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EX-31.2 - EX-31.2 - DRI CORP | d82760exv31w2.htm |
EX-32.2 - EX-32.2 - DRI CORP | d82760exv32w2.htm |
EX-32.1 - EX-32.1 - DRI CORP | d82760exv32w1.htm |
EX-31.1 - EX-31.1 - DRI CORP | d82760exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2011
Commission File Number 000-28539
DRI CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina (State or other jurisdiction of incorporation or organization) |
56-1362926 (I.R.S. Employer Identification Number) |
13760 Noel Road, Suite 830
Dallas, Texas 75240
(Address of principal executive offices, Zip Code)
Dallas, Texas 75240
(Address of principal executive offices, Zip Code)
Registrants telephone number, including area code: (214) 378-8992
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 for such shorter period that the registrant was required to submit and
post such files). Yes o No o
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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ | |||
(Do not check if a smaller reporting company) |
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
Indicate the number of shares outstanding of the registrants Common Stock as of July 29,
2011:
Common Stock, par value $0.10 per share (Class of Common Stock) |
11,912,521 Number of Shares |
DRI CORPORATION AND SUBSIDIARIES
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DRI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
June 30, 2011 | December 31, 2010 | ||||||||
(Unaudited) | (Note 1) | ||||||||
ASSETS |
|||||||||
Current Assets |
|||||||||
Cash and cash equivalents |
$ | 1,162 | $ | 1,391 | |||||
Trade accounts receivable, net |
18,526 | 15,678 | |||||||
Note receivable |
86 | 86 | |||||||
Other receivables |
39 | 300 | |||||||
Inventories, net |
14,416 | 15,134 | |||||||
Prepaids and other current assets |
1,627 | 1,389 | |||||||
Deferred tax assets, net |
758 | 613 | |||||||
Total current assets |
36,614 | 34,591 | |||||||
Property and equipment, net |
1,394 | 1,388 | |||||||
Software, net |
6,610 | 5,757 | |||||||
Goodwill |
1,177 | 10,398 | |||||||
Intangible assets, net |
631 | 651 | |||||||
Other assets |
544 | 1,045 | |||||||
Total assets |
$ | 46,970 | $ | 53,830 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||||
Current Liabilities |
|||||||||
Lines of credit |
$ | 9,973 | $ | 8,454 | |||||
Loans payable |
149 | 442 | |||||||
Current portion of long-term debt |
6,467 | 944 | |||||||
Foreign tax settlement |
418 | 550 | |||||||
Accounts payable |
9,639 | 8,703 | |||||||
Accrued expenses and other current liabilities |
5,874 | 6,354 | |||||||
Preferred stock dividends payable |
305 | 19 | |||||||
Total current liabilities |
32,825 | 25,466 | |||||||
Long-term debt and capital leases, net |
551 | 6,239 | |||||||
Deferred tax liabilities, net |
94 | 84 | |||||||
Liability for uncertain tax positions |
944 | 723 | |||||||
Commitments and contingencies (Notes 7 and 8) |
|||||||||
Shareholders Equity |
|||||||||
Series K redeemable, convertible preferred stock, $0.10 par value,
liquidation preference of $5,000 per share; 475 shares authorized; 439
shares issued and outstanding at June 30, 2011 and December 31, 2010;
redeemable at the discretion of the Company at any time. |
1,957 | 1,957 | |||||||
Series E redeemable, nonvoting, convertible preferred stock, $0.10 par value,
liquidation preference of $5,000 per share; 80 shares authorized; 80 shares
issued and outstanding at June 30, 2011 and December 31, 2010; redeemable
at the discretion of the Company at any time. |
337 | 337 | |||||||
Series G redeemable, convertible preferred stock, $0.10 par value,
liquidation preference of $5,000 per share; 725 shares authorized; 536 shares
issued and outstanding at June 30, 2011 and December 31, 2010; redeemable
at the discretion of the Company at any time. |
2,398 | 2,398 | |||||||
Series H redeemable, convertible preferred stock, $0.10 par value,
liquidation preference of $5,000 per share; 125 shares authorized; 76 shares issued
and outstanding at June 30, 2011 and December 31, 2010; redeemable at the
discretion of the Company at any time. |
332 | 332 | |||||||
Series AAA redeemable, nonvoting, convertible preferred stock, $0.10 par value,
liquidation preference of $5,000 per share; 166 shares authorized; 166 shares
issued and outstanding at June 30, 2011 and December 31, 2010; redeemable
at the discretion of the Company at any time. |
830 | 830 | |||||||
Common stock, $0.10 par value, 25,000,000 shares authorized; 11,907,867 and
11,838,873 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively. |
1,191 | 1,184 | |||||||
Additional paid-in capital |
30,288 | 30,374 | |||||||
Accumulated other comprehensive income foreign currency translation |
4,546 | 3,180 | |||||||
Accumulated deficit |
(30,089 | ) | (20,121 | ) | |||||
Total DRI shareholders equity |
11,790 | 20,471 | |||||||
Noncontrolling interest Castmaster Mobitec India Private Limited |
766 | 847 | |||||||
Total shareholders equity |
12,556 | 21,318 | |||||||
Total liabilities and shareholders equity |
$ | 46,970 | $ | 53,830 | |||||
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
DRI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(In thousands, except shares and per share amounts)
(Unaudited)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 20,302 | $ | 25,559 | $ | 39,391 | $ | 47,688 | ||||||||
Cost of sales |
13,389 | 17,789 | 26,346 | 34,594 | ||||||||||||
Gross profit |
6,913 | 7,770 | 13,045 | 13,094 | ||||||||||||
Operating expenses |
||||||||||||||||
Selling, general and administrative |
5,832 | 5,834 | 11,859 | 11,815 | ||||||||||||
Research and development |
55 | 158 | 211 | 266 | ||||||||||||
Goodwill
impairment |
9,911 | | 9,911 | | ||||||||||||
Total operating expenses |
15,798 | 5,992 | 21,981 | 12,081 | ||||||||||||
Operating income (loss) |
(8,885 | ) | 1,778 | (8,936 | ) | 1,013 | ||||||||||
Other income |
51 | 15 | 53 | 14 | ||||||||||||
Foreign currency gain (loss) |
146 | 55 | (143 | ) | 144 | |||||||||||
Interest expense |
(555 | ) | (362 | ) | (936 | ) | (722 | ) | ||||||||
Total other income and expense |
(358 | ) | (292 | ) | (1,026 | ) | (564 | ) | ||||||||
Income (loss) before income tax expense |
(9,243 | ) | 1,486 | (9,962 | ) | 449 | ||||||||||
Income tax expense |
(234 | ) | (383 | ) | (87 | ) | (131 | ) | ||||||||
Net income (loss) |
(9,477 | ) | 1,103 | (10,049 | ) | 318 | ||||||||||
Less: Net (income) loss attributable to noncontrolling interest, net of tax |
15 | (223 | ) | 81 | (325 | ) | ||||||||||
Net income (loss) attributable to DRI Corporation |
(9,462 | ) | 880 | (9,968 | ) | (7 | ) | |||||||||
Provision for preferred stock dividends |
(181 | ) | (117 | ) | (355 | ) | (225 | ) | ||||||||
Net income (loss) applicable to common
shareholders of DRI Corporation |
$ | (9,643 | ) | $ | 763 | $ | (10,323 | ) | $ | (232 | ) | |||||
Net income (loss) per share applicable to common shareholders of DRI Corporation |
||||||||||||||||
Basic |
$ | (0.81 | ) | $ | 0.06 | $ | (0.87 | ) | $ | (0.02 | ) | |||||
Diluted |
$ | (0.81 | ) | $ | 0.06 | $ | (0.87 | ) | $ | (0.02 | ) | |||||
Weighted average number of common shares outstanding |
||||||||||||||||
Basic |
11,880,838 | 11,797,095 | 11,866,401 | 11,775,348 | ||||||||||||
Diluted |
11,880,838 | 14,322,759 | 11,866,401 | 11,775,348 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
DRI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | (10,049 | ) | $ | 318 | |||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities |
||||||||
Deferred income taxes |
(116 | ) | (591 | ) | ||||
Change in liability for uncertain tax positions |
102 | 392 | ||||||
Depreciation of property and equipment |
224 | 215 | ||||||
Amortization of software |
595 | 419 | ||||||
Amortization of intangible assets |
62 | 54 | ||||||
Amortization of deferred financing costs |
261 | 277 | ||||||
Amortization of debt discount |
34 | 55 | ||||||
Loan termination fee accrual |
303 | 117 | ||||||
Bad debt expense |
16 | 22 | ||||||
Share-based compensation |
243 | 243 | ||||||
Write-down of inventory for obsolescence |
42 | 89 | ||||||
Goodwill impairment |
9,911 | | ||||||
Loss on disposal of fixed assets |
4 | 2 | ||||||
Other, primarily effect of foreign currency (gain) and bank fees |
102 | (244 | ) | |||||
Changes in operating assets and liabilities |
||||||||
Increase in trade accounts receivable |
(2,306 | ) | (1,544 | ) | ||||
Decrease in other receivables |
165 | 3 | ||||||
(Increase) decrease in inventories |
1,293 | (2,764 | ) | |||||
Decrease in prepaids and other current assets |
4 | 460 | ||||||
Increase in other assets |
| (24 | ) | |||||
Increase in accounts payable |
693 | 961 | ||||||
Increase (decrease) in accrued expenses and other current liabilities |
(134 | ) | 299 | |||||
Decrease in foreign tax settlement |
(244 | ) | (163 | ) | ||||
Net cash provided by (used in) operating activities |
1,205 | (1,404 | ) | |||||
Cash flows from investing activities |
||||||||
Proceeds from sale of fixed assets |
5 | | ||||||
Purchases of property and equipment |
(169 | ) | (449 | ) | ||||
Investments in software development |
(1,295 | ) | (1,244 | ) | ||||
Net cash used in investing activities |
(1,459 | ) | (1,693 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from bank borrowings and lines of credit |
39,600 | 51,477 | ||||||
Principal payments on bank borrowings and lines of credit |
(39,543 | ) | (49,667 | ) | ||||
Proceeds from issuance of preferred stock, net of costs |
| 716 | ||||||
Payment of loan amendment fees |
(103 | ) | (5 | ) | ||||
Payment of dividends on preferred stock |
(51 | ) | (53 | ) | ||||
Net cash provided by (used in) financing activities |
(97 | ) | 2,468 | |||||
Effect of exchange rate changes on cash and cash equivalents |
122 | (46 | ) | |||||
Net decrease in cash and cash equivalents |
(229 | ) | (675 | ) | ||||
Cash and cash equivalents at beginning of period |
1,391 | 1,800 | ||||||
Cash and cash equivalents at end of period |
$ | 1,162 | $ | 1,125 | ||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||
Preferred stock issued for services |
$ | | $ | 120 | ||||
Preferred stock dividends |
$ | 304 | $ | 115 | ||||
Conversion of preferred stock to common stock |
$ | | $ | 75 | ||||
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
DRI CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND DISCLOSURE
In this Quarterly Report on Form 10-Q, we will refer to DRI Corporation as DRI, Company,
we, us and our. DRI was incorporated in 1983. 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, bus manufacturers and private fleet operators. The
Company markets primarily to customers located in North and South America, the Far East, the Middle
East, Asia, Australia, and Europe.
