long-term portion of capital leases
|
|
|
14
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt and capital leases, less current portion
|
|
$
|
6,239
|
|
|
$
|
6,572
|
|
|
|
|
|
|
|
|
|
|
Interest expense was $1.5 million, $1.5 million, and
$1.4 million for the years ended December 31, 2010,
2009, and 2008, respectively.
58
The repayment amounts of long-term debt are due as follows (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
944
|
|
2012
|
|
|
5,682
|
|
2013
|
|
|
11
|
|
2014
|
|
|
6
|
|
2015
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,643
|
|
|
|
|
|
|
The date of repayment of the outstanding principal balance of
the Term Loan under the BHC Agreement as of December 31,
2010 included in the foregoing table is based on the extended
maturity date of the BHC Agreement as disclosed in Note 24.
|
|
(10)
|
Accrued
Expenses and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Salaries, commissions, and benefits
|
|
$
|
2,516
|
|
|
$
|
2,024
|
|
Taxes payroll, sales, income, and other
|
|
|
1,375
|
|
|
|
1,967
|
|
Warranties
|
|
|
809
|
|
|
|
805
|
|
Current portion of capital leases
|
|
|
17
|
|
|
|
15
|
|
Interest payable
|
|
|
135
|
|
|
|
166
|
|
Deferred revenue
|
|
|
639
|
|
|
|
557
|
|
Customer rebates and credits
|
|
|
320
|
|
|
|
404
|
|
Other
|
|
|
543
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
6,354
|
|
|
$
|
6,459
|
|
|
|
|
|
|
|
|
|
|
On February 2, 2010 and August 16, 2010, the
Companys board of directors adopted amendments to
DRIs Amended and Restated Articles of Incorporation, as
amended, pursuant to which authorized shares of preferred stock
of the Company, par value $0.10 per share, are designated as
follows: 166 shares are designated as Series AAA
Redeemable, Nonvoting Preferred Stock (Series AAA
Preferred), 30,000 shares are designated as
Series D Junior Participating Preferred Stock
(Series D Preferred), 80 shares are
designated as Series E Redeemable Nonvoting Convertible
Preferred Stock (Series E Preferred),
725 shares are designated as Series G Convertible
Preferred Stock (Series G Preferred),
125 shares are designated as Series H Convertible
Preferred Stock (Series H Preferred),
475 shares are designated as Series K Senior
Convertible Preferred Stock (Series K
Preferred), and 4,968,429 shares remain undesignated.
As of December 31, 2010, we had outstanding 166 shares
of Series AAA Preferred with a liquidation value of
$830,000, 80 shares of Series E Preferred with a
liquidation value of $400,000, 536 shares of Series G
Preferred with a liquidation value of $2.7 million,
76 shares of Series H Preferred with a liquidation
value of $380,000, and 439 shares of Series K
Preferred with a liquidation value of $2.2 million and, in
each case, plus accrued but unpaid dividends. There are no
shares of Series D Preferred outstanding.
Series K
Preferred
On October 26, 2009 and December 31, 2009, the Company
sold an aggregate of 299 shares of Series K Preferred,
par value $0.10 per share, to multiple outside investors
pursuant to a subscription agreement with
59
each investor. Each share of Series K Preferred has a
liquidation preference of $5,000 per share (the
Liquidation Preference). Gross proceeds to the
Company were $1.5 million, of which $250,000 were applied
toward partial payment of the Term Loan with BHC and the
remaining proceeds were used for general corporate working
capital purposes. The Company recorded $154,000 of Series K
Preferred issuance costs incurred as of December 31, 2009
as a reduction of the carrying value of the Series K
Preferred.
On January 5, 2010, the Company sold an additional
11 shares of Series K Preferred to two investors
pursuant to a subscription agreement with each investor. Gross
proceeds of $55,000 were used for general corporate working
capital purposes. Additionally, on January 5, 2010, the
Company issued an aggregate of 24 shares of the
Series K Preferred to a placement agent as consideration
for such agents services to the Company in connection with
the placement of the 310 shares of Series K Preferred
described herein.
On April 27, 2010, 15 shares of Series K
Preferred with a liquidation value of $75,000 were converted
into 42,857 shares of the Companys Common Stock.
On August 16, 2010, the Company sold an additional
120 shares of Series K Preferred to multiple outside
investors pursuant to a subscription agreement with each
investor. The aggregate proceeds to the Company from this
offering were $600,000, which were used to make a recallable
equity investment in Mobitec AB.
In addition to the subscription agreement entered into with each
Series K Preferred investor, the Company entered into a
registration rights agreement with each Series K Preferred
investor pursuant to which the Company agreed that upon written
demand from each Series K Preferred investor, the Company
will register the shares of Series K Preferred issued to
the Series K Preferred investor pursuant to the
subscription agreement (the Registrable Securities)
for resale by the Series K Preferred investor under the
Securities Act of 1933, as amended (the Securities
Act). The Company also agreed that it will register the
Registrable Securities if the Company registers any of its
securities under the Securities Act in connection with a public
offering of the Companys Common Stock during the one
(1) year period following the issuance date of the
Series K Preferred to each investor.
At the option of the holder, any or all outstanding shares of
Series K Preferred may be converted into a number of fully
paid and nonassessable shares of Common Stock. The number of
shares of Common Stock received upon conversion will be
determined by multiplying the number of shares of Series K
Preferred to be converted by a fraction, the numerator of which
is the Liquidation Preference plus all accrued but unpaid
dividends on such shares, if any, and the denominator of which
is the conversion price then in effect for the Series K
Preferred (the Conversion Price). The Conversion
Price is as follows: (i) during the period from
October 7, 2009 through October 6, 2011, $1.75 per
share; (ii) during the period from October 7, 2011
through October 6, 2013, $2.25 per share; and (iii) on
or after October 7, 2013, $3.00 per share. The Conversion
Price is subject to adjustments upon the occurrence of stock
splits, stock dividends, combinations or consolidations,
reclassifications, exchanges and substitutions. The outstanding
shares of Series K Preferred will automatically convert to
shares of Common Stock if the closing bid price for the Common
Stock on The NASDAQ Stock Market (or other exchange or market on
which the Common Stock may from time to time be traded) for any
consecutive
20-day
period exceeds a certain amount (the Maximum Bid
Price). The Maximum Bid Price is as follows:
(i) during the period from October 7, 2009 through
October 6, 2011, $4.00 per share; (ii) during the
period from October 7, 2011 through October 6, 2013,
$4.75 per share; and (iii) on or after October 7,
2013, $5.50 per share.
The holders of Series K Preferred are entitled to receive
cumulative quarterly dividends payable in cash or additional
shares of Series K Preferred, at the option of the holder,
when and if declared by the Board of Directors, at a rate of
9.5% per annum on the Liquidation Preference. The holders of the
Series K Preferred are entitled to vote with the holders of
the Common Stock as a single class on any matters on which the
holders of the Common Stock are entitled to vote and are
entitled to a number of votes equal to the quotient obtained by
dividing the Liquidation Preference by the then applicable
Conversion Price, as defined above. The Company has the right to
redeem all or any portion of the outstanding shares of
Series K Preferred at its discretion.
60
Series E
Preferred
Series E Preferred is convertible at any time into shares
of Common Stock at a conversion price of $3.00 per share of
Common Stock, subject to certain adjustments, and, prior to
conversion, does not entitle the holders to any voting rights,
except as may be required by law. The Company does not have the
right to require conversion. Holders of Series E Preferred
are entitled to receive cumulative quarterly dividends, when and
if declared by the Board of Directors, at the rate of 7% per
annum on the liquidation value of $5,000 per share.
Series E Preferred is redeemable at the option of the
Company at any time, in whole or in part, at a redemption price
equal to the liquidation value plus accrued and unpaid
dividends, or $400,000 at December 31, 2010. Holders of
Series E Preferred do not have the right to require
redemption.
Series G
Preferred
Series G Preferred is convertible at any time into shares
of Common Stock at a conversion price of $2.21 per share of
Common Stock, subject to certain adjustments, and entitles the
holders to voting rights on any matters on which holders of
Common Stock are entitled to vote, based upon the quotient
obtained by dividing the liquidation preference by $2.23,
excluding any fractional shares. Holders of Series G
Preferred are entitled to receive cumulative quarterly dividends
payable in additional shares of Series G Preferred or cash,
at the option of the holder, when and if declared by the Board
of Directors, at a rate of 14% per annum on the liquidation
value of $5,000 per share. The Company has the right to redeem
all or any portion of the outstanding shares of Series G
Preferred at its discretion.
Series H
Preferred
Series H Preferred is convertible at any time into shares
of Common Stock at a conversion price of $2.08 per share of
Common Stock, subject to certain adjustments, and entitles the
holders to voting rights on any matters on which holders of
Common Stock are entitled to vote, based upon the quotient
obtained by dividing the liquidation preference by the
conversion price, excluding any fractional shares. Holders of
Series H Preferred are entitled to receive cumulative
quarterly dividends payable in additional shares of
Series H Preferred or cash, at the option of the holder,
when and if declared by the Board of Directors, at a rate of 14%
per annum on the liquidation value of $5,000 per share. The
Company has the right to redeem all or any portion of the
outstanding shares of Series H Preferred at its discretion.
Series J
Preferred
On October 13, 2009, 50 shares of Series J
Preferred with a liquidation value of $250,000 were converted
into 110,600 shares of the Companys Common Stock. On
October 29, 2009, 40 shares of Series J Preferred
with a liquidation value of $200,000 were converted into
88,480 shares of the Companys Common Stock. As a
result of these conversions, there are no shares of
Series J Preferred outstanding.
Series AAA
Preferred
Series AAA Preferred is convertible at any time into shares
of Common Stock at a conversion price of $5.50 per share of
Common Stock and, prior to conversion, does not entitle the
holders to any voting rights, except as may be required by law.
Holders of Series AAA Preferred are entitled to receive
quarterly dividends, when and if declared by the Board of
Directors, at the rate of 5% per annum on the liquidation value
of $5,000 per share. The Company has the right to redeem the
Series AAA Preferred at its sole discretion upon providing
holders with appropriate written notice.
Liquidation
Priority
The Series K Preferred ranks prior and superior to the
Companys Series E Preferred, Series G Preferred,
Series H Preferred, Series AAA Preferred, and Common
Stock with respect to liquidation. The Series E Preferred,
Series G Preferred, Series H Preferred, and
Series J Preferred have equal priority with respect to
liquidation, and shares of these series have liquidation
preferences prior to the Companys outstanding shares of
Series AAA Preferred and Common Stock.
61
|
|
(12)
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net Income (loss)
|
|
$
|
(1,753
|
)
|
|
$
|
1,976
|
|
|
$
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
1,204
|
|
|
|
1,464
|
|
|
|
(4,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
1,204
|
|
|
|
1,464
|
|
|
|
(4,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(549
|
)
|
|
|
3,440
|
|
|
|
(1,927
|
)
|
Comprehensive income attributable to the noncontrolling interest
|
|
|
(143
|
)
|
|
|
(175
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to DRI Corporation
|
|
$
|
(692
|
)
|
|
$
|
3,265
|
|
|
$
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Common
Stock Warrants
|
In connection with the BHC Agreement, we issued BHC a warrant to
purchase up to 350,000 shares of our Common Stock (the
BHC Warrant) at an exercise price of $2.99 per
share. The fair value allocated to the BHC Warrant of $333,000,
calculated using the Black-Scholes model, was recorded as a
discount to the Term Loan and is being amortized over the
three-year term of the BHC Agreement.
