##### 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 September 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)
    
    Identification 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 o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
 o þ
  Common Stock, par value $.10 per share
    
    11,838,873(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  September 30, 2010 (Unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended September 30,
2010 and 2009 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 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
    
    
    16Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 5.
Other Information
    
    
    27Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30EX-10.6EX-10.7EX-31.1EX-31.2EX-32.1EX-32.2
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
  
 
 September 30, 2010
    
    
    December 31, 2009(Unaudited)
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    984
    
    
    $
    1,800Trade accounts receivable, net
    
    
    17,260
    
    
    
    18,192Current portion of note receivable
    
    
    86
    
    
    
    86Stock subscription receivable
    
    
    
    
    
    
    670Other receivables
    
    
    344
    
    
    
    822Inventories, net
    
    
    16,247
    
    
    
    13,042Prepaids and other current assets
    
    
    3,057
    
    
    
    2,667Deferred tax assets, net
    
    
    459
    
    
    
    250Total current assets
    
    
    38,437
    
    
    
    37,529Property and equipment, net
    
    
    6,950
    
    
    
    5,266Long-term portion of note receivable
    
    
    
    
    
    
    86Goodwill
    
    
    10,478
    
    
    
    9,793Intangible assets, net
    
    
    685
    
    
    
    728Other assets
    
    
    540
    
    
    
    890Total assets
    
    $
    57,090
    
    
    $
    54,292LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    8,478
    
    
    $
    7,200Loans payable
    
    
    297
    
    
    
    463Current portion of long-term debt
    
    
    6,133
    
    
    
    960Current portion of foreign tax settlement
    
    
    587
    
    
    
    561Accounts payable
    
    
    10,218
    
    
    
    10,099Accrued expenses and other current liabilities
    
    
    5,950
    
    
    
    6,459Preferred stock dividends payable
    
    
    21
    
    
    
    20Total current liabilities
    
    
    31,684
    
    
    
    25,762Long-term debt and capital leases, net
    
    
    1,204
    
    
    
    6,572Foreign tax settlement, long-term
    
    
    31
    
    
    
    294Deferred tax liabilities, net
    
    
    336
    
    
    
    338Liability for uncertain tax positions
    
    
    557
    
    
    
    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; 475 shares authorized; 439 and
299 shares issued and outstanding at September 30, 2010 and December 31, 2009,
respectively; redeemable at the discretion of the Company at any time.
    
    
    1,957
    
    
    
    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 September 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; 518 and 480
shares issued and outstanding at September 30, 2010 and December 31, 2009,
respectively; redeemable at the discretion of the Company after five years from date
of issuance.
    
    
    2,308
    
    
    
    2,118Series H Redeemable, Convertible Preferred Stock, $.10 par value, liquidation
preference of $5,000 per share; 125 shares authorized; 73 and 69 shares issued and
outstanding at September 30, 2010 and December 31, 2009, respectively; redeemable at
the discretion of the Company after five years from date of issuance.
    
    
    317
    
    
    
    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 September 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; 11,838,873 and
11,746,327 shares issued and outstanding at September 30, 2010 and December 31, 2009,
respectively.
    
    
    1,184
    
    
    
    1,175Additional paid-in capital
    
    
    30,440
    
    
    
    30,393Accumulated other comprehensive income  foreign currency translation
    
    
    3,298
    
    
    
    1,976Accumulated deficit
    
    
    (18,672
    )
    
    
    (18,276
    )Total DRI shareholders equity
    
    
    21,999
    
    
    
    20,191Noncontrolling interests
    
    
    1,279
    
    
    
    755Total shareholders equity
    
    
    23,278
    
    
    
    20,946Total liabilities and shareholders equity
    
    $
    57,090
    
    
    $
    54,292
  3




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009 (Note 1)
    
    
    2010
    
    
    2009 (Note 1)Net sales
    
    $
    19,860
    
    
    $
    21,555
    
    
    $
    67,548
    
    
    $
    56,271Cost of sales
    
    
    13,352
    
    
    
    14,388
    
    
    
    47,946
    
    
    
    38,748Gross profit
    
    
    6,508
    
    
    
    7,167
    
    
    
    19,602
    
    
    
    17,523Operating expensesSelling, general and administrative
    
    
    5,726
    
    
    
    5,000
    
    
    
    17,541
    
    
    
    14,628Research and development
    
    
    113
    
    
    
    160
    
    
    
    379
    
    
    
    428Total operating expenses
    
    
    5,839
    
    
    
    5,160
    
    
    
    17,920
    
    
    
    15,056Operating income
    
    
    669
    
    
    
    2,007
    
    
    
    1,682
    
    
    
    2,467Other expense
    
    
    (15
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    (120
    )Foreign currency loss
    
    
    (350
    )
    
    
    (343
    )
    