The Companys unaudited interim consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). Accordingly, certain information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) have been omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited interim consolidated financial statements contain
all adjustments and information (consisting only of normal recurring accruals) considered necessary
for a fair statement of the results for the interim periods presented.
The year-end balance sheet data was derived from the Companys audited financial statements
but does not include all disclosures required by GAAP. The accompanying unaudited interim
consolidated financial statements and related notes should be read in conjunction with the
Companys audited financial statements included in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2010 (the 2010 Annual Report). The results of operations for the three
and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for
the full fiscal year.
Capitalized costs related to internally developed software have been classified in the
unaudited consolidated balance sheet as Software as of June 30, 2011, and the related amount of
capitalized software that was recorded in Property and Equipment as of December 31, 2010 has been
reclassified to Software in order to conform with current period presentation.
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 collectibility 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)
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 (ESP), if neither vendor-specific nor
third-party evidence is available.
The objective of ESP is to determine the price at which we would sell our products and
services if they were sold on a standalone basis. Our determination of ESP involves the weighting
of several factors including the selling price for similar products and services, the cost to
produce or provide the deliverables, the anticipated margin on the deliverables, and the
characteristics of the market into which our products and services are sold. We analyze the
selling prices used in our allocation of arrangement consideration at a minimum on an annual basis.
Selling prices will be analyzed on a more frequent basis if a significant change in our business
necessitates a more timely analysis or if we perceive significant variances in the market for our
products and services. During the three and six months ended June 30, 2011 and 2010, there was no
material impact on the allocation of arrangement consideration as a result of changes in ESP.
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
6
Table of Contents
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.
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.
Product Warranties
The Company provides a limited warranty for its products, generally for a period of one to
five years. The Companys standard warranties require the Company to repair or replace defective
products during such warranty periods 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. The following table summarizes product warranty
activity during the six months ended June 30, 2011 and 2010.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Balance at beginning of period |
$ | 809 | $ | 805 | ||||
Additions charged to costs and expenses |
47 | 238 | ||||||
Deductions |
(59 | ) | (96 | ) | ||||
Foreign exchange translation loss |
50 | 11 | ||||||
Balance at end of period |
$ | 847 | $ | 958 | ||||
Recent Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU
2011-04 improves the comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards.
Although most of the amendments only clarify existing guidance in U.S. GAAP, ASU 2011-04 requires
new disclosures, with a particular focus on Level 3 measurements, including quantitative
information about the significant unobservable inputs used for all
Level 3 measurements and a
qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the
unobservable inputs disclosed. ASU 2011-04 also requires the hierarchy classification for those
items whose fair value is not recorded on the balance sheet but is disclosed in the footnotes. ASU
2011-04 is effective for financial statements issued for fiscal years beginning after December 15,
2011, and interim periods within those fiscal years. The Company believes the adoption of ASU
2011-04 will not have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05
requires an entity to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of
comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the
option to present components of other comprehensive income as part of the statement of equity. ASU
2011-05 is effective for financial statements issued for fiscal years beginning after December 15,
2011, and interim periods within those fiscal years. The Company believes the adoption of ASU
2011-05 will not have a material impact on its consolidated financial statements.
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 June 30, 2011 and
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 similar credit ratings at
June 30,
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2011 and December 31, 2010. The carrying value and estimated fair value of our long-term
debt at June 30, 2011 was $6.1 million and $5.7 million, respectively, and $6.6 million and $5.9
million at December 31, 2010, 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 each measurement date.
Non-monetary Transactions
Non-monetary transactions are accounted for in accordance with ASC Topic 845-10, Non-monetary
Transactions, which requires accounting for non-monetary transactions to be based on the fair
value of the assets (or services) involved. Thus, the cost of a non-monetary asset acquired in
exchange for another non-monetary asset is the fair value of the asset surrendered to obtain it,
and a gain or loss, if any, shall be recognized on the exchange. The fair value of the asset
received shall be used to measure the cost if it is more clearly evident than the fair value of the
asset surrendered.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is assigned to our reporting units, which are defined as the domestic and
international operating segments. We evaluate goodwill for impairment annually, as of December 31,
or more frequently if events or changes in circumstances indicate that the asset might be impaired.
During the second quarter of 2011, a decrease in the NASDAQ market price of the Companys Common
Stock indicated an impairment of goodwill may exist. As a result, we evaluated goodwill for
impairment as of June 30, 2011. 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 involve 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 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.
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 units goodwill, an
impairment charge is recorded for the difference.
Primarily as a result of a $7.4 million decline in trailing-twelve-month revenue in the
international reporting unit, for the twelve months ended June 30, 2011 compared to fiscal 2010,
which occurred within its 51%-owned joint venture, Castmaster Mobitec, partially offset by
increases in sales in the remaining international markets, we determined it was more likely than
not that the international reporting units fair value had declined below its carrying value during
the second quarter of fiscal 2011. An analysis was prepared to
compute the fair value of the international reporting unit, which
confirmed it had declined below its carrying value. An additional analysis was performed to allocate the fair value
of the international reporting unit to all of the assets and liabilities of that unit as if the
unit had been acquired in a business combination. Based on the preliminary results of this
analysis, the Company believes it is more likely than not that the fair value of the international
reporting units goodwill is below its carrying amount which indicates full impairment of the
carrying value of the international reporting units goodwill as of June 30, 2011 of approximately
$9.9 million. The estimated impairment charge is therefore included in operating expenses in the
accompanying consolidated statements of operations for the three and six months ended June 30,
2011.
Estimating the fair value of a reporting unit involves the use of estimates and significant
judgments that are based on a number of factors including actual operating results, future business
plans, economic projections and market data. Actual results may differ from forecasted results. The
goodwill impairment charge related to the Companys international reporting unit reflects the
preliminary indication from the impairment analysis performed to date and is subject to
finalization of certain fair value estimates being performed with the assistance of an outside
independent valuation specialist, and may be adjusted when all aspects of the analysis are
completed. The Company currently expects to finalize its goodwill impairment analysis during the
third quarter of fiscal 2011. Any adjustments to the Companys preliminary estimate of impairment
as a result of completion of this evaluation are currently expected to be recorded in the Companys
consolidated financial statements for the third quarter of fiscal 2011.
The
change in the carrying amount of goodwill for the six months ended
June 30, 2011, is as follows:
(In thousands) | ||||
Balance as of December 31, 2010 |
$ | 10,398 | ||
Goodwill impairment |
(9,911 | ) | ||
Effect of exchange rates |
690 | |||
Balance as of June 30, 2011 |
$ | 1,177 | ||
The
composition of the Companys intangible assets and the
associated accumulated amortization as of June 30, 2011, and December
31, 2010 is as composition follows.
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
Weighted Average | ||||||||||||||||||||||||||||
Remaining Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||||||||||
(Years) | Amount | Amortization | Net Carrying Amount | Amount | Amortization | Net Carrying Amount | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||||||||||
Customer lists |
5.05 | $ | 1,875 | $ | 1,244 | $ | 631 | $ | 1,759 | $ | 1,108 | $ | 651 | |||||||||||||||
Amortization expense is estimated to be approximately $125,000 for each of the years ending
December 31, 2011 through December 31, 2015.
The difference in the gross carrying amount from December 31, 2010 to June 30, 2011 is due to
fluctuations in foreign currency exchange rates.
(3) INVENTORIES
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Raw materials and system components |
$ | 11,940 | $ | 11,962 | ||||
Work in process |
| 17 | ||||||
Finished goods |
2,476 | 3,155 | ||||||
Total inventories, net |
$ | 14,416 | $ | 15,134 | ||||
(4) PROPERTY AND EQUIPMENT
Estimated | ||||||||||||
Depreciable | June 30, | December 31, | ||||||||||
Lives (years) | 2011 | 2010 | ||||||||||
(In thousands) | ||||||||||||
Leasehold improvements |
3-10 | $ | 380 | $ | 370 | |||||||
Automobiles |
4-6 | 384 | 382 | |||||||||
Computer and telecommunications equipment |
2-5 | 1,336 | 1,223 | |||||||||
Test equipment |
3-7 | 176 | 180 | |||||||||
Furniture and fixtures |
2-10 | 3,163 | 2,939 | |||||||||
5,439 | 5,094 | |||||||||||
Less accumulated depreciation |
(4,045 | ) | (3,706 | ) | ||||||||
Total property and equipment, net |
$ | 1,394 | $ | 1,388 | ||||||||
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(5) SOFTWARE
Estimated | ||||||||||||
Depreciable | June 30, | December 31, | ||||||||||
Lives (years) | 2011 | 2010 | ||||||||||
(In thousands) | ||||||||||||
Software |
5 | $ | 9,940 | $ | 9,335 | |||||||
Software projects in progress |
2,833 | 1,732 | ||||||||||
12,773 | 11,067 | |||||||||||
Less accumulated amortization |
(6,163 | ) | (5,310 | ) | ||||||||
Total software, net |
$ | 6,610 | $ | 5,757 | ||||||||
Salaries and related costs of certain engineering personnel used in the development of
software meet the capitalization criteria of ASC Topic 985-20, Costs of Computer Software to be
Sold, Leased, or Marketed. The total amount of software development costs capitalized during the
three and six months ended June 30, 2011 was $693,000 and $1.3 million, respectively.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Salaries, commissions, and benefits |
$ | 2,399 | $ | 2,516 | ||||
Taxes payroll, sales, income, and other |
986 | 1,375 | ||||||
Warranties |
847 | 809 | ||||||
Current portion of capital leases |
16 | 17 | ||||||
Interest payable |
120 | 135 | ||||||
Deferred revenue |
945 | 639 | ||||||
Customer rebates and credits |
140 | 320 | ||||||
Other |
421 | 543 | ||||||
Total accrued expenses and other current liabilities |
$ | 5,874 | $ | 6,354 | ||||
(7) LINES OF CREDIT AND LOANS PAYABLE
(a) Domestic line of credit and loan payable
The Companys wholly-owned subsidiaries, Digital Recorders, Inc. and TwinVision of North
America, Inc. (collectively, the Borrowers), have in place an asset-based lending agreement (as
amended, the PNC Agreement) with PNC Bank, National Association (PNC), which matures on the
earlier of (a) April 30, 2012 or (b) five days prior to the maturity date of the BHC Agreement (as
defined in the following paragraph). 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 and is secured by substantially all tangible and intangible U.S. assets
of the Company. 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
accounts receivable of the Borrowers, limited to the lesser of $2.5 million in the aggregate or the
aggregate amount of coverage under Acceptable Credit Insurance Policies (as defined in the PNC
Agreement) 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 Eurodollar Rate Loans 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. 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 of
$40,000. At June 30, 2011, the outstanding principal balance on the revolving credit facility
established under the PNC Agreement was approximately $4.2 million and remaining borrowing
availability under the revolving credit facility was approximately $1.2 million.