On March 26, 2009, in connection with an amendment of the
BHC Agreement (as described in Note 9), the BHC Warrant was
amended (the First Warrant Amendment) to modify the
exercise price at which BHC is entitled, under the terms of the
BHC Warrant, to purchase an aggregate of 350,000 shares of
DRIs Common Stock, par value $0.10 per share. Pursuant to
the terms of the First Warrant Amendment, BHC held the right to
purchase (i) 200,000 shares of Common Stock at an
exercise price equal to $1.00 per share, and
(ii) 150,000 shares of Common Stock at an exercise
price equal to $2.99 per share. The increase in fair value of
the BHC Warrant of $57,000 resulting from the adjustment of the
exercise price was recorded as deferred finance cost and is
being amortized as selling, general, and administrative expense
ratably over the remaining term of the Term Loan.
Effective July 1, 2009, DRI and BHC agreed to an amendment
of the BHC Warrant (the Second Warrant Amendment)
which deleted the dilutive issuance provision (the
Provision) contained in the BHC Warrant. Pursuant to
the Provision, if DRI effected a dilutive issuance, as defined
in the BHC Warrant, at any time while the BHC Warrant was
outstanding, then the exercise price would be adjusted in
accordance to the procedures described in the Provision. The
Second Warrant Amendment also modified the exercise price at
which BHC is entitled, under the terms of the BHC Warrant, as
amended, to purchase an aggregate of 350,000 shares of
Common Stock. Pursuant to the terms of the Second Warrant
Amendment, BHC held the right to purchase
(i) 200,000 shares of Common Stock at an exercise
price equal to $1.00 per share, and
(ii) 150,000 shares of Common Stock at an exercise
price equal to $2.50 per share. The increase in fair value of
the BHC Warrant of $10,000 resulting from the adjustment of the
exercise price was recorded as deferred finance cost and is
being amortized as selling, general, and administrative expense
ratably over the remaining term of the Term Loan.
On December 29, 2009, in connection with an amendment of
the BHC Agreement, DRI and BHC entered into an amendment to the
BHC Warrant (the Third Warrant Amendment) to modify
the exercise price at which BHC is entitled, under the terms of
the BHC Warrant, to purchase an aggregate of 350,000 shares
of DRIs Common Stock. Pursuant to the terms of the Third
Warrant Amendment, BHC now holds the right to purchase
(i) 200,000 shares of Common Stock at an exercise
price equal to $1.00 per share, and
(ii) 150,000 shares of Common Stock at an exercise
price equal to $1.75 per share. The increase in fair value of
the BHC Warrant resulting from the adjustment of the exercise
price of $21,000 was recorded as deferred finance cost and is
being amortized as selling, general, and administrative expense
ratably over the remaining term of the Term Loan.
62
The Company has issued Common Stock warrants in addition to the
BHC Warrant. A summary of outstanding Common Stock Warrants as
of December 31, 2010 is as follows:
|
|
|
|
|
|
|
Outstanding
|
|
Exercise
|
|
Expiration
|
Warrants
|
|
Price
|
|
Date
|
|
93,750
|
|
$
|
1.60
|
|
|
March 2011
|
15,929
|
|
$
|
2.26
|
|
|
June 2012
|
80,000
|
|
$
|
2.00
|
|
|
April 2013
|
150,000
|
|
$
|
1.75
|
|
|
June 2013
|
200,000
|
|
$
|
1.00
|
|
|
June 2013
|
The warrants set forth above to purchase 93,750 shares of
Common Stock at an exercise price of $1.60 per share expired in
March 2011 without being exercised by the holder.
|
|
(14)
|
Stock-Based
Compensation
|
The Company has two plans under which it has issued and
outstanding stock options and restricted stock, the 1993
Incentive Stock Option Plan and the 2003 Stock Option Plan
(collectively, the Stock Option Plans). Under the
Stock Option Plans, 3,155,000 shares of Common Stock have
been authorized for issuance. As of December 31, 2010,
there were 600,333 shares of Common Stock available for
future issuance, all under the 2003 Stock Option Plan. The
Company issues new shares of Common Stock upon exercise of stock
options and vesting of restricted stock awards.
Stock
Options
Compensation cost for stock options is measured at the grant
date based on the fair value of the award. The Company
recognizes these compensation costs net of a forfeiture rate and
recognizes the compensation costs for only those shares expected
to vest on a straight-line basis over the requisite service
period of the award, which is generally the stock option vesting
term. The Company estimated the forfeiture rate based on its
historical experience since the inception of the Stock Option
Plans.
The Company issues incentive stock options whereby stock options
to purchase Common Stock are granted with exercise prices that
are no less than the stocks estimated fair market value at
the date of the grant, vest based on three to four years of
continuous service, and have ten year contractual terms.
A summary of incentive stock option activity as of
December 31, 2010 and changes during the year then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 31, 2009
|
|
|
1,021,456
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
110,004
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(39,000
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(25,150
|
)
|
|
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
1,067,310
|
|
|
$
|
2.34
|
|
|
|
7.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2010
|
|
|
957,282
|
|
|
$
|
2.35
|
|
|
|
7.2
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
602,959
|
|
|
$
|
2.45
|
|
|
|
6.2
|
|
|
|
|
|
The Company has issued non-qualified stock options to purchase
Common Stock, primarily to non-employee members of the Board of
Directors, which vest immediately upon grant or over three to
four years
63
and have five to ten year contractual terms. A summary of
non-qualified stock option activity as of December 31, 2010
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 31, 2009
|
|
|
458,414
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
67,496
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(78,000
|
)
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
447,910
|
|
|
$
|
2.04
|
|
|
|
3.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2010
|
|
|
399,699
|
|
|
$
|
1.99
|
|
|
|
3.6
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
239,660
|
|
|
$
|
2.22
|
|
|
|
2.4
|
|
|
|
|
|
Shares vested and expected to vest at December 31, 2010 in
the tables above represent shares fully vested as of
December 31, 2010, plus all non-vested shares as of
December 31, 2010, adjusted for the estimated forfeiture
rate. The aggregate intrinsic value in the tables above
represents the total pretax intrinsic value (the difference
between the Companys closing stock price on the last
trading day of 2010 and the exercise price, multiplied by the
number of
in-the-money
options) that would have been received by the stock option
holders had all the stock option holders exercised their stock
options on December 31, 2010. This amount changes based on
the fair market value of the Companys Common Stock.
The aggregate intrinsic value of stock options exercised during
the year ended December 31, 2008 was $1,500. Cash received
from stock option exercises was $2,700 during the year ended
December 31, 2008. There were no stock options exercised
during the years ended December 31, 2009 and 2010. The
total fair value of stock options vested during the years ended
December 31, 2010, 2009, and 2008 was $364,000, $315,000, and
$74,000, respectively.
Total compensation expense related to the Stock Option Plans was
$374,000, $347,000, and $187,000 for the years ended
December 31, 2010, 2009, and 2008, respectively, and is
included in selling, general and administrative expense in the
accompanying consolidated statements of operations.
The fair value of stock option awards for the years ended
December 31, 2010, 2009, and 2008, was estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions and fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average fair value of grants
|
|
$
|
1.08
|
|
|
$
|
0.74
|
|
|
$
|
1.59
|
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
|
|
3.4
|
%
|
Expected life
|
|
|
6.3 years
|
|
|
|
6.3 years
|
|
|
|
6.8 years
|
|
Expected volatility
|
|
|
76
|
%
|
|
|
71
|
%
|
|
|
70
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
A description of each assumption used in calculating the fair
value of stock option awards under the Black-Scholes option
pricing model is as follows:
Risk-free interest rate. The Company
bases the risk-free interest rate on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected
life of the option.
Expected life. The expected life
represents the period of time that options granted are expected
to be outstanding and was determined based on the average length
of time grants have remained outstanding in the past.
Expected volatility. The Companys
volatility factor was calculated under the Black-Scholes model
based on historical volatility of the Companys Common
Stock.
64
Expected dividends. The Company has not
issued any dividends to date and does not anticipate issuing any
dividends in the foreseeable future.
As of December 31, 2010, there was $375,000 and $126,000 of
unrecognized stock-based compensation expense related to
non-vested incentive and non-qualified stock option grants,
respectively. That cost is expected to be recognized over a
weighted-average period of 1.8 and 1.9 years, respectively.
Restricted
Stock
During the year ended December 31, 2010, the Company issued
restricted stock primarily to employees and members of the Board
of Directors which vest over four years and have five to ten
year contractual terms. No restricted stock had been issued
prior to the year ended December 31, 2010. The fair value
of restricted stock is based on the market price of our Common
Stock on the date of grant. Compensation expense for restricted
stock awards is recognized on a straight-line basis over the
vesting term of four years.
A summary of non-vested restricted stock activity as of
December 31, 2010 and changes during the year then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock at December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
97,500
|
|
|
|
1.41
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock at December 31, 2010
|
|
|
97,500
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense related to restricted stock was
$12,000 for the year ended December 31, 2010 and is
included in selling, general and administrative expense in the
accompanying consolidated statements of operations.
As of December 31, 2010, there was $126,000 of unrecognized
stock-based compensation expense related to non-vested
restricted stock. That cost is expected to be recognized over a
weighted-average period of 3.7 years.
The Company has in place a shareholder-approved, equity-based
stock compensation plan for members of the Board of Directors
and certain key executive managers of the Company. The
compensation plan partially compensates members of the Board of
Directors and key executive management of the Company in the
form of stock of the Company in lieu of cash compensation. The
plan is made available on a fully voluntary basis. The plan
includes the following provisions:
In regard to compensation to non-employee members of the Board
of Directors, the plan provides:
|
|
|
|
|
Regular monthly retainer fee compensation is paid up to $1,000
in Common Stock and the remainder paid in cash, with shares
payable determined as described below.
|
|
|
|
Shares of Common Stock payable under this plan are issued on a
quarterly basis.
|
|
|
|
Individual directors may annually (as of each Annual Meeting of
Shareholders) elect to opt in or out of the
payment-in-stock
provision of the plan, effective the following January 1.
|
In regard to compensation to key executive managers, the plan
provides:
|
|
|
|
|
Each key executive manager of the Company may make the election
to receive up to $1,000 per month of
his/her
compensation in the form of Common Stock, with shares payable
determined as described below.
|
|
|
|
Shares of Common Stock payable under the plan are issued on a
quarterly basis.
|
65
|
|
|
|
|
The election to participate will be on a yearly basis, effective
January 1 of each year. If the election is made to participate,
the commitment is for the full year, unless compelling and
extenuating circumstances arise supporting doing otherwise.
|
The number of shares payable under this plan is determined by
dividing the cash value of stock compensation by the higher of
(1) the actual closing price on the last trading day of
each month, or (2) the book value of the Company on the
last day of each month. Fractional shares are rounded up to the
next full share amount. During the year ended December 31,
2010, the Company issued 49,689 shares of Common Stock to
fifteen individuals under this plan at an average price of $1.82
per share in lieu of approximately $90,250 in cash compensation.
