##### 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, 2010
 Commission File Number 000-28539
 DRI CORPORATION
 Exact name of Registrant as specified in its Charter)
 North Carolina
    
    56-1362926(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Ide0ntification Number)
 13760 Noel Road, Suite 830
Dallas, Texas 75240  (Address of principal executive offices, Zip Code)
 (214) 378-8992
 þ o
 o o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a
smaller reporting company)Smaller Reporting Company þ o þ
  Common Stock, par value $.10 per share
    
    11,822,515(Class of Common Stock)
    
    Number of Shares




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##### 



DRI CORPORATION AND SUBSIDIARIES
 INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  June 30, 2010 (Unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Operations  Three and Six Months Ended June 30, 2010
and 2009 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2010 and 2009
(Unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    24Item 6.
    
    Exhibits
    
    
    25SIGNATURES
    
    
    26EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 
 June 30, 2010
    
    
    December 31, 2009(Unaudited)
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,125
    
    
    $
    1,800Trade accounts receivable, net
    
    
    19,018
    
    
    
    18,192Current portion of note receivable
    
    
    172
    
    
    
    86Stock subscription receivable
    
    
    
    
    
    
    670Other receivables
    
    
    1,179
    
    
    
    1,645Inventories, net
    
    
    15,182
    
    
    
    13,042Prepaids and other current assets
    
    
    1,614
    
    
    
    1,844Deferred tax assets, net
    
    
    416
    
    
    
    250Total current assets
    
    
    38,706
    
    
    
    37,529Property and equipment, net
    
    
    6,137
    
    
    
    5,266Long-term portion of note receivable
    
    
    
    
    
    
    86Goodwill
    
    
    8,983
    
    
    
    9,793Intangible assets, net
    
    
    622
    
    
    
    728Other assets
    
    
    642
    
    
    
    890Total assets
    
    $
    55,090
    
    
    $
    54,292LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    9,074
    
    
    $
    7,200Loans payable
    
    
    520
    
    
    
    463Current portion of long-term debt
    
    
    5,995
    
    
    
    960Current portion of foreign tax settlement
    
    
    550
    
    
    
    561Accounts payable
    
    
    10,555
    
    
    
    10,099Accrued expenses and other current liabilities
    
    
    6,270
    
    
    
    6,459Preferred stock dividends payable
    
    
    77
    
    
    
    20Total current liabilities
    
    
    33,041
    
    
    
    25,762Long-term debt and capital leases, net
    
    
    1,221
    
    
    
    6,572Foreign tax settlement, long-term
    
    
    116
    
    
    
    294Deferred tax liabilities, net
    
    
    263
    
    
    
    338Liability for uncertain tax positions
    
    
    323
    
    
    
    380Commitments and contingencies (Notes 6 and 7)Shareholders Equity and Noncontrolling InterestsSeries K Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per
share; 500 shares authorized; 319 and
299 shares issued and outstanding at
June 30, 2010 and December 31, 2009,
respectively; redeemable at the
discretion of the Company at any time.
    
    
    1,439
    
    
    
    1,341Series E Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per
share; 80 shares authorized; 80 shares
issued and outstanding at June 30,
2010 and December 31, 2009; redeemable
at the discretion of the Company at
any time.
    
    
    337
    
    
    
    337Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per
share; 725 shares authorized; 500 and
480 shares issued and outstanding at
June 30, 2010 and December 31, 2009,
respectively; redeemable at the
discretion of the Company after five
years from date of issuance.
    
    
    2,218
    
    
    
    2,118Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per
share; 125 shares authorized; 72 and
69 shares issued and outstanding at
June 30, 2010 and December 31, 2009,
respectively; redeemable at the
discretion of the Company after five
years from date of issuance.
    
    
    312
    
    
    
    297Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per
share; 166 shares authorized; 166
shares issued and outstanding at June
30, 2010 and December 31, 2009;
redeemable at the discretion of the
Company at any time.
    
    
    830
    
    
    
    830Common stock, $.10 par value, 25,000,000 shares authorized; 11,822,515 and
11,746,327 shares issued and
outstanding at June 30, 2010 and
December 31, 2009, respectively.
    