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) that matures
April 30, 2012 and which is included in the current portion of long-term debt on the Companys
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 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., a wholly-owned subsidiary of DRI, and a pledge of 65% of the outstanding
common stock of all our foreign subsidiaries other than Mobitec Pty Ltd., Castmaster Mobitec India
Private Ltd., and Mobitec Far East Pte. Ltd. The Borrowers are subject to a termination fee which
escalates over time to a maximum amount of $1.7 million. The
9
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amount of the termination fee due is
dependent upon the date of repayment, with the maximum amount of $1.7 million due if the Term Loan
is not paid until January 1, 2012 or thereafter. We are recording the maximum termination fee on
the Term Loan ratably over the remaining term of the BHC Agreement as interest expense. During the
six months ended June 30, 2011 and 2010, we recorded approximately $303,000 and $117,000,
respectively, of interest expense related to the Term Loan termination fee, all of which is
included in the current portion of long-term debt on the Companys accompanying consolidated
balance sheet.
The PNC Agreement and the BHC Agreement contain certain financial covenants with which we and
our subsidiaries must comply. One such covenant in the BHC Agreement provides that the aggregate
indebtedness of our foreign subsidiaries, as defined in the BHC Agreement, shall not exceed $7.0
million at any time during or at the end of any fiscal quarter. Due primarily to changes in
foreign currency exchange rates from the quarter ended December 31, 2010 to the quarter ended March
31, 2011, we were not in compliance with this covenant for the quarter ended March 31, 2011, as the
aggregate indebtedness of our foreign subsidiaries exceeded $7.0 million by approximately $127,000.
Had foreign currency exchange rates during the quarter ended March 31, 2011 remained constant with
foreign currency exchange rates as of the end of the prior quarter, the aggregate indebtedness of
our foreign subsidiaries as of March 31, 2011 would have been approximately $432,000 lower than the
amount we reported as of that date and no covenant violation would have occurred. BHC agreed to
waive this covenant violation for the quarter ended March 31, 2011. We were in compliance with all
covenants of the PNC Agreement and BHC Agreement for the quarter ended June 30, 2011.
b) International lines of credit and loans payable
Mobitec AB, our wholly-owned Swedish subsidiary, has in place agreements with Svenska
Handelsbanken AB (Handelsbanken) under which working capital credit facilities have been
established. On February 25, 2011 and May 30, 2011, Mobitec AB and Handelsbanken entered into
amendments to these agreements to, among other things, maintain the aggregate borrowing capacity on
these credit facilities at 38.0 million Swedish krona (SEK) (approximately $6.0 million, based on
exchange rates at June 30, 2011) through August 30, 2011, on which date the aggregate borrowing
capacity will be reduced by 7.0 million SEK (approximately $1.1
million, based on exchange rates at June 30, 2011) to 31.0 million SEK (approximately $4.9 million, based
on exchange rates at June 30, 2011). At June 30, 2011, borrowings due and outstanding under these
credit facilities totaled 30.7 million SEK (approximately $4.9 million, based on exchange rates at
June 30, 2011) and are reflected as lines of credit in the accompanying consolidated balance sheet.
Additional borrowing availability under these agreements at June 30, 2011 amounted to approximately
$920,000. We believe we will be able to extend the supplemental
overdraft facility that expires on August 30, 2011 to maintain our
borrowing availability but can give no assurance of such. These credit agreements renew annually on a calendar-year basis.
At June 30, 2011, Mobitec AB had an outstanding principal balance of 1.1 million SEK
(approximately $178,000, based on exchange rates at June 30, 2011) due on a term loan under a
credit agreement with Handelsbanken (the Mobitec Loan) which matures March 31, 2012. The
outstanding principal balance due on the Mobitec Loan is reflected as long-term debt in the
accompanying consolidated balance sheet.
Mobitec GmbH, the Companys wholly-owned German subsidiary, has a credit facility in place
under an agreement with Handelsbanken pursuant to which a maximum of 912,000 Euro (EUR)
(approximately $1.3 million, based on exchange rates at June 30, 2011) can be borrowed. At June 30,
2011, borrowings due and outstanding under this credit facility totaled 658,000 EUR (approximately
$948,000, based on exchange rates at June 30, 2011) and are reflected as lines of credit in the
accompanying consolidated balance sheet. Additional borrowing availability under this credit
facility at June 30, 2011 amounted to approximately $365,000. 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 June 30, 2011, Mobitec Brazil Ltda had outstanding borrowings under a loan with Banco do
Brasil S.A. of approximately 234,000 Brazilian real (BRL) (approximately $149,000, based on
exchange rates at June 30, 2011). The borrowings are secured by accounts receivable on certain
export sales by Mobitec Brazil Ltda, bear interest at an annual rate of 4.98%, and have a maturity
date of October 21, 2011. These borrowings are included in loans payable on the accompanying
consolidated balance sheet.
At June 30, 2011, Mobitec Empreendimientos e Participações Ltda. (Mobitec EP) had an
outstanding balance of approximately $1.1 million due on a promissory note entered into in
connection with the July 1, 2009 acquisition of the remaining fifty percent (50%) of the issued and
outstanding interests of Mobitec Brazil Ltda. The note is payable in twelve (12) successive fixed
quarterly principal payments of $162,500 within thirty (30) days after the close of each calendar
quarter (each such payment, an Installment Payment) with the last Installment Payment due within
thirty (30) days after the close of the calendar quarter ending September 30, 2012. The unpaid
principal balance of the note bears simple interest at a rate of five percent (5%) per annum, which
is payable quarterly on each date on which an Installment Payment is due. Mobitec EP has the right,
at its discretion, with certain interest rate provisions applied, to not make up to two Installment
Payments, provided such two Installment Payments are not consecutive (with such amounts to bear
interest therefrom at a rate of nine percent (9%) per annum) and to defer such Installment Payments
to the end date of the note. The outstanding principal balance due on this note is included in
long-term debt in the accompanying consolidated balance sheet. Mobitec EP elected to not make the
Installment Payment that was due July 30, 2010. The missed Installment Payment will be deferred
until the end date of the note, if not paid sooner, and will bear interest at an annual rate of 9%.
Mobitec EP has made all other Installment Payments due under the terms of the promissory note.
10
Table of Contents
At June 30, 2011, Castmaster Mobitec India Private Limited had two loans payable to HDFC Bank
in India with an aggregate outstanding principal balance of approximately 3.8 million Indian rupees
(INR) (approximately $82,000, based on exchange rates at June 30, 2011). One loan has a principal
balance of approximately 3.0 million INR (approximately $65,000, based on exchange rates at June
30, 2011), bears interest at an annual rate of 8.0%, and matures on September 7, 2012. The second
loan has a principal balance of approximately 785,000 INR (approximately $17,000, based on exchange
rates at June 30, 2011), bears interest at an annual rate of 9.51%, and matures on November 7,
2014. The outstanding principal balance due on these notes is included in long-term debt in the
accompanying consolidated balance sheet.
Domestic and international lines of credit consist of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Line of credit with PNC Bank,
National Association dated June 30,
2008; payable in full on the earlier
of (a) April 30, 2012 or (b) five
days prior to the maturity date of
the BHC Agreement; secured by all
tangible and intangible U.S. assets
of the Company; bears average
interest rate of 5.00% and 5.00% in
2011 and 2010, respectively. |
$ | 4,173 | $ | 2,841 | ||||
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 5.99% and
4.48% in 2011 and 2010,
respectively. |
2,082 | 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 6.39% and
4.59% in 2011 and 2010,
respectively. |
2,770 | 2,575 | ||||||
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 4.60%
and 4.39% in 2011 and 2010,
respectively. |
948 | 737 | ||||||
Total lines of credit |
$ | 9,973 | $ | 8,454 | ||||
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. Due to a number of factors including net losses reported in the
last twelve months, borrowing availability on our revolving lines of credit have been negatively
impacted, the Companys working capital has decreased, and we have implemented a range of cash
management procedures with an objective of working within our liquidity and capital resource
constraints. We may be required to seek additional financing to support the working capital and
capital expenditure needs of our operations during the remainder of fiscal year 2011. In addition,
the revolving credit facility under the PNC Agreement and the Term Loan under the BHC Agreement
each mature in April 2012. We anticipate we will not have adequate cash resources from operations
to pay the outstanding debt balances of these two credit facilities on or before their maturity
date. This will require us to seek alternative financing in sufficient amounts and/or pursue
strategic alternatives, any of which will likely be dilutive to existing shareholders. If we are not
successful in these efforts we may be required to significantly curtail our operations, which would
have a material adverse impact on our financial position.