During the year ended December 31, 2009, the Company issued
80,641 shares of Common Stock to fourteen individuals under
this plan at an average price of $1.25 per share in lieu of
approximately $100,750 in cash compensation. During the year
ended December 31, 2008, the Company issued
35,573 shares of Common Stock to ten individuals under this
plan at an average price of $2.40 per share in lieu of
approximately $86,000 in cash compensation.
Under the provisions of ASC Topic
740-10-25,
at December 31, 2010, the Company had recorded a liability
for unrecognized tax benefits related to transfer pricing on
intercompany sales of $723,000, which included accrued interest
and penalties of $260,000 and of which $463,000 would increase
the effective tax rate if recognized. While the Company believes
that it has adequately provided for all tax positions, amounts
asserted by taxing authorities could be greater than the
Companys accrued position. Accordingly, additional
provisions could be recorded in the future as revised estimates
are made or the underlying matters are settled or otherwise
resolved.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31,
2010 and 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance as of January 1
|
|
$
|
228
|
|
|
$
|
264
|
|
Additions for tax positions related to prior years
|
|
|
|
|
|
|
|
|
Additions for tax positions related to the current year
|
|
|
207
|
|
|
|
(62
|
)
|
Foreign exchange translation gain
|
|
|
28
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
463
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
The Company files its tax returns as prescribed by the tax laws
of the U.S. federal jurisdiction and various states and
foreign jurisdictions in which it operates. The Companys
2006 to 2010 tax years remain open to examination by
U.S. taxing authorities. The foreign jurisdictions have
open tax years from 2004 to 2010. Potential accrued interest on
uncertain tax positions is recorded as a component of interest
expense and potential accrued penalties are recorded as selling,
general and administrative expenses.
The pretax income (loss) for each of the years ended
December 31, 2010, 2009, and 2008 was taxed by the
following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(2,179
|
)
|
|
$
|
(360
|
)
|
|
$
|
444
|
|
Foreign
|
|
|
671
|
|
|
|
3,172
|
|
|
|
2,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,508
|
)
|
|
$
|
2,812
|
|
|
$
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The income tax provision charged (benefit credited) for each of
the years ended December 31, 2010, 2009, and 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign
|
|
|
685
|
|
|
|
861
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
861
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(440
|
)
|
|
|
(25
|
)
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440
|
)
|
|
|
(25
|
)
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
245
|
|
|
$
|
836
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) differs from the expected
amount of income tax expense (benefit) determined by applying
the U.S. federal income tax rates to the pretax income
(loss) for each of the years ended December 31, 2010, 2009,
and 2008 due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Pretax
|
|
|
|
|
|
of Pretax
|
|
|
|
|
|
of Pretax
|
|
|
|
Amount
|
|
|
Earnings (Loss)
|
|
|
Amount
|
|
|
Earnings (Loss)
|
|
|
Amount
|
|
|
Earnings (Loss)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Computed expected tax expense (benefit)
|
|
$
|
(513
|
)
|
|
|
34.0
|
%
|
|
$
|
956
|
|
|
|
34.0
|
%
|
|
$
|
1,028
|
|
|
|
34.0
|
%
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible expenses
|
|
|
133
|
|
|
|
(8.8
|
)
|
|
|
99
|
|
|
|
3.5
|
|
|
|
72
|
|
|
|
2.4
|
|
(Increase)/decrease in prior year NOL
|
|
|
280
|
|
|
|
(18.5
|
)
|
|
|
(85
|
)
|
|
|
(3.0
|
)
|
|
|
(1,127
|
)
|
|
|
(37.3
|
)
|
Higher (lower) rates on earnings of foreign operations
|
|
|
37
|
|
|
|
(2.5
|
)
|
|
|
(9
|
)
|
|
|
(0.3
|
)
|
|
|
211
|
|
|
|
7.0
|
|
State taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
0.2
|
|
Uncertain tax positions
|
|
|
177
|
|
|
|
(11.7
|
)
|
|
|
(70
|
)
|
|
|
(2.5
|
)
|
|
|
63
|
|
|
|
2.1
|
|
Changes in valuation allowance
|
|
|
131
|
|
|
|
(8.8
|
)
|
|
|
(55
|
)
|
|
|
(2.0
|
)
|
|
|
843
|
|
|
|
27.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
245
|
|
|
|
(16.3
|
)%
|
|
$
|
836
|
|
|
|
29.7
|
%
|
|
$
|
1,096
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities that give
rise to the deferred income taxes as of December 31, 2010
and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Federal and state loss carryforwards
|
|
$
|
7,142
|
|
|
$
|
6,301
|
|
Federal tax credits
|
|
|
300
|
|
|
|
305
|
|
Foreign loss carryforwards
|
|
|
2,398
|
|
|
|
2,259
|
|
Inventory reserve and capitalization
|
|
|
154
|
|
|
|
122
|
|
Other accruals and reserves
|
|
|
221
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
10,215
|
|
|
|
9,220
|
|
Less valuation allowance
|
|
|
(8,250
|
)
|
|
|
(8,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,965
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,352
|
)
|
|
|
(851
|
)
|
Untaxed foreign reserves
|
|
|
(84
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,436
|
)
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
529
|
|
|
$
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
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, 2010, the
Companys deferred tax valuation allowance was attributable
to operating loss carryforwards from its various domestic
jurisdictions and one of its foreign subsidiaries. It is the
Companys belief that it is more likely than not the
deferred tax assets generated by the operating loss
carryforwards in these jurisdictions will not be realized in
future periods.
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, 2010 and
2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Current assets
|
|
$
|
613
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
1,352
|
|
|
$
|
851
|
|
Noncurrent liabilities
|
|
|
(1,436
|
)
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent liabilities
|
|
$
|
(84
|
)
|
|
$
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred assets (liabilities)
|
|
$
|
529
|
|
|
$
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company has net operating loss
carryforwards for federal income tax purposes of
$19.3 million, which are available to offset future federal
taxable income, if any, and which expire beginning in 2012
through 2030. In addition, two of the Companys domestic
subsidiaries have net economic loss carryforwards for state
income tax purposes of $12.3 million, which are available
to offset future state taxable income, if any, through 2030.
Further, one of the Companys foreign subsidiaries also has
loss carryforwards for German tax purposes of $5.2 million,
which are available to offset future foreign taxable income.
The Companys ability to utilize net operating loss
carryforwards in the case of certain events including
significant changes in ownership interests may be limited. If
the net operating loss carryforwards are limited
68
and the Company has taxable income that 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 $300,000 at December 31,
2010 that expire in various years from 2011 through 2023.
|
|
(16)
|
Related
Party Transactions
|
As more fully described in Note 11, the Company sold shares
of Series K Preferred to multiple investors during the
years ended December 31, 2010 and 2009. Two of the
investors who purchased Series K Preferred in December
2009, John K. Pirotte and Helga Houston, are members of the
Companys board of directors. Mr. Pirotte purchased
10 shares of Series K Preferred with an aggregate
liquidation preference of $50,000 and Ms. Houston purchased
4 shares of Series K Preferred with an aggregate
liquidation preference of $20,000. In January 2010, John D.
Higgins, a member of the Companys board of directors and
David L. Turney, the Companys Chairman of the Board and
Chief Executive Officer, purchased Series K Preferred.
Mr. Higgins purchased 10 shares of Series K
Preferred with an aggregate liquidation preference of $50,000
and Mr. Turney purchased 1 share of Series K
Preferred with a liquidation preference of $5,000.
|
|
(17)
|
Segment
and Geographic Information
|
DRI conducts its operations in one business segment.
Accordingly, the accompanying consolidated statements of
operations report the results of operations of that operating
segment and no separate disclosure is provided herein.
Geographic sales information provided below is based upon
location of customer. Long-lived assets include net property and
equipment and other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
34,748
|
|
|
$
|
32,104
|
|
|
$
|
30,576
|
|
Europe
|
|
|
22,760
|
|
|
|
26,602
|
|
|
|
20,008
|
|
Asia-Pacific
|
|
|
17,313
|
|
|
|
15,644
|
|
|
|
8,018
|
|
Middle East
|
|
|
489
|
|
|
|
381
|
|
|
|
948
|
|
South America
|
|
|
11,991
|
|
|
|
7,554
|
|
|
|
11,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,301
|
|
|
$
|
82,285
|
|
|
$
|
70,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,105
|
|
|
$
|
3,670
|
|
|
$
|
2,982
|
|
Europe
|
|
|
2,619
|
|
|
|
1,948
|
|
|
|
1,527
|
|
Asia-Pacific
|
|
|
957
|
|
|
|
313
|
|
|
|
46
|
|
South America
|
|
|
509
|
|
|
|
225
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,190
|
|
|
$
|
6,156
|
|
|
$
|
4,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company, in the normal course of its operations, is involved
in legal actions incidental to the business. In
managements 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.
|
|
(19)
|
Foreign
Tax Settlement
|
In December 2006, Mobitec Brazil, recorded a liability for
Imposto sobre Produtos Industrializados (Industrialized Products
Tax or IPI Tax), a form of federal value-added tax
in Brazil, and related penalties and interest assessed by
Brazils Federal Revenue Service (FRS) in the
amount of $1.5 million, or $750,000 net of the
minority ownership in Mobitec Brazil. The assessment was the
result of an audit
69
performed by the FRS in 2006 for the periods January 1,
1999 to June 30, 2006 and varying interpretations of
Brazils complex tax laws by the FRS and the Company. The
Company reached a settlement with the FRS to pay the assessed
amount in monthly installments over a five-year period.
Under the provisions of a new law enacted in Brazil in 2009, the
FRS provided relief to certain Brazilian entities by allowing a
partial reduction in the amount of IPI tax obligations and
related penalties and interest that have been previously
assessed against those entities. Pursuant to the provisions of
the new law, the outstanding IPI tax obligations, including
penalties and interest, of Mobitec Brazil previously assessed,
which are reflected as foreign tax settlement in the
accompanying consolidated balance sheets, were reduced by
approximately $275,000 (based on exchange rates as of
December 31, 2009). Accordingly, in September 2009, we
recorded an adjustment to reduce the foreign tax settlement by
approximately $275,000, with a corresponding adjustment of
$242,000 (based on exchange rates as of December 31,
2009) to reduce selling, general, and administrative
expenses. The difference in the amount of the reduction recorded
to the liability and the amount of the reduction recorded to
expenses arises from different currency exchange rates used to
convert transactions reported in Mobitec Brazils
functional currency to U.S. dollars on the balance sheet
and statement of operations, as described in Note 1.
The basic net income (loss) per common share has been computed
based upon the weighted average shares of Common Stock
outstanding. Diluted net income (loss) per common share has been
computed based upon the weighted average shares of Common Stock
outstanding and shares that would have been outstanding assuming
the issuance of Common Stock for all potentially dilutive
equities outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
Net income (loss) applicable to common shareholders of DRI
Corporation
|
|
$
|
(2,398
|
)
|
|
$
|
1,511
|
|
|
$
|
1,193
|
|
Effect of dilutive securities on net income (loss) of DRI
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Convertible preferred stock
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders of DRI
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation, assuming conversions
|
|
$
|
(2,398
|
)
|
|
$
|
1,522
|
|
|
$
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares oustanding Basic
|
|
|
11,804,189
|
|
|
|
11,548,403
|
|
|
|
11,333,984
|
|
Effect of dilutive securities on shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
10,898
|
|
|
|
26,170
|
|
Warrants
|
|
|
|
|
|
|
71,504
|
|
|
|
19,925
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
112,394
|
|
Convertible preferred stock
|
|
|
|
|
|
|
85,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Diluted
|
|
|
11,804,189
|
|
|
|
11,715,807
|
|
|
|
11,492,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No recognition was given to potentially dilutive securities
aggregating 5,086,287 shares of Common Stock for the year
ended December 31, 2010. Due to the net loss applicable to
common shareholders of DRI Corporation in that period, such
securities would have been anti-dilutive. The calculation of
weighted average shares outstanding for the years ended
December 31, 2009 and 2008 excludes preferred stock
convertible into 1,695,433 and 1,641,729 shares of Common
Stock, respectively, because they are anti-dilutive, and
2,010,049 and 2,533,039, respectively, of stock options and
warrants because these securities would not have been dilutive
for these periods due to the fact that the exercise prices were
greater than the average market price of our Common Stock for
these periods or the total assumed proceeds under the treasury
stock method resulted in negative incremental shares.