    
    1,182
    
    
    
    1,175Additional paid-in capital
    
    
    30,471
    
    
    
    30,393Accumulated other comprehensive income  foreign currency translation
    
    
    540
    
    
    
    1,976Accumulated deficit
    
    
    (18,283
    )
    
    
    (18,276
    )Total DRI shareholders equity
    
    
    19,046
    
    
    
    20,191Noncontrolling interests
    
    
    1,080
    
    
    
    755Total shareholders equity
    
    
    20,126
    
    
    
    20,946Total liabilities and shareholders
equity
    
    $
    55,090
    
    
    $
    54,292
  3




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    25,559
    
    
    $
    21,514
    
    
    $
    47,688
    
    
    $
    34,716Cost of sales
    
    
    17,789
    
    
    
    14,844
    
    
    
    34,594
    
    
    
    24,360Gross profit
    
    
    7,770
    
    
    
    6,670
    
    
    
    13,094
    
    
    
    10,356Operating expensesSelling, general and administrative
    
    
    5,834
    
    
    
    5,155
    
    
    
    11,815
    
    
    
    9,628Research and development
    
    
    158
    
    
    
    189
    
    
    
    266
    
    
    
    268Total operating expenses
    
    
    5,992
    
    
    
    5,344
    
    
    
    12,081
    
    
    
    9,896Operating income
    
    
    1,778
    
    
    
    1,326
    
    
    
    1,013
    
    
    
    460Other income (expense)
    
    
    15
    
    
    
    (106
    )
    
    
    14
    
    
    
    (112
    )Foreign currency gain
    
    
    55
    
    
    
    149
    
    
    
    144
    
    
    
    24Interest expense
    
    
    (362
    )
    
    
    (365
    )
    
    
    (722
    )
    
    
    (701
    )Total other income and expense
    
    
    (292
    )
    
    
    (322
    )
    
    
    (564
    )
    
    
    (789
    )Income (loss) before income tax (expense) benefit
    
    
    1,486
    
    
    
    1,004
    
    
    
    449
    
    
    
    (329
    )Income tax (expense) benefit
    
    
    (383
    )
    
    
    19
    
    
    
    (131
    )
    
    
    38Net income (loss)
    
    
    1,103
    
    
    
    1,023
    
    
    
    318
    
    
    
    (291
    )Less: Net (income) loss attributable to noncontrolling interests, net of tax
    
    
    (223
    )
    
    
    130
    
    
    
    (325
    )
    
    
    371Net income (loss) attributable to DRI Corporation
    
    
    880
    
    
    
    1,153
    
    
    
    (7
    )
    
    
    80Provision for preferred stock dividends
    
    
    (117
    )
    
    
    (78
    )
    
    
    (225
    )
    
    
    (154
    )Net income (loss) applicable to common shareholders of DRI Corporation
    
    $
    763
    
    
    $
    1,075
    
    
    $
    (232
    )
    
    $
    (74
    )Net income (loss) per share applicable to common shareholders of DRI CorporationBasic
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Diluted
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Weighted average number of common shares and common
share equivalents outstandingBasic
    
    
    11,797,095
    
    
    
    11,498,254
    
    
    
    11,775,348
    
    
    
    11,485,806Diluted
    
    
    14,322,759
    
    
    
    13,228,690
    
    
    
    11,775,348
    
    
    
    11,485,806
  4




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Six Months Ended June 30,2010
    
    
    2009Cash flows from operating activitiesNet income (loss)
    
    $
    318
    
    
    $
    (291
    )Adjustments to reconcile net income (loss) to net cash
used in operating activitiesDeferred income taxes
    
    
    (591
    )
    
    
    62Change in liability for uncertain tax positions
    
    
    392
    
    
    
    (1
    )Depreciation and amortization of property and equipment
    
    
    634
    
    
    
    475Amortization of intangible assets
    
    
    54
    
    
    
    59Amortization of deferred financing costs
    
    
    277
    
    
    
    225Amortization of debt discount
    
    
    55
    
    
    
    55Change in fair value of warrant liability
    
    
    
    
    
    
    110Loan termination fee accrual
    
    
    117
    
    
    
    123Bad debt expense
    
    
    22
    
    
    