    
    (206
    )
    
    
    (319
    )Interest expense
    
    
    (394
    )
    
    
    (358
    )
    
    
    (1,116
    )
    
    
    (1,059
    )Total other expense
    
    
    (759
    )
    
    
    (709
    )
    
    
    (1,323
    )
    
    
    (1,498
    )Income (loss) before income tax expense
    
    
    (90
    )
    
    
    1,298
    
    
    
    359
    
    
    
    969Income tax expense
    
    
    (100
    )
    
    
    (212
    )
    
    
    (231
    )
    
    
    (174
    )Net income (loss)
    
    
    (190
    )
    
    
    1,086
    
    
    
    128
    
    
    
    795Less: Net (income) loss attributable to noncontrolling interests, net of tax
    
    
    (199
    )
    
    
    (164
    )
    
    
    (524
    )
    
    
    207Net income (loss) attributable to DRI Corporation
    
    
    (389
    )
    
    
    922
    
    
    
    (396
    )
    
    
    1,002Provision for preferred stock dividends
    
    
    (156
    )
    
    
    (80
    )
    
    
    (381
    )
    
    
    (234
    )Net income (loss) applicable to common shareholders of DRI Corporation
    
    $
    (545
    )
    
    $
    842
    
    
    $
    (777
    )
    
    $
    768Net income (loss) per share applicable to common shareholders of DRI CorporationBasic
    
    $
    (0.05
    )
    
    $
    0.07
    
    
    $
    (0.07
    )
    
    $
    0.07Diluted
    
    $
    (0.05
    )
    
    $
    0.07
    
    
    $
    (0.07
    )
    
    $
    0.07Weighted average number of common shares and common
share equivalents outstandingBasic
    
    
    11,826,249
    
    
    
    11,522,979
    
    
    
    11,792,501
    
    
    
    11,498,333Diluted
    
    
    11,826,249
    
    
    
    13,395,830
    
    
    
    11,792,501
    
    
    
    11,566,882
  4




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Nine Months Ended September 30,2010
    
    
    2009 (Note 1)Cash flows from operating activitiesNet income
    
    $
    128
    
    
    $
    795Adjustments to reconcile net income to net cash
provided by operating activitiesDeferred income taxes
    
    
    (203
    )
    
    
    7Change in liability for uncertain tax positions
    
    
    100
    
    
    
    (29
    )Depreciation and amortization of property and equipment
    
    
    990
    
    
    
    750Amortization of intangible assets
    
    
    82
    
    
    
    87Amortization of deferred financing costs
    
    
    417
    
    
    
    346Amortization of debt discount
    
    
    83
    
    
    
    83Change in fair value of warrant liability
    
    
    
    
    
    
    110Loan termination fee accrual
    
    
    176
    
    
    
    184Bad debt expense
    
    
    268
    
    
    
    107Stock issued in lieu of cash compensation
    
    
    90
    
    
    
    74Stock-based compensation expense
    
    
    279
    
    
    
    269Write-down of inventory for obsolescence
    
    
    114
    
    
    
    133Loss on sale of fixed assets
    
    
    24
    
    
    
    14Other, primarily effect of foreign currency loss
    
    
    140
    
    
    
    291Changes in operating assets and liabilities(Increase) decrease in trade accounts receivable
    
    
    1,071
    
    
    
    (3,782
    )(Increase) decrease in other receivables
    
    
    441
    
    
    
    (960
    )Increase in inventories
    
    
    (3,591
    )
    
    
    (1,962
    )(Increase) decrease in prepaids and other current assets
    
    
    484
    
    
    
    (410
    )Increase in other assets
    
    
    (26
    )
    
    
    (35
    )Increase (decrease) in accounts payable
    
    
    (5
    )
    
    
    5,991Increase (decrease) in accrued expenses and other current liabilities
    
    
    (370
    )
    
    
    970Decrease in foreign tax settlement
    
    
    (248
    )
    
    
    (449
    )Net cash provided by operating activities
    
    
    444
    
    
    
    2,584Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    
    
    
    
    3Purchases of property and equipment
    
    
    (582
    )
    
    
    (111
    )Investments in software development
    
    
    (1,872
    )
    
    
    (1,495
    )Net cash used in investing activities
    
    
    (2,454
    )
    
    
    (1,603
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    75,112
    
    
    
    59,676Principal payments on bank borrowings and lines of credit
    
    
    (75,025
    )
    
    
    (59,799
    )Proceeds from issuance of Preferred stock, net of costs
    
    
    1,268
    
    
    
    Payment of loan fees
    
    
    (15
    )
    
    
    (79
    )Payment of dividends on Preferred stock
    
    
    (169
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,171
    
    
    
    (202
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    23
    
    
    
    175Net increase (decrease) in cash and cash equivalents
    
    
    (816
    )
    