70
|
|
(21)
|
Unaudited
Quarterly Financial Data
|
The following is a summary of unaudited quarterly results of
operations for the years ended December 31, 2010 and 2009,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
|
(In thousands, except share and per share amounts)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
22,129
|
|
|
$
|
25,559
|
|
|
$
|
19,860
|
|
|
$
|
19,753
|
|
Gross profit
|
|
|
5,324
|
|
|
|
7,770
|
|
|
|
6,508
|
|
|
|
5,938
|
|
Operating income (loss)
|
|
|
(765
|
)
|
|
|
1,778
|
|
|
|
669
|
|
|
|
(1,456
|
)
|
Net income (loss) applicable to common shareholders of DRI
Corporation
|
|
|
(995
|
)
|
|
|
763
|
|
|
|
(545
|
)
|
|
|
(1,621
|
)
|
Net income (loss) applicable to common shareholders per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
Weighted average number of common shares and common share
equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,753,359
|
|
|
|
11,797,095
|
|
|
|
11,826,249
|
|
|
|
11,838,873
|
|
Diluted
|
|
|
11,753,359
|
|
|
|
14,322,759
|
|
|
|
11,826,249
|
|
|
|
11,838,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
|
(In thousands, except share and per share amounts)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
13,202
|
|
|
$
|
21,514
|
|
|
$
|
21,555
|
|
|
$
|
26,014
|
|
Gross profit
|
|
|
3,686
|
|
|
|
6,670
|
|
|
|
7,167
|
|
|
|
7,273
|
|
Operating income (loss)
|
|
|
(866
|
)
|
|
|
1,326
|
|
|
|
2,007
|
|
|
|
1,375
|
|
Net income (loss) applicable to common shareholders of DRI
Corporation
|
|
|
(1,149
|
)
|
|
|
1,075
|
|
|
|
842
|
|
|
|
743
|
|
Net income (loss) applicable to common shareholders per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and common share equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,473,219
|
|
|
|
11,498,254
|
|
|
|
11,522,979
|
|
|
|
11,696,980
|
|
Diluted
|
|
|
11,473,219
|
|
|
|
13,228,690
|
|
|
|
13,395,830
|
|
|
|
13,629,129
|
|
|
|
(22)
|
Employee
Benefit Plan
|
The Company has a defined contribution plan which covers
substantially all of its full-time U.S. employees. The
employees annual contributions are limited to the maximum
allowed under the U.S. Internal Revenue Code. The Company
may elect to match employee contributions and make further
discretionary contributions to the plan. For the years ended
December 31, 2010, 2009, and 2008, the Company did not
elect to contribute to the plan on behalf of the employees.
71
|
|
(23)
|
Non-monetary
Transaction Advertising Rights
|
On July 12, 2010, Castmaster Mobitec entered into a
non-monetary exchange transaction with Delhi Transport
Corporation (DTC) under terms of a contract (the
DTC Advertising Contract) pursuant to which
Castmaster Mobitec is to provide LED destination signs sought
for procurement by DTC in exchange for 24 months of
advertising rights on 1,500 of DTCs existing fleet of
buses. The buses serve both urban and rural areas, in Delhi as
well as satellite communities. In order to monetize the value of
the advertising rights conveyed by the DTC Contract, Castmaster
Mobitec began negotiating a contract to sell such rights to an
advertising company. On October 12, 2010, Castmaster
Mobitec entered into an advertising agreement (the
Advertising Agreement) with an advertising services
company (the Advertising Company) to sell the
advertising rights on the same terms and conditions conveyed to
Castmaster Mobitec by the DTC Contract.
Prior to accepting the first installment payment from the
Advertising Company, which was due on October 20, 2010,
Castmaster Mobitec sought to clarify with the Advertising
Company that the time period available for advertising under the
DTC Contract would expire on July 12, 2012, unless
extended, and therefore might convey less than 24 months of
advertising rights. The Advertising Company provided Castmaster
Mobitec with a letter dated October 28, 2010 acknowledging
that approximately 20 months of advertising rights were
then available under the DTC Contract and requesting, but not
demanding, that Castmaster Mobitec seek a one-year extension of
the DTC Contract, pursuant to which DTC has the discretion to
grant such extension. If no extension is granted, revenue
generated by the advertising rights will be limited to the time
between the start date of advertising and the expiration date of
July 12, 2012.
As of December 31, 2010, installation of LED destination
signs had been completed on approximately one-third of
DTCs 1,500-bus fleet, and installation of the remaining
900 buses was halted pending a decision by DTC to grant the
requested one-year extension. The terms of the DTC contract
stipulate a completion date of November 5, 2010 for the
installation of the remaining 900 buses in the fleet, with a
provision for liquidated damages if not completed by that date.
While DTC has not waived its rights under the contract, we do
not believe DTC will seek to enforce liquidated damages because
the cost impact of the delay is primarily related to the
potential loss on the non-monetary transaction that Castmaster
Mobitec would suffer if unable to monetize the advertising
rights prior to the expiration of the rights.
As a result of delays in the start date of the advertising, the
uncertainty of DTC granting the one-year extension and the
resulting uncertainty related to the completion of installation
of the remaining 900 bus sets, we are unable to conclude that
our ability to monetize the value of the advertising rights is
reasonably assured. Therefore, the profit potential from the
sale of the advertising rights is considered to be a gain
contingency which, in accordance with U.S. GAAP, is not
reflected in our financial results. We recorded a pre-tax charge
of approximately $1.0 million ($0.5 million net of
non-controlling interests) which reflects a full valuation
allowance of the advertising rights asset recorded in exchange
for the inventory provided to DTC under the terms of the
contract.
On February 25, 2011, Mobitec AB and Handelsbanken entered
into (i) an amendment (the Base Facility
Amendment) to Mobitec ABs existing base overdraft
facility with Handelsbanken (the Base Overdraft
Facility) and (ii) an amendment (the
Supplementary Facility Amendment) to Mobitec
ABs existing supplementary overdraft facility with
Handelsbanken (the Supplementary Overdraft
Facility). The Base Facility Amendment increased the
amount available under the Base Overdraft Facility by
5.0 million SEK (approximately US$738,000 based on currency
exchange rates at December 31, 2010), from 7.0 million
SEK (approximately US$1.0 million based on currency
exchange rates at December 31, 2010) to
12.0 million SEK (approximately US$1.8 million based
on currency exchange rates at December 31, 2010) for
the overdraft period commencing on March 1, 2011 and
terminating on December 31, 2011. The Supplementary
Facility Amendment reduced the amount available under the
Supplementary Overdraft Facility by 5.0 million SEK
(approximately US$738,000 based on currency exchange rates at
December 31, 2010), from 12.0 million SEK
(approximately US$1.8 million based on currency exchange
rates at December 31, 2010) to 7.0 million SEK
72
(approximately US$1.0 million based on currency exchange
rates at December 31, 2010) for the overdraft period
commencing on March 1, 2011 and terminating on May 31,
2011.
After giving effect to the Base Facility Amendment and the
Supplementary Facility Amendment, the total borrowing capacity
available to Mobitec AB under the Base Overdraft Facility and
the Supplementary Overdraft Facility will remain constant at
19.0 million SEK (approximately US$2.8 million based
on currency exchange rates at December 31, 2010) and
Mobitec ABs total aggregate borrowing capacity for all
working capital credit facilities with Handelsbanken will remain
constant at 38.0 million SEK (approximately
US$5.6 million based on currency exchange rates at
December 31, 2010) until May 31, 2011. Unless
Mobitec AB and Handelsbanken agree to extend, renew or otherwise
modify the Supplementary Overdraft Facility on or prior to
May 31, 2011, then, on such date, the Supplementary
Overdraft Facility will terminate and Mobitec ABs total
borrowing capacity with Handelsbanken will be reduced by
7.0 million SEK (approximately US$1.0 million based on
currency exchange rates at December 31, 2010).
On March 31, 2011 and April 6, 2011, the PNC Agreement
and BHC Agreement, respectively, were each amended to, among
other things, extend the maturity date of those agreements. The
maturity date of the PNC Agreement was extended to the earlier
of (a) April 30, 2012 or (b) five days prior to
the maturity date of the BHC Agreement. The maturity date of the
BHC Agreement was extended to April 30, 2012. These
amendments to the PNC Agreement and BHC Agreement also revised
certain of the financial covenants with which we and our
subsidiaries must comply to:
|
|
|
|
|
Establish the fixed charge coverage ratio required to be
maintained as of the end of each of the fiscal quarters ending
March 31, 2011, June 30, 2011, September 30,
2011, December 31, 2011 and each fiscal quarter ending
thereafter as set forth below:
|
|
|
|
|
|
|
|
Fixed Charge
|
Fiscal Quarter Ending:
|
|
Coverage Ratio:
|
|
March 31, 2011
|
|
|
No Test
|
|
June 30, 2011
|
|
|
No Test
|
|
September 30, 2011
|
|
|
No Test
|
|
December 31, 2011 and each fiscal quarter ending thereafter
|
|
|
1.25 to 1.00
|
|
|
|
|
|
|
Establish the leverage ratio required to be maintained as of the
end of each of the fiscal quarters ending March 31, 2011,
June 30, 2011, September 30, 2011, December 31,
2011 and each fiscal quarter ending thereafter as set forth
below:
|
|
|
|
|
|
Fiscal Quarter Ending:
|
|
Leverage Ratio:
|
|
March 31, 2011
|
|
|
17.50 to 1.00
|
|
June 30, 2011
|
|
|
16.50 to 1.00
|
|
September 30, 2011
|
|
|
10.25 to 1.00
|
|
December 31, 2011 and each fiscal quarter ending thereafter
|
|
|
4.00 to 1.00
|
|
|
|
|
|
|
Establish the minimum, trailing-twelve-month EBITDA that must be
maintained by DRI Corporation on a consolidated basis as of the
end of each of the fiscal quarters ending March 31, 2011,
June 30, 2011, September 30, 2011, December 31,
2011 and each fiscal quarter ending thereafter as set forth
below:
|
|
|
|
|
|
Fiscal Quarter Ending:
|
|
EBITDA:
|
|
March 31, 2011
|
|
$
|
2,750,000
|
|
June 30, 2011
|
|
$
|
3,000,000
|
|
September 30, 2011
|
|
$
|
5,000,000
|
|
December 31, 2011 and each fiscal quarter ending thereafter
|
|
$
|
7,000,000
|
|
The amendment to the PNC Agreement also (a) reduced the
early termination fee to $40,000 and (b) established a
minimum domestic EBITDA amount that we and the Borrowers must
maintain on a trailing-
73
twelve-month basis as of the end of each of the fiscal quarters
ending March 31, 2011, June 30, 2011,
September 30, 2011, December 31, 2011 and each fiscal
quarter ending thereafter as set forth below:
|
|
|
|
|
Fiscal Quarter Ending:
|
|
EBITDA:
|
|
March 31, 2011
|
|
$
|
525,000
|
|
June 30, 2011
|
|
$
|
625,000
|
|
September 30, 2011
|
|
$
|
900,000
|
|
December 31, 2011 and each fiscal quarter ending thereafter
|
|
|
No Test
|
|
The amendment to the BHC Agreement also (a) revised the
minimum Net Worth, as defined in the BHC Agreement, that we and
the Borrowers must maintain, at all times during and at the end
of each fiscal quarter, to $12,500,000 and (b) revised the
termination fee required to be paid on each date on which any
payment or prepayment of principal on the Term Loan occurs as
set forth below:
|
|
|
|
|
|
|
Then the Amount of the
|
If the Payment Date is:
|
|
Termination Fee Shall Equal:
|
|
On or before June 30, 2011
|
|
$
|
800,000
|
|
After June 30, 2011, but on or before September 30,
2011
|
|
$
|
1,000,000
|
|
After September 30, 2011, but on or before
December 30, 2011
|
|
$
|
1,300,000
|
|
January 1, 2012 and thereafter
|
|
$
|
1,700,000
|
|
Additionally, the amendments to the PNC Agreement and BHC
Agreement (1) allow us to pay non-cash dividends consisting
of additional shares of our capital stock and (2) prohibit
us from paying cash dividends on any series of preferred stock
until such time that we can demonstrate pro forma compliance
with the fixed charge coverage ratio covenant, as amended and
set forth above, for the fiscal quarter most recently ended;
provided, however, if the fixed charge coverage ratio was not
tested in such fiscal quarter, no such payments shall be
permitted. Series K Preferred dividends have preference to
the payment of all other dividends. Currently all Series K
Preferred dividends are designated as cash dividends. With the
restrictions of the PNC Agreement and BHC Agreement, as amended
and described herein, the Company is effectively restricted from
paying any cash or non-cash dividends on any series of preferred
stock during the prohibited period defined in the preceding
clause (2) because of the Series K Preferred
preference. Therefore, dividends on all series of preferred
stock shall be accrued in the future and not paid or issued
until such prohibition under the PNC Agreement and BHC Agreement
no longer exists.