    83Stock issued in lieu of cash compensation
    
    
    59
    
    
    
    47Stock-based compensation expense
    
    
    184
    
    
    
    172Write-down of inventory for obsolescence
    
    
    89
    
    
    
    102Loss on sale of fixed assets
    
    
    2
    
    
    
    13Other, primarily effect of foreign currency gain
    
    
    (244
    )
    
    
    (76
    )Changes in operating assets and liabilitiesIncrease in trade accounts receivable
    
    
    (1,544
    )
    
    
    (5,306
    )(Increase) decrease in other receivables
    
    
    3
    
    
    
    (227
    )Increase in inventories
    
    
    (2,764
    )
    
    
    (1,444
    )(Increase) decrease in prepaids and other current assets
    
    
    460
    
    
    
    (317
    )Increase in other assets
    
    
    (24
    )
    
    
    (21
    )Increase in accounts payable
    
    
    961
    
    
    
    5,338Increase in accrued expenses
    
    
    299
    
    
    
    21Decrease in foreign tax settlement
    
    
    (163
    )
    
    
    (134
    )Net cash used in operating activities
    
    
    (1,404
    )
    
    
    (932
    )Cash flows from investing activitiesPurchases of property and equipment
    
    
    (449
    )
    
    
    (74
    )Investments in software development
    
    
    (1,244
    )
    
    
    (912
    )Net cash used in investing activities
    
    
    (1,693
    )
    
    
    (986
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    51,477
    
    
    
    36,584Principal payments on bank borrowings and lines of credit
    
    
    (49,667
    )
    
    
    (34,823
    )Proceeds from issuance of Preferred stock, net of costs
    
    
    716
    
    
    
    Payment of loan amendment fees
    
    
    (5
    )
    
    
    Payment of dividends on Preferred stock
    
    
    (53
    )
    
    
    (52
    )Net cash provided by financing activities
    
    
    2,468
    
    
    
    1,709Effect of exchange rate changes on cash and cash equivalents
    
    
    (46
    )
    
    
    25Net decrease in cash and cash equivalents
    
    
    (675
    )
    
    
    (184
    )Cash and cash equivalents at beginning of period
    
    
    1,800
    
    
    
    598Cash and cash equivalents at end of period
    
    $
    1,125
    
    
    $
    414
 5




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Six Months Ended June 30,2010
    
    
    2009(In thousands)Supplemental disclosures of non-cash investing and financing activities:Preferred stock issued for services
    
    $
    120
    
    
    $
    Preferred stock dividends
    
    $
    115
    
    
    $
    100Purchase of equipment under capital lease obligation
    
    $
    
    
    
    $
    27Increase in fair value of warrants due to modification
    
    $
    
    
    
    $
    56
  6




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DRI CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (TM)
  (1) BASIS OF PRESENTATION AND DISCLOSURE
     Product Warranties
  7




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Six Months ended June 30,2010
    
    
    2009(In thousands)Balance at beginning of period
    
    $
    805
    
    
    $
    495Additions charged to costs and expenses
    
    
    238
    
    
    
    117Deductions
    
    
    (96
    )
    
    
    (141
    )Foreign exchange translation loss
    
    
    11
    
    
    
    29Balance at end of period
    
    $
    958
    
    
    $
    500
 Recent Accounting Pronouncements
  Fair Value of Assets and Liabilities
  Fair Value of Financial Instruments
  (2) GOODWILL AND OTHER INTANGIBLE ASSETS
  (3) INVENTORIES
 June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials and system components
    
    $
    10,765
    
    
    $
    8,924Work in process
    
    
    16
    
    
    
    35Finished goods
    
    
    4,401
    
    
    
    4,083Total inventories
    
    $
    15,182
    
    
    $
    13,042
 (4) PROPERTY AND EQUIPMENT
 EstimatedDepreciable
    
    June 30,
    
    
    December 31,Lives (years)
    
    2010
    
    
    2009(In thousands)Leasehold improvements
    
    3 - 10
    
    $
    306
    
    
    $
    306Automobiles
    
    4 - 6
    
    
    399
    
    
    
    387Computer and telecommunications equipment
    
    2 - 5
    
    
    1,152
    
    
    