11
Table of Contents
(8) LONG-TERM DEBT
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Term loan with BHC Interim Funding III, L.P., dated June 30, 2008;
payable in full April 30, 2012; secured by substantially all
tangible and intangible assets of the Company; bears interest rate
of 12.75%. |
$ | 4,750 | $ | 4,750 | ||||
Term loan with Svenska Handelsbanken AB, dated June 30, 2008;
payable in quarterly installments of $59,000; secured by accounts
receivable and inventory of the Swedish subsidiary, Mobitec AB;
bears average interest rate of 7.14% and 6.24% in 2011 and 2010,
respectively. |
178 | 277 | ||||||
Term loan with Roberto Demore, dated August 31, 2009; payable in
quarterly installments of $162,500; unsecured; bears interest rate
of 5.0%, with 9.0% on deferred installments. (see Note 7) |
1,138 | 1,463 | ||||||
Term loan with HDFC Bank, dated October 5, 2009; payable in monthly
installments of $4,601, inclusive of interest at 8.0%. |
65 | 90 | ||||||
Term loan with HDFC Bank, dated November 14, 2009; payable in
monthly installments of $497, inclusive of interest at 9.51%. |
17 | 19 | ||||||
Term loan with Banco Finesa, dated May 28, 2010; paid in full June
2011. |
| 44 | ||||||
Total long-term debt |
6,148 | 6,643 | ||||||
Term loan termination fee
accrual |
884 | 581 | ||||||
Less current portion |
(6,467 | ) | (944 | ) | ||||
Less debt discount |
(21 | ) | (55 | ) | ||||
544 | 6,225 | |||||||
Long-term portion of capital
leases |
7 | 14 | ||||||
Total long-term debt and capital leases, less current portion |
$ | 551 | $ | 6,239 | ||||
(9) PREFERRED STOCK
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 Redeemable
Convertible Preferred Stock (Series G Preferred), 125 shares are designated as Series H
Redeemable Convertible Preferred Stock (Series H Preferred), 475 shares are designated as Series
K Senior Redeemable Convertible Preferred Stock (Series K Preferred), and 4,968,429 shares remain
undesignated. As of June 30, 2011, 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. There are no shares of Series D Preferred outstanding.
Pursuant to terms of the PNC Agreement and BHC Agreement, as amended, the Company is currently
restricted from paying any cash or non-cash dividends on any series of preferred stock until such
time as it can demonstrate pro forma compliance with the fixed coverage ratio covenant as set forth
in those agreements; provided, however, if the fixed charge coverage ratio is not tested in a
fiscal quarter, no such payments shall be permitted. Therefore, dividends on all series of
preferred stock shall be accrued and not paid or issued until such restriction under the PNC
Agreement and BHC Agreement no longer exists. Pursuant to terms of the PNC Agreement and the BHC
Agreement, the fixed charge coverage ratio was not tested in the first quarter or second quarter of
2011 and all unpaid and unissued preferred stock dividends for each of those two quarters have been
accrued.
(10) PER SHARE AMOUNTS
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. The Companys convertible preferred stock, restricted stock, options and warrants
represent the only potentially dilutive equities outstanding.
12
Table of Contents
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands, except share amounts) | ||||||||||||||||
Net income (loss) applicable to common shareholders of DRI Corporation |
$ | (9,643 | ) | $ | 763 | $ | (10,323 | ) | $ | (232 | ) | |||||
Effect of dilutive securities on net income (loss) of DRI Corporation: |
||||||||||||||||
Convertible preferred stock |
| 106 | | | ||||||||||||
Net income (loss) applicable to common shareholders of DRI
Corporation, assuming conversions |
$ | (9,643 | ) | $ | 869 | $ | (10,323 | ) | $ | (232 | ) | |||||
Weighted average shares outstanding Basic |
11,880,838 | 11,797,095 | 11,866,401 | 11,775,348 | ||||||||||||
Effect of dilutive securities on shares outstanding: |
||||||||||||||||
Options |
| 39,917 | | | ||||||||||||
Warrants |
| 123,971 | | | ||||||||||||
Convertible preferred stock |
| 2,361,776 | | | ||||||||||||
Weighted average shares outstanding Diluted |
11,880,838 | 14,322,759 | 11,866,401 | 11,775,348 | ||||||||||||
The calculation of weighted average shares outstanding for the diluted calculation excludes 1,628,629 stock
options and warrants for the three months ended June 30, 2010 because these
securities would not have been dilutive for the period due to the fact that the exercise price
was greater than the average market price of our Common Stock for the period or the total
assumed proceeds under the treasury stock method resulted in negative incremental shares. No
recognition was given to potentially dilutive securities aggregating 4,898,376 shares
for the six months ended June 30, 2010, and 4,851,279 shares for the three and six months ended June 30, 2011,
since, due to the net loss applicable to
common shareholders of DRI Corporation in those periods, such securities would have been
anti-dilutive.
(11) SHAREHOLDERS EQUITY, COMPREHENSIVE INCOME (LOSS) AND NONCONTROLLING INTEREST
Set forth below is a reconciliation of shareholders equity attributable to the Company and
total noncontrolling interest at the beginning and end of the six months ended June 30, 2011 and
2010 (in thousands).
DRI Shareholders Equity | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Accum- | Other | Total DRI | Compre- | Total | |||||||||||||||||||||||||||||||
Preferred | Common | Paid-in | ulated | Comprehensive | Shareholders | Noncontrolling | hensive | Shareholders | ||||||||||||||||||||||||||||
Stock | Stock | Capital | Deficit | Income | Equity | Interest | Income (loss) | Equity | ||||||||||||||||||||||||||||
Balance as of December 31, 2010 |
$ | 5,854 | $ | 1,184 | $ | 30,374 | $ | (20,121 | ) | $ | 3,180 | $ | 20,471 | $ | 847 | $ | 21,318 | |||||||||||||||||||
Issuance of common stock |
7 | 84 | 91 | 91 | ||||||||||||||||||||||||||||||||
Preferred stock dividends |
(355 | ) | (355 | ) | (355 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
185 | 185 | 185 | |||||||||||||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net loss |
(9,968 | ) | (9,968 | ) | (81 | ) | $ | (10,049 | ) | (10,049 | ) | |||||||||||||||||||||||||
Translation adjustment |
1,366 | 1,366 | 1,366 | 1,366 | ||||||||||||||||||||||||||||||||
Total
comprehensive loss |
$ | (8,683 | ) | |||||||||||||||||||||||||||||||||
Balance as of June 30, 2011 |
$ | 5,854 | $ | 1,191 | $ | 30,288 | $ | (30,089 | ) | $ | 4,546 | $ | 11,790 | $ | 766 | $ | 12,556 | |||||||||||||||||||
DRI Shareholders Equity | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Accum- | Other | Total DRI | Compre- | Total | |||||||||||||||||||||||||||||||
Preferred | Common | Paid-in | ulated | Comprehensive | Shareholders | Noncontrolling | hensive | Shareholders | ||||||||||||||||||||||||||||
Stock | Stock | Capital | Deficit | Income (Loss) | Equity | Interest | Income (loss) | Equity | ||||||||||||||||||||||||||||
Balance as of December 31, 2009 |
$ | 4,923 | $ | 1,175 | $ | 30,393 | $ | (18,276 | ) | $ | 1,976 | $ | 20,191 | $ | 755 | $ | 20,946 | |||||||||||||||||||
Issuance of common stock |
3 | 56 | 59 | 59 | ||||||||||||||||||||||||||||||||
Issuance of Series K preferred stock, net of issuance costs |
165 | 165 | 165 | |||||||||||||||||||||||||||||||||
Issuance of Series G preferred stock dividend |
100 | 100 | 100 | |||||||||||||||||||||||||||||||||
Issuance of Series H preferred stock dividend |
15 | 15 | 15 | |||||||||||||||||||||||||||||||||
Conversion of Series K Preferred Stock, net of issuance costs |
(67 | ) | 4 | 63 | | | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(225 | ) | (225 | ) | (225 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense |
184 | 184 | 184 | |||||||||||||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net Income (loss) |
(7 | ) | (7 | ) | 325 | $ | 318 | 318 | ||||||||||||||||||||||||||||
Translation adjustment |
(1,436 | ) | (1,436 | ) | (1,436 | ) | (1,436 | ) | ||||||||||||||||||||||||||||
Total comprehensive loss |
$ | (1,118 | ) | |||||||||||||||||||||||||||||||||
Balance as of June 30, 2010 |
$ | 5,136 | $ | 1,182 | $ | 30,471 | $ | (18,283 | ) | $ | 540 | $ | 19,046 | $ | 1,080 | $ | 20,126 | |||||||||||||||||||
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COMPREHENSIVE INCOME (LOSS)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net income (loss) |
$ | (9,477 | ) | $ | 1,103 | $ | (10,049 | ) | $ | 318 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Foreign currency translation adjustment, net of tax |
102 | (1,331 | ) | 1,366 | (1,436 | ) | ||||||||||
Total other comprehensive income (loss), net of tax |
102 | (1,331 | ) | 1,366 | (1,436 | ) | ||||||||||
Comprehensive loss |
(9,375 | ) | (228 | ) | (8,683 | ) | (1,118 | ) | ||||||||
Comprehensive (income) loss attributable to the
noncontrolling interest |
13 | (153 | ) | 18 | (246 | ) | ||||||||||
Comprehensive loss attributable to DRI
Corporation |
$ | (9,362 | ) | $ | (381 | ) | $ | (8,665 | ) | $ | (1,364 | ) | ||||
(12) 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. Net sales information set forth below is based on
geographic location of our customers. Long-lived assets set forth below include net property, net
software, and equipment and other assets.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net sales |
||||||||||||||||
North America |
$ | 7,967 | $ | 9,888 | $ | 15,839 | $ | 16,946 | ||||||||
Europe |
7,447 | 6,900 | 13,093 | 11,563 | ||||||||||||
Asia-Pacific |
1,578 | 5,194 | 3,969 | 13,208 | ||||||||||||
Middle East |
145 | 136 | 337 | 359 | ||||||||||||
South America |
3,165 | 3,441 | 6,153 | 5,612 | ||||||||||||
$ | 20,302 | $ | 25,559 | $ | 39,391 | $ | 47,688 | |||||||||
June 30, | ||||||||
2011 | December 31, | |||||||
(Unaudited) | 2010 | |||||||
(In thousands) | ||||||||
Long-lived assets |
||||||||
North America |
$ | 4,270 | $ | 4,105 | ||||
Europe |
2,905 | 2,619 | ||||||
Asia-Pacific |
793 | 957 | ||||||
South America |
580 | 509 | ||||||
$ | 8,548 | $ | 8,190 | |||||
As of June 30, 2011 and December 31, 2010, approximately $2.9 million and $2.6 million,
respectively, of the Companys long-lived assets were located in Sweden.
(13) INCOME TAXES
As a result of its net operating loss carryforwards, the Company has significant gross
deferred income tax assets. The Company reduces its deferred income tax assets by a valuation
allowance when, based on available evidence, it is more likely than not that a significant portion
of the deferred income tax assets will not be realized. The Companys total deferred income tax
assets and liabilities as of June 30, 2011 were $11.1 million and $1.7 million, respectively, and
its deferred income tax valuation allowance was $8.7 million.
As a result of intercompany sales that give rise to uncertain tax positions related to
transfer pricing, during the six months ended June 30, 2011, the Company recorded an increase to
its liability for unrecognized tax benefits of approximately $103,000. These increases, if
recognized, would affect the Companys effective tax rate. Changes in foreign currency exchange
rates increased the liability for unrecognized tax benefits by approximately $118,000 during the
six months ended June 30, 2011.