We believe we will be able to comply with the financial
covenants of the PNC Agreement and BHC Agreement, as amended and
set forth above, but can give no assurance of such.
74
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
The Companys management, under the supervision and with
the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of the design and operation of the Companys disclosure
controls and procedures as defined under Rule
l3a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this
evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective as of December 31, 2010, the
end of the period covered by this Annual Report.
Managements
Report on Internal Control Over Financial
Reporting
The management of DRI Corporation is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
Management, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the
Companys internal control over financial reporting based
on the Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on its evaluation,
management concluded that the Companys internal control
over financial reporting was effective as of December 31,
2010.
Our disclosure controls and procedures as well as our internal
controls over financial reporting are designed to provide
reasonable assurance of achieving their objectives as specified
above. Management does not expect, however, that our disclosure
controls and procedures as well as our internal controls over
financial reporting will prevent or detect all error and fraud.
Any control system, no matter how well designed and operated, is
based upon certain assumptions and can provide only reasonable,
not absolute, assurance that its objectives will be met.
Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any,
within the Company have been detected.
This Annual Report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting. The
effectiveness of internal control over financial reporting was
not subject to attestation by the Companys independent
registered public accounting firm pursuant to rules of the SEC
that require the Company to provide only managements
report in this Annual Report.
Remediation
of Material Weakness Revenue
Recognition
During our 2008 year end audit, management identified a
material weakness in internal controls related to revenue
recognition. The Company enters into revenue transactions from
time to time that contain multiple elements and deliverables,
some of which are contingent on each other. Revenue recognition
in these types of contracts can be complicated and requires
thorough evaluation and documentation to ensure revenue is
properly accounted for in accordance with U.S. GAAP.
Actions were taken in 2009 to strengthen internal controls
around revenue recognition, and increased efforts were
undertaken in 2010, including the retention of a consultant with
multiple element revenue recognition expertise. The consultant
assisted the Company in reviewing all multiple element
arrangements entered into by the Company and in evaluating such
arrangements to determine proper accounting treatment. In
addition, in the second quarter of 2010 the Companys
management participated in formal training by subject matter
experts on revenue recognition.
Management, in conjunction with an independent consulting firm
with expertise in implementing and testing internal controls,
has performed testing that validates the operating effectiveness
of internal controls related to revenue recognition. Based on
this effectiveness testing, internal controls were determined to
have been in place and operating effectively as of
September 30, 2010. While we were unable to conclude that
remediation had been achieved as of September 30, 2010 as
the controls had not been in place for a sufficient
75
length of time to be concluded upon, we have determined that
remediation of the internal control weakness related to revenue
recognition was remediated as of December 31, 2010.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2010 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, other
than the actions taken to remediate the material weakness
described above.
|
|
Item 9B.
|
Other
Information
|
None.
Certain information required by Part III is incorporated by
reference to the Companys definitive Proxy Statement
pursuant to Regulation 14A relating to the annual meeting
of shareholders for 2010, which shall be filed with the SEC no
later than April 30, 2011 (the Proxy
Statement). Only those sections of the Proxy Statement
that specifically address the items set forth herein are
incorporated by reference.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information called for by this item is incorporated herein
by reference to the Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
The information called for by this item is incorporated herein
by reference to the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
|
The information called for by this item is incorporated herein
by reference to the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information called for by this item is incorporated herein
by reference to the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information called for by this item is incorporated herein
by reference to the Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(1)(2)
Financial Statements
See the Index to Consolidated Financial Statements in
Part II, Item 8.
76
The following documents are filed herewith or have been included
as exhibits to previous filings with the SEC and are
incorporated herein by this reference:
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference from the Companys
Registration Statement on Form S-3, filed with the SEC on
December 23, 2003)
|
|
3
|
.1.1
|
|
Articles of Amendment to the Articles of Incorporation of the
Company containing an amendment to eliminate a staggered
election of Board members (incorporated herein by reference to
the Companys Report on Form 10-Q for the quarter ended
June 30, 2005)
|
|
3
|
.1.2
|
|
Articles of Amendment to Articles of Incorporation of the
Company, dated February 2, 2010, amending and restating the
Companys Preferred Stock capitalization (incorporated
herein by reference to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2009 filed with the
SEC on April 15, 2010)
|
|
3
|
.2
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series E
Redeemable Nonvoting Convertible Stock (incorporated herein by
reference from the Companys Report on Form 8-K, filed with
the SEC on November 12, 2003)
|
|
3
|
.3
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series F Redeemable Convertible Preferred Stock
(incorporated herein by reference from the Companys Report
on Form 8-K, filed with the SEC on April 14, 2004)
|
|
3
|
.4
|
|
Articles of Amendment to the Articles of Incorporation of the
Company containing Series AAA Preferred Stock Change in
Quarterly Dividend Accrual and Conversion Price (incorporated
herein by reference to the Companys Report on Form 10-K
for the year ended December 31, 2004)
|
|
3
|
.5
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series G Convertible Preferred Stock
(incorporated herein by reference to the Companys Report
on Form 8-K filed on June 28, 2005)
|
|
3
|
.5.1
|
|
Articles of Correction of Articles of Amendment to the Articles
of Incorporation of the Company containing a correction to an
error in the Amended Certificate of Designation of Series G
Convertible Preferred Stock (incorporated herein by reference to
the Companys Report on Form 10-Q for the quarter
ended June 30, 2005)
|
|
3
|
.6
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series H Convertible Preferred Stock
(incorporated herein by reference to the Companys Report
on Form 8-K filed on November 4, 2005)
|
|
3
|
.7
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series I Convertible Preferred Stock
(incorporated herein by reference to the Companys Report
on Form 8-K filed on March 23, 2006)
|
|
3
|
.8
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series D Junior
Participating Preferred Stock (incorporated herein by reference
to the Companys Registration Statement on Form 8-A filed
with the SEC on December 17, 1999)
|
|
3
|
.8.1
|
|
Amendment No. 1 to Certificate of Designation of Series D Junior
Participating Preferred Stock (incorporated herein by reference
to the Companys Report on Form 8-K filed with the SEC on
September 28, 2006)
|
|
3
|
.8.2
|
|
Amendment No. 2 to Certificate of Designation of Series D Junior
Participating Preferred Stock (incorporated herein by reference
to the Companys Registration Statement on Form 8-A filed
with the SEC on October 2, 2006)
|
|
3
|
.9
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series J Convertible Preferred Stock
(incorporated herein by reference to the Companys Report
on Form 10-Q for the quarter ended June 30, 2007)
|
|
3
|
.10
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series K Senior
Convertible Preferred Stock (incorporated herein by reference to
the Companys Report on Form 8-K filed with the SEC on
October 15, 2009)
|
77
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
3
|
.10.1
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series K Senior
Convertible Preferred Stock (incorporated herein by reference to
the Companys Report on Form 8-K filed with the SEC on
November 12, 2009)
|
|
3
|
.10.2
|
|
Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series K Senior
Convertible Preferred Stock, dated December 29, 2009
(incorporated herein by reference to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2009
filed with the SEC on April 15, 2010)
|
|
3
|
.10.3
|
|
Amendment to Certificate of Designation of Series K Senior
Convertible Preferred Stock, dated January 5, 2010 (incorporated
herein by reference to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2009 filed with the
SEC on April 15, 2010)
|
|
3
|
.10.4
|
|
Amendment to Certificate of Designation of Series K Senior
Convertible Preferred Stock, dated August 16, 2010 (incorporated
herein by reference to the Companys Report on Form 8-K
filed with the SEC on August 20, 2010)
|
|
3
|
.11
|
|
Amended and Restated Bylaws of the Company (incorporated herein
by reference to the Companys Report on Form 8-K filed on
September 18, 2006)
|
|
3
|
.11.1
|
|
Amendment to Bylaws of DRI Corporation, dated as of September
12, 2007 (incorporated herein by reference to the Companys
Report on Form 8-K filed with the SEC on September 14, 2007)
|
|
4
|
.1
|
|
Form of specimen certificate for Common Stock of the Company
(incorporated herein by reference from the Companys
Registration Statement on Form SB-2, filed with the SEC (SEC
File
No. 33-82870-A))
|
|
4
|
.2
|
|
Rights Agreement, dated as of September 22, 2006, between the
Company and American Stock Transfer & Trust Company, as
Rights Agent, together with the following exhibits thereto:
Exhibit A Certificate of Designation of Series
D Junior Participating Preferred Stock of Digital Recorders,
Inc. and the Amendment to Certificate of Designation of Series D
Junior Participating Preferred Stock of Digital Recorders, Inc.;
Exhibit B Form of Right Certificate; and
Exhibit C Summary of Rights to Purchase Shares
(incorporated herein by reference to the Companys
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on October 2, 2006)
|
|
4
|
.2.1
|
|
Amendment No. 2 to Rights Agreement, dated July 8, 2004, between
Digital Recorders, Inc. and Continental Stock Transfer &
Trust Company (incorporated herein by reference to the
Companys Report on Form 8-K, filed with the SEC on July 8,
2004)
|
|
4
|
.3
|
|
Form of Certificate of Designation of Series H Convertible
Preferred Stock (incorporated herein by reference to the
Companys Report on Form 8-K filed on November 4, 2005)
|
|
4
|
.4
|
|
Omnibus Amendment dated as of January 10, 2007, effective
December 31, 2006, by and among the Company, TwinVision of North
America, Inc., Digital Audio Corporation, Robinson-Turney
International, Inc., and Laurus Master Fund, Ltd. (incorporated
herein by reference to the Companys Report on Form 8-K
filed with the SEC on January 16, 2007)
|
|
4
|
.5
|
|
Amended and Restated Secured Term Note dated as of January 10,
2007, effective December 31, 2006, by and between the Company,
TwinVision of North America, Inc., Digital Audio Corporation,
Robinson-Turney International, Inc., and Laurus Master Fund,
Ltd. (incorporated herein by reference to the Companys
Report on Form 8-K filed with the SEC on January 16, 2007)
|
|
4
|
.6
|
|
Second Amended and Restated Registration Rights Agreement dated
as of January 10, 2007, effective December 31, 2006, by and
between the Company and Laurus Master Fund, Ltd. (incorporated
herein by reference to the Companys Report on Form 8-K
filed with the SEC on January 16, 2007)
|
|
4
|
.7
|
|
Warrant, dated as of June 30, 2008, issued by the Company to BHC
Interim Funding III, L.P. (incorporated herein by reference to
the Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
78
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
4
|
.7.1
|
|
First Amendment to Warrant, dated March 26, 2009, by and between
the Company and BHC Interim Funding III, L.P. (incorporated by
reference to the Companys Report on Form 10-K filed with
the SEC on March 31, 2009)
|
|
4
|
.7.2
|
|
Second Amendment to Warrant, dated September 30, 2009, by and
between the Company and BHC Interim Funding II, L.P.