    1,137Software
    
    5
    
    
    6,826
    
    
    
    7,163Test equipment
    
    3 - 7
    
    
    175
    
    
    
    144Furniture and fixtures
    
    2 - 10
    
    
    2,532
    
    
    
    2,331Software projects in progress
    
    
    
    
    2,401
    
    
    
    1,24513,791
    
    
    
    12,713Less accumulated depreciation and
amortization
    
    
    
    
    (7,654
    )
    
    
    (7,447
    )Total property and equipment, net
    
    
    
    $
    6,137
    
    
    $
    5,266
 8




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(5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Salaries, commissions, and benefits
    
    $
    2,316
    
    
    $
    2,024Taxes  payroll, sales, income, and other
    
    
    1,753
    
    
    
    1,967Warranties
    
    
    958
    
    
    
    805Current portion of capital leases
    
    
    14
    
    
    
    15Interest payable
    
    
    116
    
    
    
    166Deferred revenue
    
    
    515
    
    
    
    557Customer rebates and credits
    
    
    259
    
    
    
    404Other
    
    
    339
    
    
    
    521Total accrued expenses
    
    $
    6,270
    
    
    $
    6,459
 (6) LINES OF CREDIT AND LOANS PAYABLE
 (a) Domestic line of credit and loan payable
    9




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b) International lines of credit and loans payable
         10




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June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Line of credit with PNC Bank,
National Association dated June 30,
2008; payable in full June 30, 2011;
secured by all tangible and
intangible U.S. assets of the
Company; bears average interest rate
of 5.00% and 5.00% in 2010 and 2009,
respectively.
    
    $
    4,148
    
    
    $
    3,786Line of credit with Svenska
Handelsbanken AB; renews annually on
a calendar-year basis; secured by
certain assets of the Swedish
subsidiary, Mobitec AB; bears
average interest rate of 4.05% and
3.53% in 2010 and 2009,
respectively.
    
    
    1,983
    
    
    
    Line of credit with Svenska
Handelsbanken AB; renews annually on
a calendar-year basis; secured by
accounts receivable of the Swedish
subsidiary, Mobitec AB; bears
average interest rate of 4.06% and
4.83% in 2010 and 2009,
respectively.
    
    
    2,179
    
    
    
    2,047Line 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 5.00%
and 3.48% in 2010 and 2009,
respectively.
    
    
    764
    
    
    
    1,367Total lines of credit
    
    $
    9,074
    
    
    $
    7,200
 (7) LONG-TERM DEBT
 June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Term loan with BHC Interim Funding III, L.P., dated June 30, 2008;
payable in full June 30, 2011; secured by substantially all tangible
and intangible assets of the Company; bears interest rate of 12.75%.
    
    $
    4,750
    
    
    $
    4,750Term loan with Svenska Handelsbanken AB, dated June 30, 2008; payable
in quarterly installments of $48,000; secured by accounts receivable
and inventory of the Swedish subsidiary, Mobitec AB; bears average
interest rate of 5.72% and 7.32% in 2010 and 2009, respectively.
    
    
    337
    
    
    
    470Term loan with Roberto Demore, dated August 31, 2009; payable in
quarterly installments of $162,500; unsecured; bears interest rate of
5.0%.
    
    
    1,625
    
    
    
    1,950Term loan with HDFC Bank, dated October 5, 2009; payable in monthly
installments of $4,488, inclusive of interest at 8.0%.
    
    
    111
    
    
    
    132Term loan with HDFC Bank, dated November 14, 2009; payable in monthly
installments of $484, inclusive of interest at 9.51%.
    