The income tax expense or benefit reported for interim periods is based on our projected
annual effective tax rate for the fiscal year and also includes expense or benefit recorded to the
provision for uncertain tax positions in foreign jurisdictions. Our projected annual effective tax
rate is sensitive to variations in the estimated and actual level of annual pre-tax income,
variations in the tax jurisdictions in which the pre-tax income is recognized, and various discrete
income tax expenses that may need to be recorded from time to time. As these variations occur, the
Companys projected annual effective tax rate and the resulting income tax expense or
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benefit
recorded in interim periods can vary significantly from period to period. Income tax expense
(benefit) as a percentage of income (loss) before income
taxes was approximately (0.9)% and 29.2%
for the six months ended June 30, 2011 and 2010, respectively. For the three months ended June 30,
2011 and 2010, income tax expense as a percentage of income before income taxes was approximately
(2.5)% and 25.8%, respectively. The changes in the rates are
primarily related to a permanent difference in the accounting
treatment for book and tax purposes of a goodwill impairment charge
recorded in the second quarter of 2011, which is more fully described
in Note 2, and changes in the
mix of income (loss) before income taxes between countries whose income taxes are offset by a full
valuation allowance and those that are not.
(14) NON-MONETARY TRANSACTION ADVERTISING RIGHTS
On July 12, 2010, Castmaster Mobitec India Private Limited, a majority-owned subsidiary of
Mobitec AB (Castmaster Mobitec), entered into a non-monetary exchange transaction with a transit
agency customer (the Transit Agency) under the terms of a Concession Agreement (the Transit
Agency Contract) pursuant to which Castmaster Mobitec agreed to install LED destination signs on a total of 1,500 of the Transit Agencys existing fleet of buses and, in exchange therefore, the
Transit Agency agreed to grant Castmaster Mobitec the right to place advertisements on such buses
for a period of twenty-four (24) months (collectively, the Advertising Rights). In order to
monetize the value of the Advertising Rights, on October 12, 2010 Castmaster Mobitec entered into
an advertising agreement (the Advertising Agreement) with an advertising services company (the
Advertising Company), pursuant
to which Castmaster Mobitec granted the Advertising Company exclusive agency rights to operate
the Advertising Rights in exchange for ten monthly installment payments, commencing on October 20,
2010, of approximately $330,000 each.
Prior to accepting the first installment payment for the operation of the Advertising Rights,
Castmaster Mobitec informed the Advertising Company that the Transit Agency Contract, as well as
the Advertising Rights granted thereunder, would expire on July 11, 2012 (the Expiration Date)
(unless the Transit Agency, in its sole and absolute discretion, agreed to extend the same for an
additional one-year term), and, therefore, the Advertising Company would have the right to operate
the Advertising Rights for a period of less than 24 months. By letter dated October 28, 2010, the
Advertising Company acknowledged that approximately 20 months of advertising rights remained
available under the Transit Agency Contract and requested, but did not demand, that Castmaster
Mobitec seek to obtain from the Transit Agency a one-year extension of the Advertising Rights.
Subsequently, Castmaster Mobitec requested that the Transit Agency agree to extend the Transit
Agency Contract and the Advertising Rights granted thereunder for an additional one-year term,
ending on July 11, 2013 (the One-Year Extension). As of December 31, 2010, Castmaster Mobitec had
completed the installation of LED destination signs on approximately 600 of the Transit Agencys
buses; nevertheless, the installation of LED destination signs on the remaining 900 buses was
halted pending the receipt by Castmaster Mobitec of the Transit Agencys decision on whether to
grant the One-Year Extension. If the Transit Agency declines to grant the One-Year Extension, the
revenue to Castmaster Mobitec generated by the Advertising Rights will be limited to that which may
be obtained during the time between the start date of advertising and the Expiration Date.
As a result of delays in the start date of the advertising, the uncertainty of the Transit
Agency granting the One-Year Extension, and the uncertainty of completing the installation of LED
destination signs on the remaining 900 of the Transit Agencys buses, as of December 31, 2010 we
were unable to conclude that our ability to monetize the value of the Advertising Rights was
reasonably assured. Therefore, at the end of fiscal 2010, 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. The terms of the Transit Agency Contract
stipulated a completion date of November 5, 2010, with a provision for liquidated damages of up to
12 million INR (approximately $265,000 based on currency exchange rates at June 30, 2011) if not
completed by that date. While the Transit Agency has not waived its rights to collect liquidated
damages under the Transit Agency Contract, at this time, we do not believe the Transit Agency will
seek payment of liquidated damages from Castmaster Mobitec. Further, Castmaster Mobitec has not
waived its right to re-sell the Advertising Rights for the remainder of the term of the Transit
Agency Contract and we believe the value of the remaining term of the Advertising Rights exceeds
the amount of liquidated damages that could be imposed. We intend to seek final resolution of
these matters with the Transit Agency before the end of our fiscal year, December 31, 2011. We
believe that Castmaster Mobitec will incur no additional material expense or liability relating to
the Transit Agency Contract beyond that which was recorded by the Company in connection with the
impairment of the Advertising Rights in fiscal 2010, although we can give no assurance of such.
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(15) SUBSEQUENT EVENT
On
August 5, 2011, Standard & Poors (S&P) lowered the long-term sovereign credit rating of U.S.
Government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term
credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect
on financial markets. However, we are unable to predict the longer-term impact on such markets and the
participants therein and, accordingly, are unable to predict the longer-term impact these actions will have
on our operating results and financial position.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THAT ARE IN ITEM 1 OF THIS QUARTERLY REPORT AND WITH THE AUDITED
FINANCIAL STATEMENTS AND THE RELATED NOTES THAT ARE IN THE 2010 ANNUAL REPORT.
Business General
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.
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 buses and vans, and rental car agencies. DRIs OEM customers
are the manufacturers of transportation rail, bus and van-like vehicles. The relative percentage of
sales to end-user customers compared to OEM customers varies widely from quarter-to-quarter and
year-to-year, and within products and product lines comprising DRIs mix of total sales in any
given period.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates used in the preparation of the Consolidated
Financial Statements presented in the 2010 Annual Report are listed and described in Managements
Discussion and Analysis of Financial Condition and Results of Operations in the 2010 Annual Report
and include the following:
| Allowance for doubtful accounts; | ||
| Inventory valuation; | ||
| Warranty reserve; | ||
| Intangible assets and goodwill; | ||
| Income taxes, including deferred tax assets; | ||
| Revenue recognition; and | ||
| Stock-based compensation. |
Our financial statements include amounts that are based on managements best estimates and
judgments. The most significant estimates relate to allowance for uncollectible accounts
receivable, inventory obsolescence, intangible asset valuations and useful lives, goodwill
impairment, warranty costs, income taxes, stock-based compensation, valuation of advertising rights
obtained in a non-monetary transaction, and revenue on projects with multiple deliverables. These
estimates may be adjusted as more current information becomes available, and any adjustment could
be significant.
The Company believes there were no significant changes during the six month period ended June
30, 2011 to the items disclosed as critical accounting policies and estimates in Managements
Discussion and Analysis of Financial Condition and Results of Operations in the 2010 Annual Report.
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Recent Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU
2011-04 improves the comparability of fair value measurements presented and disclosed in financial
statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards.
Although most of the amendments only clarify existing guidance in U.S. GAAP, ASU 2011-04 requires
new disclosures, with a particular focus on Level 3 measurements, including quantitative
information about the significant unobservable inputs used for all
Level 3 measurements and a
qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the
unobservable inputs disclosed. ASU 2011-04 also requires the hierarchy classification for those
items whose fair value is not recorded on the balance sheet but is disclosed in the footnotes. ASU
2011-04 is effective for financial statements issued for fiscal years beginning after December 15,
2011, and interim periods within those fiscal years. The Company believes the adoption of ASU
2011-04 will not have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05
requires an entity to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of
comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the
option to present components of other comprehensive income as part of the statement of equity. ASU
2011-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2011, and interim periods
within those fiscal years. The Company believes the adoption of ASU 2011-05 will not have a
material impact on its consolidated financial statements.
Results of Operations
Management reviews a number of key indicators to evaluate the Companys financial performance,
including net sales, gross profit and selling, general and administrative expenses. The following
table sets forth the percentage of our revenues represented by certain items included in our
consolidated statements of operations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
65.9 | 69.6 | 66.9 | 72.5 | ||||||||||||
Gross profit |
34.1 | 30.4 | 33.1 | 27.5 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
28.7 | 22.8 | 30.1 | 24.8 | ||||||||||||
Research and development |
0.3 | 0.6 | 0.5 | 0.6 | ||||||||||||
Goodwill
impairment |
48.8 | | 25.2 | | ||||||||||||
Total operating expenses |
77.8 | 23.4 | 55.8 | 25.4 | ||||||||||||
Operating
income (loss) |
(43.7 | ) | 7.0 | (22.7 | ) | 2.1 | ||||||||||
Total other income and expense |
(1.8 | ) | (1.1 | ) | (2.6 | ) | (1.2 | ) | ||||||||
Income (loss) before income tax expense |
(45.5 | ) | 5.9 | (25.3 | ) | 0.9 | ||||||||||
Income tax expense |
(1.2 | ) | (1.5 | ) | (0.2 | ) | (0.3 | ) | ||||||||
Net income (loss) |
(46.7 | ) | 4.4 | (25.5 | ) | 0.6 | ||||||||||
Net (income) loss attributable to noncontrolling interest, net of tax |
0.1 | (0.9 | ) | 0.2 | (0.7 | ) | ||||||||||
Net income (loss) attributable to DRI Corporation |
(46.6 | )% | 3.5 | % | (25.3 | )% | (0.1 | )% | ||||||||
COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND 2010
Net Sales and Gross Profit. Our net sales for the three months ended June 30, 2011, decreased
$5.3 million, or 20.6%, from $25.6 million for the three months ended June 30, 2010, to $20.3
million for the three months ended June 30, 2011. The decrease resulted from lower sales by our
foreign subsidiaries of $3.5 million and lower U.S. domestic sales of $1.8 million.