(incorporated by reference to the Companys Report on Form
10-Q for the quarter ended September 30, 2009)
|
|
4
|
.7.3
|
|
Third Amendment to Warrant, dated December 28, 2009, by and
between the Company and BHC Interim Funding II, L.P.
(incorporated herein by reference to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2009
filed with the SEC on April 15, 2010)
|
|
4
|
.8
|
|
Stock Purchase Warrant, dated as of October 13, 2003, issued by
the Company to Dolphin Offshore Partners, L.P. (terminated)
(incorporated herein by reference to the Companys Report
on Form 8-K, filed with the SEC on November 12, 2003)
|
|
4
|
.9
|
|
Stock Purchase Warrant, dated June 23, 2005, issued by the
Company to Dolphin Offshore Partners, L.P. (incorporated herein
by reference to the Companys Report on Form 8-K filed on
June 28, 2005)
|
|
4
|
.10
|
|
Stock Purchase Warrant issued by the Company to Transit Vehicle
Technology Investments, Inc., dated March 21, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on March 23, 2006)
|
|
4
|
.11
|
|
Common Stock Purchase Warrant issued by the Company to Laurus
Master Fund, Ltd., dated as of April 28, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on May 4, 2006)
|
|
10
|
.1
|
|
Form of Office Lease Agreement, between the Company and Sterling
Plaza Limited Partnership (incorporated herein by reference from
the Companys Form 10-KSB/A, filed with the SEC on May 21,
2001)
|
|
10
|
.1.1
|
|
First Amendment to Lease Agreement, between the Company and
Sterling Plaza Limited Partnership, d/b/a Dallas Sterling Plaza
Limited Partnership, dated August 25, 2003 (incorporated herein
by reference to the Companys Registration Statement of
Form S-1, filed with the SEC on January 4, 2005)
|
|
10
|
.1.2
|
|
Second Amendment to Lease Agreement, between the Company and
Sterling Plaza Limited Partnership, d/b/a Dallas Sterling Plaza
Limited Partnership, dated September 17, 2004 (incorporated
herein by reference to the Companys Registration Statement
of Form S-1, filed with the SEC on January 4, 2005)
|
|
10
|
.2
|
|
Lease Agreement, between the Company and The Prudential Savings
Bank, F.S.B., dated December 18, 1998 (incorporated herein by
reference from the Companys Form 10-KSB/A, filed with the
SEC on June 6, 2001)
|
|
10
|
.2.1
|
|
First Lease Amendment, between the Company and Property Reserve,
Inc., f/k/a The Prudential Savings Bank, F.S.B., dated December
11, 2002 (incorporated herein by reference to the Companys
Registration Statement of Form S-1, filed with the SEC on
January 4, 2005)
|
|
10
|
.2.2
|
|
Second Lease Amendment, between the Company and Property
Reserve, Inc., f/k/a The Prudential Savings Bank, F.S.B., dated
June 18, 2003 (incorporated herein by reference to the
Companys Registration Statement of Form S-1, filed with
the SEC on January 4, 2005)
|
|
10
|
.2.3
|
|
Third Lease Amendment, between the Company and Property Reserve,
Inc., f/k/a The Prudential Savings Bank, F.S.B., dated August
21, 2003 (incorporated herein by reference to the Companys
Registration Statement of Form S-1, filed with the SEC on
January 4, 2005)
|
|
10
|
.2.4
|
|
Fourth Lease Amendment, between the Company and Property
Reserve, Inc., f/k/a The Prudential Savings Bank, F.S.B., dated
September 8, 2003 (incorporated herein by reference to the
Companys Registration Statement of Form S-1, filed with
the SEC on January 4, 2005)
|
|
10
|
.3
|
|
Share Purchase Agreement, dated as of October 13, 2003, by and
between Dolphin Offshore Partners, L.P. and the Company
(incorporated herein by reference to the Companys Report
on Form 8-K, filed with the SEC on November 12, 2003)
|
79
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.4
|
|
Securities Purchase Agreement, dated as of November 5, 2003, by
and between the Company, as seller, and BFSUS Special
Opportunities Trust PLC and Renaissance US Growth &
Investment Trust PLC, collectively as purchasers (incorporated
herein by reference to the Companys Report on Form 8-K,
filed with the SEC on November 12, 2003)
|
|
10
|
.5
|
|
Loan and Security Agreement, dated as of November 6, 2003, by
and between LaSalle Business Credit, LLC, as lender, and the
Company, as borrower (incorporated herein by reference to the
Companys Report on Form 8-K, filed with the SEC on
November 12, 2003)
|
|
10
|
.5.1
|
|
Waiver, Consent and Fourth Amendment Agreement between the
Company and LaSalle Business Credit, LLC, dated March 6, 2006
(incorporated herein by reference to the Companys Report
on Form 10-K filed with the SEC on April 17, 2006)
|
|
10
|
.6
|
|
Amended and Restated Registration Rights Agreement, dated as of
April 1, 2004, by and between the Company and Dolphin Offshore
Partners, L.P. (incorporated herein by reference from the
Companys Report on Form 8-K, filed with the SEC on April
14, 2004)
|
|
10
|
.7
|
|
Securities Purchase Agreement dated as of April 21, 2004, among
Digital Recorders, Inc. and the investors named therein
(incorporated herein by reference to the Companys Report
on Form 8-K, filed with the SEC on April 22, 2004)
|
|
10
|
.8
|
|
Registration Rights Agreement dated as of April 21, 2004, among
Digital Recorders, Inc. and the investors named therein
(incorporated herein by reference to the Companys Report
on Form 8-K, filed with the SEC on April 22, 2004)
|
|
10
|
.9
|
|
Securities Purchase Agreement, dated October 5, 2004, between
the Company and Riverview Group LLC (incorporated herein by
reference to the Companys Report on Form 8-K, filed with
the SEC on October 7, 2004)
|
|
10
|
.10
|
|
Registration Rights Agreement, dated October 5, 2004, between
the Company and Riverview Group LLC (incorporated herein by
reference to the Companys Report on Form 8-K, filed with
the SEC on October 7, 2004)
|
|
10
|
.11
|
|
Share Purchase Agreement, dated June 23, 2005, by and between
the Company and Dolphin Offshore Partners, L.P.(incorporated
herein by reference to the Companys Report on Form 8-K
filed on June 28, 2005)
|
|
10
|
.12
|
|
Registration Rights Agreement, dated June 23, 2005, by and
between the Company and Dolphin Offshore Partners, L.P.
(incorporated herein by reference to the Companys Report
on Form 8-K filed on June 28, 2005)
|
|
10
|
.13
|
|
Share Purchase Agreement, dated October 31, 2005, between John
D. Higgins and the Company (incorporated herein by reference to
the Companys Report on Form 8-K filed on November 4, 2005)
|
|
10
|
.14
|
|
Form of Registration Rights Agreement between John D. Higgins
and the Company (incorporated herein by reference to the
Companys Report on Form 8-K filed on November 4, 2005)
|
|
10
|
.15
|
|
Secured Non-Convertible Revolving Note between the Company and
Laurus Master Fund, Ltd., dated March 15, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on March 21, 2006)
|
|
10
|
.16
|
|
Security Agreement (with Schedules) between the Company and
Laurus Master Fund, Ltd. dated March 15, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on March 21, 2006)
|
|
10
|
.17
|
|
Grant of Security Interest in Patents and Trademarks (with
Schedules) between the Company and Laurus Master Fund, Ltd.,
dated March 15, 2006 (incorporated herein by reference to the
Companys Report on Form 8-K filed on March 21, 2006)
|
|
10
|
.18
|
|
Stock Pledge Agreement (with Schedules) between the Company and
Laurus Master Fund, Ltd., dated March 15, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on March 21, 2006)
|
|
10
|
.19
|
|
Registration Rights Agreement between the Company and Laurus
Master Fund, Ltd., dated March 15, 2006 (incorporated
herein by reference to the Companys Report on Form 8-K
filed on March 21, 2006)
|
80
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.19.1
|
|
Amended and Restated Registration Rights Agreement dated as of
April 28, 2006, by and between Digital Recorders, Inc. and
Laurus Master Fund, Ltd. (incorporated herein by reference to
the Companys Report on Form 8-K filed on May 4, 2006)
|
|
10
|
.20
|
|
Share Purchase Agreement between the Company and Transit Vehicle
Technology Investments, Inc., dated March 21, 2006 (incorporated
herein by reference to the Companys Report on
Form 8-K
filed on March 23, 2006)
|
|
10
|
.21
|
|
Registration Rights Agreement between the Company and Transit
Vehicle Technology Investments, Inc., dated March 21, 2006
(incorporated herein by reference to the Companys Report
on
Form 8-K
filed on March 23, 2006)
|
|
10
|
.22
|
|
Securities Purchase Agreement dated as of April 28, 2006, by and
between Digital Recorders, Inc., TwinVision of North America,
Inc., Digital Audio Corporation, and Robinson-Turney
International, Inc., and Laurus Master Fund, Ltd. (incorporated
herein by reference to the Companys Report on Form 8-K
filed on May 4, 2006)
|
|
10
|
.22.1
|
|
Waiver and Consent, dated as of April 30, 2007, entered into by
and between Digital Recorders, Inc., TwinVision of North
America, Inc., Digital Audio Corporation, Robinson-Turney
International, Inc. and Laurus Master Fund, Ltd. (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended March 31, 2007)
|
|
10
|
.23
|
|
Secured Term Note by Digital Recorders, Inc., TwinVision of
North America, Inc., Digital Audio Corporation, and
Robinson-Turney International, Inc., issued to Laurus Master
Fund, Ltd., in the original principal amount of $1,600,000
(incorporated herein by reference to the Companys Report
on Form 8-K filed on May 4, 2006)
|
|
10
|
.24
|
|
Share Purchase Agreement, dated as of April 30, 2007, entered
into by and among Dolphin Direct Equity Partners, LP, Digital
Audio Corporation and Digital Recorders, Inc. (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended March 31, 2007)
|
|
10
|
.25
|
|
Promissory Note, dated April 30, 2007, by Dolphin Direct Equity
Partners, LP issued to Digital Recorders, Inc. in the principal
sum of $285,000 (incorporated herein by reference to the
Companys Report on Form 10-Q for the quarter ended June
30, 2007)
|
|
10
|
.26
|
|
Form of Share Purchase Agreement, dated June 11, 2007, between
Digital Recorders, Inc. and buyer of Series J Convertible
Preferred Stock of Digital Recorders, Inc. with Schedule of
Differences (incorporated herein by reference to the
Companys Report on Form 10-Q for the quarter ended June
30, 2007)
|
|
10
|
.27
|
|
Form of Registration Rights Agreement, dated June 11, 2007,
between Digital Recorders, Inc. and holder of Series J
Convertible Preferred Stock of Digital Recorders, Inc.