    
    21
    
    
    
    22Total long-term debt
    
    
    6,844
    
    
    
    7,324Term loan termination fee accrual
    
    
    463
    
    
    
    346Less current portion
    
    
    (5,995
    )
    
    
    (960
    )Less debt discount
    
    
    (111
    )
    
    
    (166
    )1,201
    
    
    
    6,544Long-term portion of capital leases
    
    
    20
    
    
    
    28Total long-term debt and capital leases, less current portion
    
    $
    1,221
    
    
    $
    6,572
 11




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(8) PREFERRED STOCK
  (9) PER SHARE AMOUNTS
  Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited)(In thousands, except share amounts)Net income (loss) applicable to common shareholders of DRI Corporation
    
    $
    763
    
    
    $
    1,075
    
    
    
    (232
    )
    
    $
    (74
    )Effect of dilutive securities on net income (loss) of DRI Corporation:Convertible preferred stock
    
    
    106
    
    
    
    78
    
    
    
    
    
    
    
    Net income (loss) applicable to common shareholders of DRI
Corporation, assuming conversions
    
    $
    869
    
    
    $
    1,153
    
    
    
    (232
    )
    
    $
    (74
    )Weighted average shares outstanding  Basic
    
    
    11,797,095
    
    
    
    11,498,254
    
    
    
    11,775,348
    
    
    
    11,485,806Effect of dilutive securities on shares outstanding:Options
    
    
    39,917
    
    
    
    391
    
    
    
    
    
    
    
    Warrants
    
    
    123,971
    
    
    
    42,785
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    2,361,776
    
    
    
    1,687,260
    
    
    
    
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    14,322,759
    
    
    
    13,228,690
    
    
    
    11,775,348
    
    
    
    11,485,806
  12




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(10) SHAREHOLDERS EQUITY, COMPREHENSIVE INCOME (LOSS) AND NONCONTROLLING INTERESTS
  DRI Shareholders EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Interests
    
    
    EquityBalance as of December 31, 2009
    
    $
    4,923
    
    
    $
    1,175
    
    
    $
    30,393
    
    
    $
    (18,276
    )
    
    $
    1,976
    
    
    $
    20,191
    
    
    $
    755
    
    
    $
    20,946Issuance of common stock
    
    
    
    
    
    
    3
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    59Issuance of Series K Preferred Stock, net of issuance costs
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    165Issuance of Series G Preferred Stock dividend
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    100Issuance of Series H Preferred Stock dividend
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Conversion of Series K Preferred Stock, net of issuance costs
    
    
    (67
    )
    
    
    4
    
    
    
    63Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    (225
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    184Comprehensive income (loss):Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    325
    
    
    
    318Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,436
    )
    
    
    (1,436
    )
    
    
    
    
    
    
    (1,436
    )Balance as of June 30, 2010
    
    $
    5,136
    
    
    $
    1,182
    
    
    $
    30,471
    
    
    $
    (18,283
    )
    
    $
    540
    
    
    $
    19,046
    
    
    $
    1,080
    
    
    $
    20,126
 DRI Shareholders EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Interests
    
    
    EquityBalance as of December 31, 2008
    
    $
    3,765
    
    
    $
    1,147
    
    
    $
    32,706
    
    
    $
    (20,398
    )
    
    $
    512
    
    
    $
    17,732
    
    
    $
    852
    
    
    $
    18,584Cumulative effect of reclassification
of warrants (ASC 815-40)
    
    
    
    
    
    
    
    
    
    
    (333
    )
    
    
    292
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )Balance as of January 1, 2009, as adjusted
    
    $
    3,765
    
    
    $
    1,147
    
    
    $
    32,373
    
    
    $
    (20,106
    )
    
    $
    512
    
    
    $
    17,691
    
    
    $
    852
    
    
    $
    18,543Issuance of common stock
    
    
    
    
    
    
    4
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    46Issuance of Series G Preferred Stock dividend
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Issuance of Series H Preferred Stock dividend
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    (154
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    172Comprehensive income (loss):Net Income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80
    
    
    
    (371
    )
    
    
    (291
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    337
    
    
    
    
    
    
    
    337Balance as of June 30, 2009
    
    $
    3,865
    
    
    $
    1,151
    
    
    $
    32,433
    
    
    $
    (20,026
    )
    
    $
    849
    
    
    $
    18,272
    
    
    $
    481
    
    
    $
    18,753
 COMPREHENSIVE INCOME (LOSS)
 June 30,2010
    
    
    2009(In thousands)Net income (loss)
    
    $
    318
    
    
    $
    (291
    )Other comprehensive income (loss), net of tax:Foreign currency translation adjustment, net of tax
    
    
    (1,436
    )
    
    
    337Total other comprehensive income (loss), net of tax
    
    
    (1,436
    )
    