The decrease in sales by our foreign subsidiaries resulted primarily from decreased sales in
the Asia-Pacific and South America markets, which were partially offset by increased sales in
Europe. Substantially all the decrease in sales in the Asia-Pacific market occurred in India, where
fulfillment of significant orders received in prior periods was substantially completed in the
first and second quarters of 2010 and there have been no significant new orders in that market
subsequent to that period. The decrease in sales in the South America market as well as the
increase in sales in Europe are primarily due to the timing of orders and cyclical nature of sales
to OEMs. The decrease in sales in South America was due to lower sales to OEMs partially
offset by increased sales to end-user customers in the second quarter of 2011 as compared to the
second quarter of 2010. The increase in sales in Europe was primarily due to higher sales to OEMs
in the Nordic countries and Poland as well as increased sales in the United Kingdom, where
preparations for the 2012 summer Olympics to be held in London have begun. The increased sales in
these European markets were partially offset by decreased sales to OEMs in Belgium, where a large
OEM order was fulfilled in the second quarter of 2010. The decrease in international sales of $3.5
million is inclusive of an increase due to foreign currency fluctuations for the quarter ended June
30, 2011 of approximately $1.7 million. Our foreign subsidiaries primarily conduct 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.
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The decrease in U.S. sales for the quarter ended June 30, 2011 as compared to the quarter
ended June 30, 2010 is primarily attributable to the timing of order receipts from and delivery to
our OEM and end-user customers. We reported decreased sales in engineered systems and related
products as well as electronic information display systems (EIDS) in the U.S. in the second
quarter of 2011 compared to the second quarter, with the larger decrease on the engineered systems
side of the business. The decrease in engineered systems sales was largely attributable to a
decrease in OEM sales between the two quarters partially offset by an increase in revenue
recognized on deliverables to end-user customers on multiple element projects. The decrease in
EIDS sales is primarily attributable to a decrease in aftermarket part sales and a decrease in OEM
sales. The decrease in sales to OEMs for both engineered systems and EIDS is primarily a function
of the variability of order receipts and deliveries from period to period.
Our gross profit of $6.9 million for the three months ended June 30, 2011 decreased $857,000,
or 11.0%, from $7.8 million for the three months ended June 30, 2010. The decrease in gross profit
was attributed to a decrease in U.S. domestic gross profits of $327,000 and a decrease in foreign
gross profits of $530,000. As a percentage of sales, our gross profit was 34.1% of our net sales
for the three months ended June 30, 2011 as compared to 30.4% for the three months ended June 30,
2010.
The U.S. gross profit as a percentage of sales for the three months ended June 30, 2011 was
34.1% as compared to 31.0% for the three months ended June 30, 2010. As previously mentioned, the
decrease in sales in the U.S. was largely attributable to decreased sales to OEMs, which generally
yield lower gross profit percentages than sales to end-user customers and resulted in higher gross
profit percentages in the second quarter of 2011 compared to the second quarter of 2010.
Additionally contributing to the increase in gross margin as a percentage of sales in the second
quarter of 2011 were (1) increased margins on projects with multiple element deliverables, which
can vary period-to-period depending on the element(s) being delivered (hardware, software or
services) and (2) price increases in selected instances which went into effect in the last quarter
of 2010.
The international gross profit as a percentage of sales for the three months ended June 30,
2011 was 34.0% as compared to 30.0% for the three months ended June 30, 2010. The increase in
international gross profit percentage is largely attributable to a variation in geographical
dispersion of product sales. Most notably, sales decreased in India, where gross profit
percentages have been generally lower than those we typically realize on similar product sales in
other international markets, and sales increased in the Nordic market, where gross profit
percentages are generally higher than in other markets we serve. Also contributing to the higher
gross profit percentage in the second quarter of 2011 were (1) higher gross profit percentages in
certain markets due to favorable material price reductions from suppliers compared to the second
quarter of 2010, (2) lower labor absorption costs in the second quarter of 2011 than in the second
quarter of 2010, when an increase in temporary production employees was necessary to meet the
demands of fulfilling large sales orders for India, and (3) a change in product mix, with
increased sales of EIDS that yield higher margins in the first six months of 2011 compared to the
same period of 2010.
We anticipate that improvements in gross margins could occur through more frequent sales of a
combination of products and services offering a broader project solution, and through the
introduction of technology improvements as well as the favorable influence of global purchasing
initiatives. However, period-to-period, overall gross margins will still reflect the variations in
sales mix and geographical dispersion of product sales.
Selling, General and Administrative. Our selling, general and administrative (SG&A)
expenses of $5.8 million for the three months ended June 30, 2011 decreased $2,000, or 0.03% from
$5.8 million for the three months ended June 30, 2010. Excluding a $469,000 increase due to a
change in foreign currency exchange rates from the second quarter of 2010 to the second quarter of
2011, SG&A expenses decreased approximately $471,000 in the second quarter of 2011 when compared to
the second quarter of 2010 primarily due to (1) decreased travel and entertainment expenses of
approximately $217,000, (2) decreased promotion, advertising, trade show and business development
expenses of approximately $28,000, (3) decreased public company costs of approximately $194,000
related primarily to decreased SEC filing expenses, investor relations expenses, public relations
expenses, legal expenses and audit fees, (4) decreased telecommunication expenses of approximately
$49,000 and (5) decreased bank fees of approximately $66,000 primarily due to lower amortization of
deferred finance costs resulting from the extension of our domestic debt agreements and, thus, the
extension of the amortization period of such costs. These decreases were partially offset by
increased personnel-related expenses of approximately $131,000 resulting primarily from an increase
in selected engineering personnel in 2011.
Research and Development. Our research and development expenses of $55,000 for the three
months ended June 30, 2011, represented a decrease of $103,000, or 65.2%, from $158,000 for the
three months ended June 30, 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 the three months ended June 30, 2011, 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 the three months ended
June 30, 2011, of $693,000 increased $130,000, from $563,000 for the three months ended June 30,
2010. In aggregate, research and development expenditures for the three months ended June 30, 2011
were $748,000 as compared to $721,000 for the three months ended June 30, 2010.
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Goodwill Impairment. During the three months ended June 30, 2011, the Company recorded a goodwill impairment charge of
approximately $9.9 million resulting from a goodwill impairment evaluation performed as of June 30, 2011. The goodwill
impairment evaluation is more fully described in Note 2 to the accompanying consolidated financial statements.
Operating
Income (Loss). The net change in operating income (loss) for the three months ended
June 30, 2011, was a decrease of $10.7 million, from net operating income of $1.8 million for the three
months ended June 30, 2010, to net operating loss of $8.9 million for the three months ended June
30, 2011. The decrease in operating income (loss) is due to decreased gross
profit and increased goodwill impairment partially offset by
decreased SG&A and research and development expenses as described herein.
Other Income and Expense. Total other income and expense decreased $66,000 from ($292,000)
for the three months ended June 30, 2010 to ($358,000) for the three months ended June 30, 2011 due
to an increase of $36,000 in other income, an increase of $91,000 in foreign currency gain, and an
increase of $193,000 in interest expense. The increase in foreign currency gain resulted primarily
from favorable changes in foreign currency exchange rates between the functional currencies of our
foreign subsidiaries and the U.S. dollar, as certain internal and external billings of our foreign
subsidiaries are denominated in the U.S. dollar. The increase in interest expense is primarily
attributable to increased accruals of a termination fee payable to our domestic subordinated lender
that is recorded as interest expense. The termination fee associated with this debt was increased
under terms of an amendment executed in April 2011 to, among other things, extend the maturity date
of this debt to April 30, 2012.
Income
Tax Expense. Net income tax expense was $234,000 for the three months ended June 30,
2011, compared to net income tax expense of $383,000 for the three months ended June 30, 2010. The
income tax expense or benefit reported for interim periods is based on our projected annual
effective tax rate for the fiscal year and also includes expense or benefit recorded to the
provision for uncertain tax positions in foreign jurisdictions. Our projected annual effective tax
rate is sensitive to variations in the estimated and actual level of annual pre-tax income,
variations in the tax jurisdictions in which the pre-tax income is recognized, and various discrete
income tax expenses that may need to be recorded from time to time. As these variations occur, the
projected annual effective tax rate and the resulting income tax expense or benefit recorded in
interim periods can vary significantly from period to period. For the three months ended June 30,
2011 and 2010, income tax expense as a percentage of income before income taxes was approximately
(2.5)% and 25.8%, respectively. The change in the rates is primarily related to a permanent difference in the accounting
treatment for book and tax purpose of a goodwill impairment charge recorded in the second quarter of 2011, which is more
fully described in Note 2 to the accompanying consolidated financial
statements, and changes in the mix
of income (loss) before income taxes between countries whose income taxes are offset by full
valuation allowance and those that are not.
Net Income (Loss) Applicable to Common Shareholders. The change in net income (loss)
applicable to common shareholders for the three months ended June 30, 2011, was a decrease of
$10.4 million from net income of $763,000 for the three months ended
June 30, 2010, to net loss of
$9.6 million for the three months ended June 30, 2011.
COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Net Sales and Gross Profit. Our net sales for the six months ended June 30, 2011, decreased
$8.3 million or 17.4%, from $47.7 million for the six months ended June 30, 2010, to $39.4 million
for the six months ended June 30, 2011. The decrease resulted from lower sales by our foreign
subsidiaries of $7.4 million and by lower U.S. domestic sales of $890,000.
The decrease in sales by our foreign subsidiaries resulted primarily from decreased sales in
the Asia-Pacific market partially offset by increased sales in the South America market and
increased sales in Europe. Substantially all the decrease in sales in the Asia-Pacific market
occurred in India, where fulfillment of significant orders received in prior periods was
substantially completed in the first and second quarters of 2010 and there have been no significant
new orders in that market subsequent to that period. The increase in sales in South America
occurred primarily in Brazil and is due to an improving economy in that market in recent periods.
The increase in sales in Europe was, in large part, due to increased sales in the United Kingdom,
where preparations for the 2012 summer Olympics to be held in London have begun. The decrease in
international sales is inclusive of an increase due to foreign currency fluctuations for the six
months ended June 30, 2011 of approximately $2.5 million.
The decrease in U.S. sales for the six months ended June 30, 2011 as compared to the six
months ended June 30, 2010 is primarily attributable to the timing of order receipts from and
delivery to our OEM and end-user customers. We reported decreased sales in both engineered systems
and EIDS in the U.S. in the first six months of 2011 compared to the same period in 2010. The
decrease in engineered systems sales was largely attributable to a decrease in OEM sales between
the two periods partially offset by an increase in revenue recognized on deliverables to end-user
customers on multiple element projects. The decrease in EIDS sales is primarily attributable to a
decrease in aftermarket part sales and a decrease in OEM sales. The decrease in sales to OEMs for
both engineered systems and EIDS is primarily a function of the variability of order receipts and
deliveries from period to period.