(incorporated herein by reference to the Companys Report
on Form 10-Q for the quarter ended June 30, 2007)
|
|
10
|
.28
|
|
Agreement, dated as of June 30, 2008, by and between the Company
and John D. Higgins (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.29
|
|
Revolving Credit and Security Agreement, dated as of June 30,
2008, by and among PNC Bank, National Association and Digital
Recorders, Inc., TwinVision of North America, Inc. and DRI
Corporation (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.29.1
|
|
Amendment No. 2 to Revolving Credit and Security Agreement,
dated September 29, 2008, by and between Digital Recorders,
Inc., TwinVision of North America, Inc. and DRI Corporation, and
PNC Bank, National Association (incorporated by reference to the
Companys Report on
Form 10-Q
for the quarter ended September 30, 2008)
|
|
10
|
.29.2
|
|
Amendment No. 3 to Revolving Credit and Security Agreement,
dated as of March 26, 2009, by and between Digital Recorders,
Inc., TwinVision of North America, Inc. and DRI Corporation, and
PNC Bank, National Association (incorporated herein by reference
to the Companys Report on Form 10-K filed with the SEC on
March 31, 2009)
|
81
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.29.3
|
|
Amendment No. 4 to Revolving Credit and Security Agreement,
dated as of July 30, 2009, by and between Digital Recorders,
Inc., TwinVision of North America, Inc., and DRI Corporation,
and PNC Bank, National Association (incorporated herein by
reference to the Companys Report on Form 8-K filed with
the SEC on August 5, 2009)
|
|
10
|
.29.4
|
|
Amendment No. 5 to Revolving Credit and Security Agreement,
dated as of October 5, 2009, by and among Digital Recorders,
Inc., TwinVision of North America, Inc., and DRI Corporation,
and PNC Bank, National Association (incorporated herein by
reference to the Companys Report on Form 10-Q for the
quarter ended September 30, 2009)
|
|
10
|
.29.5
|
|
Amendment No. 6 to Revolving Credit and Security Agreement,
dated as of December 28, 2009, by and among Digital Recorders,
Inc., TwinVision of North America, Inc., and DRI Corporation,
and PNC Bank, National Association (incorporated herein by
reference to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2009 filed with the SEC on
April 15, 2010)
|
|
10
|
.29.6
|
|
Amendment No. 7 to Revolving Credit and Security Agreement,
dated as of November 12, 2010, by and among Digital Recorders,
Inc., TwinVision of North America, Inc., and DRI Corporation,
and PNC Bank, National Association (incorporated herein by
reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2010 filed with the SEC on
November 15, 2010)
|
|
10
|
.29.7
|
|
Waiver and Amendment No. 8 to Revolving Credit and Security
Agreement, dated as of March 31, 2011, by and among Digital
Recorders, Inc., TwinVision of North America, Inc., and DRI
Corporation, and PNC Bank, National Association (filed herewith)
|
|
10
|
.30
|
|
Revolving Credit Note, dated as of June 30, 2008, issued by
Digital Recorders, Inc., TwinVision of North America, Inc. and
DRI Corporation to PNC Bank, National Association (incorporated
herein by reference to the Companys Report on Form 8-K/A,
filed with the SEC on August 14, 2008)
|
|
10
|
.31
|
|
Loan and Security Agreement, dated as of June 30, 2008, by and
among Digital Recorders, Inc., TwinVision of North America, Inc.
and DRI Corporation, and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys Report
on Form 8-K/A, filed with the SEC on August 14, 2008)
|
|
10
|
.31.1
|
|
First Amendment to the Loan and Security Agreement, dated as of
July 30, 2008, by and among Digital Recorders, Inc., TwinVision
of North America, Inc. and DRI Corporation, and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.31.2
|
|
Second Amendment to the Loan and Security Agreement, dated as of
March 26, 2009, by and among Digital Recorders, Inc., TwinVision
of North America, Inc. and DRI Corporation, and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on Form 10-K filed with the SEC on March
31, 2009)
|
|
10
|
.31.3
|
|
Letter Agreement, dated as of July 21, 2009, by and among
Digital Recorders, Inc. and TwinVision of North America, Inc.,
as Borrowers, DRI Corporation, as Guarantor, and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on Form 10-Q for the quarter ended June
30, 2009)
|
|
10
|
.31.3.1
|
|
Letter of Amendment to Letter Agreement, dated as of July 31,
2009, by and among Digital Recorders, Inc. and TwinVision of
North America, Inc., as Borrowers, DRI Corporation, as
Guarantor, and BHC Interim Funding III, L.P., as Lender
(incorporated herein by reference to the Companys Report
on Form 10-Q for the quarter ended June 30, 2009)
|
|
10
|
.31.4
|
|
Third Amendment to Loan and Security Agreement, dated as of
August 18, 2009, by and among Digital Recorders, Inc. and
TwinVision of North America, Inc., as Borrowers, DRI
Corporation, as Guarantor, and BHC Interim Funding III, L.P., as
Lender (incorporated herein by reference to the Companys
Report on Form 10-Q for the quarter ended June 30, 2009)
|
|
10
|
.31.5
|
|
Letter of Amendment to Loan and Security Agreement, dated as of
August 18, 2009, by and between DRI Corporation and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on From 8-K filed with the SEC on August
24, 2009)
|
82
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.31.6
|
|
Fourth Amendment to Loan and Security Agreement, dated as of
October 1, 2009, by and among Digital Recorders, Inc. and
TwinVision of North America, Inc., as Borrowers, DRI
Corporation, as Guarantor, and BHC Interim Funding III, L.P., as
Lender (incorporated herein by reference to the Companys
Report on Form 10-Q for the quarter ended September 30, 2009)
|
|
10
|
.31.7
|
|
Fifth Amendment to Loan and Security Agreement, dated as of
December 28, 2009, by and among Digital Recorders, Inc. and
TwinVision of North America, Inc., as Borrowers, DRI
Corporation, as Guarantor, and BHC Interim Funding III, L.P., as
Lender (incorporated herein by reference to the Companys
Annual Report on Form 10-K for the fiscal year ended December
31, 2009 filed with the SEC on April 15, 2010)
|
|
10
|
.31.8
|
|
Seventh Amendment to Loan and Security Agreement, dated as of
November 12, 2010, by and among Digital Recorders, Inc. and
TwinVision of North America, Inc., as Borrowers, DRI
Corporation, as Guarantor, and BHC Interim Funding III, L.P., as
Lender (incorporated herein by reference to the Companys
Quarterly Report on Form 10-Q for the quarter ended September
30, 2010 filed with the SEC on November 15, 2010)
|
|
10
|
.31.9
|
|
Waiver and Eighth Amendment to Loan and Security Agreement,
dated as of April 6, 2011, by and among Digital Recorders, Inc.
and TwinVision of North America, Inc., as Borrowers, DRI
Corporation, as Guarantor, and BHC Interim Funding III, L.P., as
Lender (filed herewith)
|
|
10
|
.32
|
|
Senior Secured Term Note, dated as of June 30, 2008, issued by
Digital Recorders, Inc. and TwinVision of North America, Inc. to
BHC Interim Funding III, L.P. (incorporated herein by reference
to the Companys Report on Form 8-K/A, filed with the SEC
on August 14, 2008)
|
|
10
|
.33
|
|
Continuing Unconditional Guaranty, dated as of June 30, 2008,
granted by the Company in favor of BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys Report
on Form 8-K/A, filed with the SEC on August 14, 2008)
|
|
10
|
.34
|
|
Stock Pledge Agreement, dated as of June 30, 2008, by and
between the Company and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys Report
on
Form 8-K/A,
filed with the SEC on August 14, 2008)
|
|
10
|
.35
|
|
Trademark Security Agreement, dated as of June 30, 2008, by and
between the Company and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys Report
on
Form 8-K/A,
filed with the SEC on August 14, 2008)
|
|
10
|
.36
|
|
Trademark Security Agreement, dated as of June 30, 2008, by and
between Digital Recorders, Inc. and BHC Interim Funding III,
L.P. (incorporated herein by reference to the Companys
Report on Form 8-K/A, filed with the SEC on August 14, 2008)
|
|
10
|
.37
|
|
Trademark and Security Agreement, dated as of June 30, 2008, by
and between TwinVision of North America, Inc. and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.38
|
|
Copyright Security Agreement, dated as of June 30, 2008, by and
between Digital Recorders, Inc. and BHC Interim Funding III,
L.P. (incorporated herein by reference to the Companys
Report on Form 8-K/A, filed with the SEC on August 14, 2008)
|
|
10
|
.39
|
|
Copyright Security Agreement, dated as of June 30, 2008, by and
between TwinVision of North America, Inc. and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.40
|
|
Patent Security Agreement, dated as of June 30, 2008, by and
between Digital Recorders, Inc. and BHC Interim Funding III,
L.P. (incorporated herein by reference to the Companys
Report on Form 8-K/A, filed with the SEC on August 14, 2008)
|
|
10
|
.41
|
|
Undertaking Concerning Loan Payment for purposes other than
personal consumption, by and between Handelsbanken and Mobitec
AB (English translation) (incorporated herein by reference to
the Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.41.1
|
|
Undertaking Concerning Loan Payment for purposes other than
personal consumption, dated June 16, 2009, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended June 30, 2009)
|
83
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.41.2
|
|
Undertaking Concerning Loan Payment for purposes other than
personal consumption, dated June 16, 2009, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended June 30, 2009)
|
|
10
|
.41.3
|
|
Undertaking Concerning Loan Payment for purposes other than
personal consumption, dated March 25, 2010, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2009 filed with the
SEC on April 15, 2010).
|
|
10
|
.42
|
|
Instrument for Debt A Loan for purposes other than personal
consumption, by and between Handelsbanken and Mobitec AB
(English translation) (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.43
|
|
Factoring Agreement by and between Handelsbanken and Mobitec AB
(English translation) (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.43.1
|
|
Amendment, dated October 22, 2010, to Factoring Agreement by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Report
on Form 8-K, filed with the SEC on October 25, 2010)
|
|
10
|
.44
|
|
EURO Short Term Loan Facility by and between Handelsbanken and
Mobitec GmbH (incorporated herein by reference to the
Companys Report on Form 8-K/A, filed with the SEC on
August 14, 2008)
|
|
10
|
.44.1
|
|
EURO Short Term Loan Facility by and between Handelsbanken and
Mobitec GmbH, dated as of June 25, 2009 (incorporated herein by
reference to the Companys Report on Form 8-K filed with
the SEC on July 1, 2009)
|
|
10
|
.45
|
|
Executive Employment Agreement, dated January 1, 1999, between
the Company and Larry Hagemann (incorporated herein by reference
from the Companys Proxy Statement for the Annual Meeting
of Shareholders for fiscal year 2000, filed with the SEC on June
6, 2001)
|
|
10
|
.46
|
|
Executive Employment Agreement, between the Company and David N.