    
    337Comprehensive income (loss)
    
    
    (1,118
    )
    
    
    46Comprehensive income attributable to the noncontrolling interest
    
    
    79
    
    
    
    16Comprehensive income (loss) attributable to DRI Corporation
    
    $
    (1,039
    )
    
    $
    62
 13




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##### Table of Contents



(11) SEGMENT AND GEOGRAPHIC INFORMATION
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net salesNorth America
    
    $
    9,888
    
    
    $
    8,654
    
    
    $
    16,946
    
    
    $
    15,990Europe
    
    
    6,900
    
    
    
    9,302
    
    
    
    11,563
    
    
    
    13,267Asia-Pacific
    
    
    5,194
    
    
    
    1,520
    
    
    
    13,208
    
    
    
    2,447Middle East
    
    
    136
    
    
    
    58
    
    
    
    359
    
    
    
    100South America
    
    
    3,441
    
    
    
    1,980
    
    
    
    5,612
    
    
    
    2,912$
    25,559
    
    
    $
    21,514
    
    
    $
    47,688
    
    
    $
    34,716
 June 30,2010
    
    
    December 31,(Unaudited)
    
    
    2009(In thousands)Long-lived assetsNorth America
    
    $
    4,002
    
    
    $
    3,670Europe
    
    
    2,098
    
    
    
    1,948Asia-Pacific
    
    
    344
    
    
    
    313South America
    
    
    335
    
    
    
    225$
    6,779
    
    
    $
    6,156
 (12) INCOME TAXES
    (13) SOFTWARE DEVELOPMENT
  (14) SUBSEQUENT EVENTS
  14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business  General
   Critical Accounting Policies and Estimates
  
    
    Allowance for doubtful accounts;
    
    Inventory valuation;
    
    Warranty reserve;
    
    Intangible assets and goodwill;
    
    Income taxes, including deferred tax assets;
    
    Revenue recognition; and
    
    Stock-based compensation.
   Recent Accounting Pronouncements
  Results of Operations
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Three Months Ended June 30,
    
    Six Months Ended June 30,2010
    
    2009
    
    2010
    
    2009Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    69.6
    
    
    
    69.0
    
    
    
    72.5
    
    
    
    70.2Gross profit
    
    
    30.4
    
    
    
    31.0
    
    
    
    27.5
    
    
    
    29.8Operating expenses:Selling, general and administrative
    
    
    22.8
    
    
    
    24.0
    
    
    
    24.8
    
    
    
    27.7Research and development
    
    
    0.6
    
    
    
    0.9
    
    
    
    0.6
    
    
    
    0.8Total operating expenses
    
    
    23.4
    
    
    
    24.9
    
    
    
    25.4
    
    
    
    28.5Operating income
    
    
    7.0
    
    
    
    6.1
    
    
    
    2.1
    
    
    
    1.3Total other income and expense
    
    
    (1.1
    )
    
    
    (1.5
    )
    
    
    (1.2
    )
    
    
    (2.3
    )Income (loss) before income tax (expense) benefit
    
    
    5.9
    
    
    
    4.6
    
    
    
    0.9
    
    
    
    (1.0
    )Income tax (expense) benefit
    
    
    (1.5
    )
    
    
    0.1
    
    
    
    (0.3
    )
    
    
    0.1Net income (loss)
    
    
    4.4
    
    
    
    4.7
    
    
    
    0.6
    
    
    
    (0.9
    )Net (income) loss attributable to noncontrolling interests
    
    
    (0.9
    )
    
    
    0.6
    
    
    
    (0.7
    )
    
    
    1.1Net income (loss) attributable to DRI Corporation
    
    
    3.5
    %
    
    
    5.3
    %
    
    
    (0.1
    )%
    
    
    0.2
    %
 COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
 Net Sales and Gross Profit.
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Selling, General and Administrative.
 Research and Development .
 Operating Income.
 Other Income and Expense.
 Income Tax Benefit (Expense).
 Net Income (Loss) Applicable to Common Shareholders.
 COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 Net Sales and Gross Profit.
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Selling, General and Administrative.
 Research and Development .
 18