Our gross profit for the six months ended June 30, 2011 of $13.0 million decreased $49,000, or
0.4%, from $13.1 million for the six months ended June 30, 2010. The decrease in gross profit was
attributed to a decrease in foreign gross profits of $300,000 and an increase in U.S. domestic
gross profits of $251,000. As a percentage of sales, our gross profit was 33.1% of our net sales
for the six months ended June 30, 2011 as compared to 27.5% for the six months ended June 30, 2010.
The U.S. gross profit as a percentage of sales for the six months ended June 30, 2011 was
33.9% as compared to 30.6% for the six months ended June 30, 2010. The increase in gross profit as
a percentage of sales is primarily attributable to (1) a higher concentration of higher-margin
engineered systems deliverables on multiple element projects, (2) price increases to certain
customers, and (3) a change in product mix whereby we sold more higher margin product in the first
six months of 2011 when compared to the first six months of 2010.
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The international gross profit as a percentage of sales for the six months ended June 30, 2011
was 32.6% as compared to 25.8% for the six months ended June 30, 2010. The increase in international
gross profit percentage is largely attributable to a variation in geographical dispersion of
product sales. Most notably, sales decreased in India, where gross profit percentages have been
generally lower than those we typically realize on similar product sales in other international
markets. Also contributing to the higher gross profit percentage in the first six months of 2011
were (1) higher gross profit percentages in certain markets due to favorable material price
reductions from suppliers compared to the first six months of 2010, (2) lower labor absorption
costs in the first six months of 2011 than in the first six months of 2010, when an increase in
temporary production employees was necessary to meet the demands of fulfilling large sales orders
for India, and (3) lower sales in the first six months of 2011 to a large bus manufacturer on which
gross profit percentages are lower than sales of similar products to other OEMs and customers.
Selling, General and Administrative. Our selling, general and administrative (SG&A)
expenses for the six months ended June 30, 2011, of $11.9 million, increased $44,000, or 0.4%, from
$11.8 million for the six months ended June 30, 2010. This increase includes an increase in SG&A
expenses due to foreign currency exchange fluctuation of approximately $658,000. Exclusive of the
increase due to foreign currency exchange fluctuations, SG&A expenses have decreased approximately
$614,000 primarily due to (1) decreased travel and entertainment expenses of approximately
$386,000, (2) decreased promotion, advertising, trade show and business development expenses of
approximately $326,000, (3) decreased public company costs of approximately $296,000 related
primarily to decreased SEC filing expenses, investor relations expenses, public relations expenses,
legal expenses and audit fees, and (4) decreased telecommunication expenses of approximately
$66,000. These decreases were partially offset by (1) increased personnel-related expenses of
approximately $302,000 resulting primarily from an increase in selected engineering personnel in
2011 and (2) increased general corporate legal fees of approximately $150,000 due primarily to
legal counsel received in 2011 in helping the Company begin assessing strategic alternatives to
increase shareholder value.
Research and Development. Our research and development expenses of $211,000 for the six months
ended June 30, 2011, decreased $55,000 or 20.7% as compared to $266,000 for the six months ended
June 30, 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 the six months ended June 30, 2011, 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 the six months ended June 30, 2011, of
$1.3 million, increased $51,000, from $1.2 million for the six months ended June 30, 2010. In
aggregate, research and development expenditures for the six months ended June 30, 2011 were $1.5
million as compared to $1.5 million for the six months ended June 30, 2010.
Goodwill Impairment. During the six months ended June 30, 2011,
the Company recorded a goodwill impairment charge of approximately $9.9 million resulting from a goodwill impairment evaluation
performed as of June 30, 2011. The goodwill impairment evaluation is more fully described in Note 2 to the accompanying consolidated
financial statements.
Operating
Income (Loss). The net change in our operating income (loss) for the six months ended
June 30, 2011, was a decrease of $9.9 million from net operating income of $1.0 million for the six
months ended June 30, 2010, to net operating loss of $8.9 million for the six months ended June 30,
2011. The decrease in operating income is due to decreased sales and
gross profit and increased goodwill impairment partially offset
by decreased SG&A expenses as previously described.
Other Income and Expense. Other income and expense decreased $462,000 from ($564,000) for
the six months ended June 30, 2010 to ($1.0 million) for the six months ended June 30, 2011, due to
an increase of $39,000 in other income, a decrease of $287,000 in foreign currency gain, and an
increase of $214,000 in interest expense. The decrease in foreign currency gain resulted primarily
from unfavorable changes in foreign currency exchange rates between the functional currencies of
our foreign subsidiaries and the U.S. dollar, as certain internal and external billings of our
foreign subsidiaries are denominated in the U.S. dollar. The increase in interest expense is
primarily attributable to increased accruals of a termination fee payable to our domestic
subordinated lender that is recorded as interest expense. The termination fee associated with this
debt was increased under terms of an amendment executed in April 2011 to, among other things,
extend the maturity date of this debt to April 30, 2012.
Income Tax Expense. Net income tax expense was $87,000 for the six months ended June 30,
2011, compared to net income tax expense of $131,000 for the six months ended June 30, 2010. The
income tax expense or benefit reported for interim periods is based on our projected annual
effective tax rate for the fiscal year and also includes expense or benefit recorded to the
provision for uncertain tax positions in foreign jurisdictions. Our projected annual effective tax
rate is sensitive to variations in the estimated and actual level of annual pre-tax income,
variations in the tax jurisdictions in which the pre-tax income is recognized, and various discrete
income tax expenses that may need to be recorded from time to time. As these variations occur, the
projected annual effective tax rate and the resulting income tax expense or benefit recorded in
interim periods can vary significantly from period to period. Income tax (expense) benefit as a
percentage of income (loss) before income taxes was approximately (0.9)% and 29.2% for the six
months ended June 30, 2011 and 2010, respectively. The change in the rates is primarily related to a
permanent difference in the accounting treatment for book and tax purpose of a goodwill impairment charge
recorded in the second quarter of 2011, which is more fully described
in Note 2 to the accompanying consolidated financial statements, and
changes in the mix of income (loss) before income taxes between countries whose income taxes are
offset by full valuation allowance and those that are not.
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Net Income (Loss) Applicable to Common Shareholders. The net change in net loss applicable to
common shareholders for the six months ended June 30, 2011, was
a decrease of $10.1 million from net
loss of $232,000 for the six months ended June 30, 2010, to net
loss of $10.3 million for the six months
ended June 30, 2011.
Industry and Market Overview
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, designated a wide range of tools, services, and
programs intended to increase the capacity of the nations mobility systems and guaranteed a record
level $52.6 billion in funding for public transportation through September 30, 2009, on which date
SAFETEA-LU expired. Continuation of the expired legislation and related appropriations 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. Continuation of funding in
the previously-mentioned short term mode has held funding at generally the same levels as at the
date of SAFETEA-LUs expiration.
There are some specific legislative proposals to replace SAFETEA-LU, most of which include at
least some degree of program funding cuts. Additionally, the effect of the debt ceiling
legislation remains unclear at this point. However, it is too early to point to any one
legislative proposal or action as being most likely to emerge as the front-runner. We continue to
believe that long-term federal funding legislation to replace SAFETEA-LU is not likely to occur
until 2012 or after, although at least one legislative proposal claims to be focused on passage
this fall. Extensions of the expired legislation are expected to be available until new
longer-term legislation, and adequate funding for such, can be determined. Weaknesses in the
economy at the local level have further adversely impacted this situation. These funding and
economic difficulties have impacted our U.S. market. We believe that such overall U.S. market
funding difficulties have in the past depressed our market opportunities and increased 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 continue 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, and 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., have had an adverse impact on the Company. Like 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. 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. Additionally, we are
pursuing new geographic market segments and further penetration in existing served market segments
in our efforts to maintain growth and to achieve bottom line improvement.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Six Months Ended June 30, 2011 and 2010
Our operating activities provided (used) net cash of $1.2 million and ($1.4) million for the
six months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011,
sources of cash from operations primarily resulted from a decrease in inventory of $1.3 million due
to improved inventory management, an increase in accounts payable of $693,000 due to the Company
lengthening payment cycles to more closely match the timing of collections from customers in an
effort to better manage working capital, a decrease in other receivables of $165,000, and a
decrease in prepaids and other current assets of $4,000. Cash used in operating activities
primarily resulted from an increase in trade accounts receivable of $2.3 million due to a
combination of higher sales in the second quarter and a change in the composition of accounts
receivable from end-user customers with shorter payment terms to OEM customers with longer payment
terms, a decrease in the foreign tax settlement of $244,000, a decrease in accrued expenses and
other current liabilities of $134,000, and net loss of $10.0 million
offset by $11.8 million in non-cash
expenses. Non-cash expenses were primarily related to deferred income taxes, change in the
liability for uncertain tax positions, depreciation and amortization, share-based compensation
expense, loan termination fees, and goodwill impairment (see Note 2
to the accompanying consolidated financial statements for further
discussion of this impairment.)
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Our investing activities used cash of $1.5 million and $1.7 million for the six months ended
June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 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 change in expenditures
for or sales of capital equipment in the near future.
Our financing activities provided (used) net cash of ($97,000) and $2.5 million for the six
months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011, our
primary sources of cash were from borrowings under loan agreements and asset-based lending
agreements for both our U.S. and our foreign subsidiaries. Our primary uses of cash for financing
activities were payment of loan amendment fees, dividends, and repayment of borrowings under the
asset-based lending agreements.
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:
| Our wholly-owned U.S. subsidiaries, Digital Recorders, Inc. and TwinVision of North America, Inc. (collectively, the Borrowers), have in place an asset-based lending agreement (as amended, the PNC Agreement) with PNC Bank, National Association (PNC). 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 and is secured by substantially all tangible and intangible U.S. assets of the Company. 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. 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 Eurodollar Rate Loans 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. At June 30, 2011, the outstanding principal balance on the revolving credit facility was approximately $4.2 million and remaining borrowing availability under the revolving credit facility was approximately $1.2 million. |
| Mobitec AB, our wholly-owned Swedish subsidiary, 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 SEK, or approximately $6.0 million (based on exchange rates at June 30, 2011) through August 30, 2011, on which date, under terms of the credit agreements, the maximum borrowing capacity will be reduced by 7.0 million SEK, or approximately $1.1 million (based on exchange rates at June 30, 2011). At June 30, 2011, borrowings due and outstanding under these credit facilities totaled 30.7 million SEK (approximately $4.9 million, based on exchange rates at June 30, 2011). Additional borrowing availability under these agreements at June 30, 2011 amounted to approximately $920,000. We believe we will be able to extend the supplemental overdraft facility that expires on August 30, 2011 to maintain our borrowing availability but can give no assurance of such. These credit agreements renew annually on a calendar-year basis. |
| Mobitec GmbH, our wholly-owned German subsidiary, has a credit facility in place under an agreement with Handelsbanken pursuant to which it may currently borrow up to a maximum of 912,000 EUR (approximately $1.3 million, based on exchange rates at June 30, 2011). At June 30, 2011, borrowings due and outstanding under this credit facility totaled 658,000 EUR (approximately $948,000 based on exchange rates at June 30, 2011) and additional borrowing availability amounted to approximately $365,000. 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. |
The PNC Agreement and the BHC Agreement contain certain financial covenants with which we and
our subsidiaries must comply. One such covenant in the BHC Agreement provides that the aggregate
indebtedness of our foreign subsidiaries, as defined in the BHC Agreement, shall not exceed $7.0
million at any time during or at the end of any fiscal quarter. Due primarily to changes in
foreign currency exchange rates from the quarter ended December 31, 2010 to the quarter ended March
31, 2011, we were not in compliance with this covenant for the quarter ended March 31, 2011, as the
aggregate indebtedness of our foreign subsidiaries exceeded $7.0 million by approximately $127,000.