Pilotte, dated October 25, 2004 (incorporated herein by
reference to the Companys Report on Form 8-K, filed with
the SEC on October 22, 2004)
|
|
10
|
.47
|
|
Executive Employment Agreement, dated November 15, 2007, between
Mobitec GmbH and Mobitec AB and Oliver Wels (incorporated herein
by reference from the Companys Report on Form 10-Q for the
quarter ended March 31, 2008)
|
|
10
|
.48
|
|
Executive Employment Agreement, dated December 31, 2007, between
the Company and Lawrence A. Hagemann (incorporated herein by
reference from the Companys Report on
Form 8-K,
filed with the SEC on January 10, 2008)
|
|
10
|
.49
|
|
Executive Employment Agreement, effective September 16,
2010, between the Company and Stephen P. Slay (filed herewith)
|
|
10
|
.50
|
|
Executive Employment Agreement, dated December 31, 2007, between
the Company and Rob R. Taylor (incorporated herein by reference
from the Companys Report on Form 8-K, filed with the SEC
on January 10, 2008)
|
|
10
|
.51
|
|
Executive Employment Agreement, effective December 31, 2007,
between the Company and Tanya Lind Johnson (incorporated herein
by reference from the Companys Report on Form 8-K, filed
with the SEC on January 18, 2008)
|
|
10
|
.52
|
|
Executive Employment Agreement, effective December 31, 2007,
between the Company and William F. Fay, Jr. (incorporated herein
by reference from the Companys Report on Form 8-K, filed
with the SEC on January 18, 2008)
|
|
10
|
.53
|
|
Executive Employment Agreement, effective January 1, 2008,
between the Company and David L. Turney (incorporated herein by
reference from the Companys Report on Form 8-K, filed with
the SEC on January 18, 2008)
|
|
10
|
.54
|
|
Executive Employment Agreement, effective June 17, 2010, between
the Company and Kathleen B. Oher (incorporated herein by
reference from the Companys Report on Form 8-K, filed with
the SEC on June 17, 2010)
|
84
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.55
|
|
Extension Agreement, dated as of April 30, 2008 by and between
DRI Corporation and Digital Audio Corporation (incorporated
herein by reference from the Companys Report on Form 8-K,
filed with the SEC on May 6, 2008)
|
|
10
|
.55.1
|
|
Second Extension Agreement, dated as of April 30, 2009, by and
between DRI Corporation and Digital Audio Corporation
(incorporated herein by reference to the Companys Report
on
Form 8-K
filed with the SEC on May 6, 2009)
|
|
10
|
.55.2
|
|
Third Extension Agreement, dated as of April 30, 2010, by and
between DRI Corporation and Digital Audio Corporation
(incorporated herein by reference to the Companys Report
on
Form 8-K
filed with the SEC on April 23, 2010)
|
|
10
|
.56
|
|
General Pledging, dated June 16, 2009, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended June 30, 2009)
|
|
10
|
.57
|
|
Contract A Supplementary Overdraft Facility for purposes other
than personal consumption, dated June 16, 2009, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended June 30, 2009)
|
|
10
|
.57.1
|
|
Contract A Supplementary Overdraft Facility for purposes other
than for personal consumption, dated March 25, 2010, by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2009
filed with the SEC on April 15, 2010)
|
|
10
|
.57.2
|
|
Contract A Supplementary Overdraft Facility for purposes other
than personal consumption, dated May 11, 2010, by and between
Handelsbanken and Mobitec AB (English translation) (incorporated
herein by reference to the Companys Report on Form 10-Q
for the quarter ended March 31, 2010)
|
|
10
|
.57.3
|
|
Contract A Supplementary Overdraft Facility for purposes other
than personal consumption, dated October 22, 2010, by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Report
on Form 8-K filed with the SEC on October 25, 2010)
|
|
10
|
.57.4
|
|
Contract A Supplementary Overdraft Facility for purposes other
than personal consumption, dated December 6, 2010, by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Report
on Form 8-K filed with the SEC on December 10, 2010)
|
|
10
|
.57.5
|
|
Contract A Supplementary Overdraft Facility for purposes other
than personal consumption, dated February 25, 2011, by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Report
on Form 8-K filed with the SEC on March 3, 2011)
|
|
10
|
.58
|
|
Contract A Base Overdraft Facility for purposes other than
personal consumption, dated February 25, 2011, by and
between Handelsbanken and Mobitec AB (English translation)
(incorporated herein by reference to the Companys Report
on Form 8-K filed with the SEC on March 3, 2011)
|
|
10
|
.59
|
|
Quota Purchase Agreement, dated as of July 22, 2009, by and
among Mobitec AB, Mobitec Empreendimientos e
Participações Ltda., Mobitec Brasil Ltda, Roberto
Juventino Demore, Lorena Giusti Demore, and JADI
Itinerários Eletrônicos Ltda (incorporated herein by
reference to the Companys Report on Form 10-Q for the
quarter ended June 30, 2009) (confidential treatment requested
for specific portions of this agreement)
|
|
10
|
.59.1
|
|
First Amendment to Quota Purchase Agreement, dated as of August
31, 2009, by and among Mobitec Empreendimientos e
Participações Ltda., Roberto Juventino Demore, Lorena
Giusti Demore, JADI Itinerários Eletrônicos Ltda,
Mobitec AB and Mobitec Brasil Ltda. (incorporated herein by
reference to the Companys Report on Form 10-Q for the
quarter ended September 30, 2009) (confidential treatment
requested for specific portions of this agreement)
|
85
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.60
|
|
Promissory Note, dated July 22, 2009, by Mobitec
Empreendimientos e Participações Ltda., as Maker, and
Mobitec AB, as Guarantor, issued to Roberto Juventino Demore and
Lorena Giusti Demore, in the principal amount of $1,000,000
(English translation) (incorporated herein by reference to the
Companys Report on Form 10-Q for the quarter ended June
30, 2009) (confidential treatment requested for specific
portions of this agreement)
|
|
10
|
.60.1
|
|
Promissory Note, dated August 31, 2009, by Mobitec
Empreendimientos e Participações Ltda., as Maker,
issued to Roberto Juventino Demore in the principal amount of
$1,000,000 (incorporated herein by reference to the
Companys Report on Form 10-Q for the quarter ended
September 30, 2009) (confidential treatment requested for
specific portions of this agreement)
|
|
10
|
.61
|
|
Promissory Note, dated July 22, 2009, by Mobitec AB issued to
Roberto Juventino Demore and Lorena Giusti Demore, in the
principal amount of $1,950,000 (incorporated herein by reference
to the Companys Report on Form 10-Q for the quarter ended
June 30, 2009) (confidential treatment requested for specific
portions of this agreement)
|
|
10
|
.61.1
|
|
Promissory Note, dated August 31, 2009, by Mobitec AB, issued to
Roberto Juventino Demore in the principal amount of $1,950,000
(incorporated herein by reference to the Companys Report
on Form 10-Q for the quarter ended September 30, 2009)
(confidential treatment requested for specific portions of this
agreement)
|
|
10
|
.62
|
|
Form of Subscription Agreement by and between DRI Corporation
and holder of Series K Senior Convertible Preferred Stock of DRI
Corporation (incorporated herein by reference to the
Companys Report on Form 8-K filed with the SEC on October
30, 2009)
|
|
10
|
.62.1
|
|
Form of Subscription Agreement by and between DRI Corporation
and holder of Series K Senior Convertible Preferred Stock of DRI
Corporation (incorporated herein by reference to the
Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 filed with the SEC on April 15, 2010)
|
|
10
|
.62.2
|
|
Form of Subscription Agreement by and between DRI Corporation
and holder of Series K Senior Convertible Preferred Stock of DRI
Corporation (incorporated herein by reference to the
Companys Report on Form 8-K filed with the SEC on August
20, 2010)
|
|
10
|
.63
|
|
Form of Registration Rights Agreement by and between DRI
Corporation and holder of Series K Senior Convertible Preferred
Stock of DRI Corporation (incorporated herein by reference to
the Companys Report on Form 8-K filed with the SEC on
October 30, 2009)
|
|
10
|
.63.1
|
|
Form of Registration Rights Agreement by and between DRI
Corporation and holder of Series K Senior Convertible Preferred
Stock of DRI Corporation (incorporated herein by reference to
the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 filed with the SEC on April 15,
2010)
|
|
10
|
.63.2
|
|
Form of Registration Rights Agreement by and between DRI
Corporation and holder of Series K Senior Convertible Preferred
Stock of DRI Corporation (incorporated herein by reference to
the Companys Report on Form 8-K filed with the SEC on
August 20, 2010)
|
|
21
|
.1
|
|
Listing of Subsidiaries of the Company (filed herewith)
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP (filed herewith)
|
|
31
|
.1
|
|
Section 302 Certification of David L. Turney (filed herewith)
|
|
31
|
.2
|
|
Section 302 Certification of Kathleen B. Oher (filed herewith)
|
|
32
|
.1
|
|
Section 906 Certification of David L. Turney (filed herewith)
|
|
32
|
.2
|
|
Section 906 Certification of Kathleen B. Oher (filed herewith)
|
86
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.
DRI CORPORATION
David L. Turney
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: April 15, 2011
Pursuant to the requirements of the Securities Exchange Act
of 1934, 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
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ DAVID
L. TURNEY
David
L. Turney
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
April 15, 2011
|
|
|
|
|
|
/s/ KATHLEEN
B. OHER
Kathleen
B. Oher
|
|
Vice President, Chief Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting Officer)
|
|
April 15, 2011
|
|
|
|
|
|
/s/ HUELON
ANDREW HARRISON
Huelon
Andrew Harrison
|
|
Director
|
|
April 15, 2011
|
|
|
|
|
|
/s/ JOHN
D. HIGGINS
John
D. Higgins
|
|
Director
|
|
April 15, 2011
|
|
|
|
|
|
/s/ HELGA
HOUSTON
Helga
Houston
|
|
Director
|
|
April 15, 2011
|
|
|
|
|
|
/s/ STEPHANIE
L. PINSON
Stephanie
L. Pinson
|
|
Director
|
|
April 15, 2011
|
|
|
|
|
|
/s/ JOHN
K. PIROTTE
John
K. Pirotte
|
|
Director
|
|
April 15, 2011
|
|
|
|
|
|
/s/ JULIANN
TENNEY
Juliann
Tenney
|
|
Director
|
|
April 15, 2011
|
87