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Operating Income.
 Other Income and Expense.
 Income Tax Benefit.
 Net Income (Loss) Applicable to Common Shareholders.
 Industry and Market Overview
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OUR LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows for the Six Months Ended June 30, 2010 and 2009
    Significant Financing Arrangements
  
    
    Our wholly-owned subsidiaries Digital Recorders, Inc. and TwinVision of North
America, Inc. (collectively, the Borrowers) have in place a three-year, 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,
 20




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##### Table of Contents



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 a Eurodollar
Rate Loan and (b) the Domestic Rate plus 1.75% for Domestic Rate Loans. Interest is calculated
on the principal amount of borrowings outstanding, subject to a minimum principal amount of
$3.5 million. The PNC Agreement contains certain covenants and provisions with which we and
the Borrowers must comply on a quarterly basis. At June 30, 2010, the outstanding principal
balance on the revolving credit facility was approximately $4.1 million and remaining
borrowing availability under the revolving credit facility was approximately $1.8 million.
    
    Mobitec AB has credit facilities in place under agreements with Svenska
Handelsbanken AB (Handelsbanken) pursuant to which it may currently borrow up to a maximum
of 32.5 million krona, or approximately US$4.2 million (based on exchange rates at June 30,
2010) through October 31, 2010, on which date, under terms of the credit agreements, the
maximum borrowing capacity will be reduced by 8.5 million krona, or approximately US$1.1
million (based on exchange rates at June 30, 2010). At June 30, 2010, borrowings due and
outstanding under these credit facilities totaled 32.5 million krona (approximately US$4.2
million, based on exchange rates at June 30, 2010). Additional borrowing availability under
these agreements at June 30, 2010 amounted to approximately US$4,000. These credit agreements
renew annually on a calendar-year basis.
    
    Mobitec GmbH has a credit facility in place under an agreement with Handelsbanken
pursuant to which it could borrow up to a maximum of 1.4 million Euro (approximately US$1.7
million, based on exchange rates at June 30, 2010) through April 30, 2010, on which date the
borrowing capacity was reduced by 500,000 Euro to 912,000 Euro (approximately US$1.1 million,
based on exchange rates at June 30, 2010). At June 30, 2010, borrowings due and outstanding
under this credit facility totaled 625,000 Euro (approximately US$764,000, based on exchange
rates at June 30, 2010) and additional borrowing availability amounted to approximately
US$350,000. The agreement under which this credit facility is extended has an open-ended
term.
  Management Conclusion
  21




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Impact of Inflation
  Foreign currency translation
  FORWARD-LOOKING STATEMENTS
   
    
    our ability to meet our capital requirements;
    
    our ability to meet and maintain our existing debt obligations, including obligations to
make payments under such debt instruments;
    
    our ability to comply with debt covenant requirements;
    
    the sufficiency of our liquidity and capital resources to support current operations for
the remainder of 2010;
    
    expected revenue growth in our domestic and international operations and increased
production efforts to meet such expected growth;
    
    our ability to secure additional financing on commercially reasonable terms;
    
    our ability to extend, renew or refinance existing debt on commercially reasonable terms;
    
    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 and stimulus 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;
    
    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.
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  22




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Internal Control-Integrated Framework
   Material Weakness  Mobitec Brazil Ltda.
  Material Weakness  Revenue Recognition.
 23




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Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risks Related to Indebtedness, Financial Condition and Results of Operations
 Our substantial debt could adversely affect our financial position, operations and ability to
grow.
 
    
    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.
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ITEM 6. EXHIBITS
  Exhibit No.
    
    Document10.1
    
    Third Payment Extension Agreement, dated as of April 19, 2010,
by and between DRI Corporation and Digital Audio Corporation
(incorporated herein by reference to the Companys current
report on Form 8-K, filed with the SEC on April 23, 2010)10.2
    
    Executive Employment Agreement by and between DRI Corporation
and Kathleen Oher, executed June 17, 2010 (incorporated herein
by reference to the Companys current report on Form 8-K,
filed with the SEC on June 18, 2010)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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SIGNATURES
  DRI CORPORATION
 Signature:
    /s/ Kathleen B. OherBy:
    Kathleen B. OherTitle:
    Chief Financial Officer (Principal Financial and Accounting Officer) Date:
 26