Had foreign currency exchange rates during the quarter ended March 31, 2011 remained constant with
foreign currency exchange rates as of the end of the prior quarter, the aggregate indebtedness of
our foreign subsidiaries as of March 31, 2011 would have been approximately $432,000 lower than the
amount we reported as of that date and no covenant violation would have occurred. BHC agreed to
waive this covenant violation for the quarter ended March 31, 2011. We were in compliance with all
covenants of the PNC Agreement and BHC Agreement for the quarter ended June 30, 2011. Management
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believes we will be able to comply with the financial covenants of the PNC Agreement and BHC
Agreement in the remaining quarters of 2011 but can give no assurance of such.
Management Conclusion
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. Due to a number of factors including net
losses reported in the last twelve months, borrowing availability on our revolving lines of credit
have been negatively impacted, the Companys working capital has decreased, and we have implemented
a range of cash management procedures with an objective of working within our liquidity and capital
resource constraints. We may be required to seek additional financing to support the working
capital and capital expenditure needs of our operations during the remainder of fiscal year 2011.
In addition, the revolving credit facility under the PNC Agreement and the Term Loan under the BHC
Agreement each mature in April 2012. We anticipate we will not have adequate cash resources from
operations to pay the outstanding debt balances of these two credit facilities on or before their
maturity date. This will require us to seek alternative financing in sufficient amounts and/or
pursue strategic alternatives, any of which will likely be dilutive to existing shareholders. If we are
not successful in these efforts we may be required to significantly curtail our operations, which
would have a material adverse impact on our financial position.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for the
six months ended June 30, 2011 and 2010. However, there can be no assurance that future inflation
would not have an adverse impact upon our future operating results and financial condition.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets,
liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar,
primarily in the Swedish krona, the Euro, the Brazilian real, the Australian dollar, and the Indian
rupee. To prepare our consolidated financial statements, we must translate those assets,
liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result,
increases and decreases in the value of the U.S. dollar against these other currencies will affect
the amount of these items in our consolidated financial statements, even if their value has not
changed in their original currency. This could have significant impact on our results if such
increase or decrease in the value of the U.S. dollar is substantial.
FORWARD-LOOKING STATEMENTS
Forward-looking statements appear throughout this Quarterly Report. We have based these
forward-looking statements on 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 the Risk Factors described in
Part I, Item 1A in our 2010 Annual Report and Part II, Item 1A of this Quarterly Report, as well as
all other cautionary language contained elsewhere in this Quarterly Report, most particularly in
Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operation. In some cases, readers can identify forward-looking statements by the use of words
such as believe, anticipate, expect, opinion, and similar expressions. Readers should be
aware that the occurrence of the events described in these considerations and elsewhere in this
Quarterly Report could have an adverse effect on the business, results of operations or financial
condition of the entity affected.
Forward-looking statements in this Quarterly Report include, without limitation, the following
statements regarding:
| our ability to meet our capital requirements; |
| our ability to meet and maintain our existing debt obligations, including obligations to make current payments under such debt instruments and payments of our domestic line of credit and term loan on or before their April 2012 maturity date; |
| our ability to comply with debt covenant requirements; |
| the sufficiency of our liquidity and capital resources to support current operations for the remainder of 2011; |
| our future cash flow position; |
| recent legislative action affecting the transportation and/or security industry; |
| future legislative action affecting the transportation and/or security industry; |
| the impact of transit funding legislation on the market for our products; |
| the likelihood of passage of new transit funding legislation and when passage of such legislation might occur; |
| the impact of uncertainties in transit funding legislation on the markets we serve; | |
| changes in federal or state funding for transportation and/or security-related funding; |
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| the impact of past and current credit and economic issues in the markets we serve; and |
| our future outlook with respect to the domestic and international markets for our products. |
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
Quarterly Report and in the 2010 Annual Report. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect our analysis, judgment, belief or expectation
only as of the date of this Quarterly Report. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after the date of this
Quarterly Report.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including the
principal executive officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of the design and operation of its disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of the
end of the period covered by this report. Based on this evaluation, the Companys principal
executive officer and principal financial officer concluded that, as of June 30, 2011, the
Companys disclosure controls and procedures are effective in providing reasonable assurance that
information required to be disclosed by the Company in the reports that it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. 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.
ITEM 1A. RISK FACTORS
The following risk factors supplement and/or update the risk factors the Company previously
disclosed under Part I, Item 1A of the 2010 Annual Report filed with the SEC on April 15, 2011.
Risks Related to Indebtedness, Financial Condition and Results of Operations
We may be unable to make payment on our domestic line of credit and term loan which mature in
April 2012. At June 30, 2011, our U.S. companies had outstanding principal balances of
approximately $4.2 million and $4.8 million on a line of credit facility and a term loan,
respectively, both of which mature in April 2012. In addition to the principal balance on the term
loan, our U.S. companies are required to pay a loan termination fee in an amount ranging from $1.0
million to $1.7 million, with the amount of such termination fee dependent upon the date of the
repayment of the term loan balance. We anticipate we will not have adequate cash resources from
operations to pay the outstanding principal balances of these two credit facilities, or the term
loan termination fee, on or before their maturity date. This will require us to seek alternative
financing in sufficient amounts and/or pursue strategic alternatives,
any of which will likely be dilutive
to existing shareholders. If we are not successful in these efforts we may be required to
significantly curtail our
operations, which would have a material adverse impact on our financial position.
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Our substantial debt could adversely affect our financial position, operations and ability to
grow. As of June 30, 2011, we had total debt of approximately $17.1 million. Included in this debt
are $10.0 million under our domestic and European revolving credit facilities, a $4.8 million term
loan due on April 30, 2012, a $178,000 loan due on March 31, 2012, a $1.1 million loan due on
October 30, 2012, a $65,000 loan due on September 7, 2012, a $17,000 loan due on November 7, 2014,
and a $149,000 loan due October 21, 2011. Our domestic revolving credit facility had an
outstanding balance of $4.2 million as of June 30, 2011 and matures in April 2012. Our European
revolving credit facilities had outstanding balances of $4.9 million as of June 30, 2011 under
agreements with a Swedish bank with expiration dates of December 31, 2011 and an outstanding
balance of $948,000 as of June 30, 2011 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:
| 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; | ||
| our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate could be limited; | ||
| we may be more vulnerable to general adverse economic and industry conditions; | ||
| we may be at a disadvantage compared to our competitors that may have less debt than we do; | ||
| it may be more difficult for us to obtain additional financing that may be necessary in connection with our business; | ||
| it may be more difficult for us to implement our business and growth strategies; | ||
| we may have to pay higher interest rates on future borrowings; and | ||
| 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. |
Risks Related to Our Operations and Product Development
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 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. Additionally, it is uncertain what impact the U.S. governments efforts
to decrease expenditures in connection with the recent legislation to increase the nations debt ceiling could have on the amount of
funding that is available for continuing resolutions and any new legislation replacing SAFETEA-LU. 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.
Risks Related to Our Equity Securities
Our failure to maintain the listing requirements of the NASDAQ Capital Market could
result in a delisting of our common stock. On June 10, 2011, we received a letter (the
Notification Letter) from the NASDAQ Stock Market (NASDAQ) notifying us that we no longer meet
NASDAQs continued listing requirement under Listing Rule 5550(a)(2) (the Bid Price Rule). The
Notification Letter stated that the closing bid price of our common stock has been below $1.00 per
share for 30 consecutive business days and that we therefore are not in compliance with the Bid
Price Rule. The Notification Letter stated that we are afforded 180 calendar days, or until
December 7, 2011, to regain compliance with the Bid Price Rule. To regain compliance, the closing
bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive
business days. If we do not regain compliance by December 7, 2011, NASDAQ will provide written
notification to us that our common stock will be subject to delisting from the NASDAQ Capital
Market. We may, however, be eligible for an additional grace period if we satisfy the initial
listing standards (with the exception of the Bid Price Rule) for listing on the NASDAQ Capital
Market. We may also appeal NASDAQs delisting determination to a NASDAQ Hearings Panel.
The delisting of our common stock would likely have a negative effect on the price of our
common stock and would impair the ability of our shareholders to sell or purchase our common stock
when they wish to do so. In the event that our common stock is delisted, we would take actions to
restore our compliance with NASDAQs listing requirements, but we can provide no assurance that any
such action taken by us would allow our common stock to become listed again, stabilize the market
price or improve the liquidity of our common stock, prevent our common stock from violating the Bid
Price Rule or prevent future non-compliance with NASDAQs listing requirements.
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ITEM 6. EXHIBITS
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 | |
10.1
|
Contract A Supplementary Overdraft Facility, dated as of February 25, 2011, by and between Mobitec AB and Svenska Handelsbanken AB (incorporated by reference to the Companys current report on Form 8-K, filed with the SEC on March 3, 2011). | |
10.2
|
Contract A Account with Overdraft Facility, dated as of February 25, 2011, by and between Mobitec AB and Svenska Handelsbanken AB (incorporated by reference to the Companys current report on Form 8-K, filed with the SEC on March 3, 2011). | |
10.3
|
Contract A Supplementary Overdraft Facility, dated as of May 30, 2011, by and between Mobitec AB and Svenska Handelsbanken AB, (English translation) (incorporated by reference to the Companys current report on Form 8-K, filed with the SEC on June 3, 2011). | |
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). |
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Table of Contents
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 | ||||
Signature:
|
||||
By:
|
/s/ Kathleen B. Oher | |||
Title:
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: August 15, 2011
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