    
    954Cash and cash equivalents at beginning of period
    
    
    1,800
    
    
    
    598Cash and cash equivalents at end of period
    
    $
    984
    
    
    $
    1,552
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Nine Months Ended September 30,2010
    
    
    2009(In thousands)Supplemental disclosures of non-cash investing and financing activities:Preferred stock issued for services
    
    $
    120
    
    
    $
    Preferred stock dividends
    
    $
    210
    
    
    $
    155Purchase of equipment under capital lease obligation
    
    $
    49
    
    
    $
    27Increase in fair value of warrants due to modification
    
    $
    
    
    
    $
    67Acquisition of noncontrolling interest under short and long-term debt
obligations
    
    $
    
    
    
    $
    2,950
  6




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




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Nine Months ended September 30,2010
    
    
    2009(In thousands)Balance at beginning of period
    
    $
    805
    
    
    $
    495Additions charged to costs and expenses
    
    
    238
    
    
    
    173Deductions
    
    
    (257
    )
    
    
    (155
    )Foreign exchange translation loss
    
    
    87
    
    
    
    67Balance at end of period
    
    $
    873
    
    
    $
    580
 Recent Accounting Pronouncements
  Fair Value of Assets and Liabilities
  Fair Value of Financial Instruments
  Non-monetary Transactions
  (2) GOODWILL AND OTHER INTANGIBLE ASSETS
  (3) INVENTORIES
 September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials and system components
    
    $
    12,401
    
    
    $
    8,924Work in process
    
    
    17
    
    
    
    35Finished goods
    
    
    3,829
    
    
    
    4,083Total inventories
    
    $
    16,247
    
    
    $
    13,042
 8




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##### Table of Contents



(4) PROPERTY AND EQUIPMENT
 EstimatedDepreciable
    
    
    September 30,
    
    
    December 31,Lives (years)
    
    
    2010
    
    
    2009(In thousands)Leasehold improvements
    
    
    3-10
    
    
    $
    359
    
    
    $
    306Automobiles
    
    
    4-6
    
    
    
    397
    
    
    
    387Computer and telecommunications equipment
    
    
    2-5
    
    
    
    1,213
    
    
    
    1,137Software
    
    
    5
    
    
    
    7,937
    
    
    
    7,163Test equipment
    
    
    3-7
    
    
    
    181
    
    
    
    144Furniture and fixtures
    
    
    2-10
    
    
    
    2,840
    
    
    
    2,331Software projects in progress
    
    
    
    
    
    
    2,648
    
    
    
    1,24515,575
    
    
    
    12,713Less accumulated depreciation and amortization
    
    
    
    
    
    
    (8,625
    )
    
    
    (7,447
    )Total property and equipment, net
    
    
    
    
    
    $
    6,950
    
    
    $
    5,266
 (5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Salaries, commissions, and benefits
    
    $
    2,308
    
    
    $
    2,024Taxes  payroll, sales, income, and other
    
    
    1,336
    
    
    
    1,967Warranties
    
    
    873
    
    
    
    805Current portion of capital leases
    
    
    16
    
    
    
    15Interest payable
    
    
    125
    
    
    
    166Deferred revenue
    
    
    528
    
    
    
    557Customer rebates and credits
    
    
    357
    
    
    
    404Other
    
    
    407
    
    
    
    521Total accrued expenses and other current liabilities
    
    $
    5,950
    
    
    $
    6,459
 (6) LINES OF CREDIT AND LOANS PAYABLE
 (a) Domestic line of credit and loan payable
   9




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Fixed ChargeFiscal Quarter Ending:
    
    Coverage Ratio:
    
    Leverage Ratio:
    
    EBITDA:September 30, 2010
    
    
    0.70 to 1.0
    
    
    
    8.85 to 1.0
    
    
    $
    4,750,000December 31, 2010
    
    
    0.85 to 1.0
    
    
    
    8.25 to 1.0
    
    
    $
    4,250,000March 31, 2011
    
    
    1.00 to 1.0
    
    
    
    7.25 to 1.0
    
    
    $
    5,000,000June 30, 2011
    
    
    1.05 to 1.0
    
    
    
    7.00 to 1.0
    
    
    $
    5,000,000
  b) International lines of credit and loans payable
     10




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September 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
    
    $
    3,307
    
    
    $
    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 4.18% and 3.53% in 2010 and 2009, respectively
    
    
    2,283
    
    
    
    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 4.32% and 4.83% in 2010 and 2009, respectively
    
    
    2,103
    
    
    
    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 4.42% and 3.48% in 2010 and 2009, respectively
    
    
    785
    
    
    
    1,367Total lines of credit
    
    $
    8,478
    
    
    $
    7,200
 11




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(7) LONG-TERM DEBT
  September 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 $56,000; secured by accounts
receivable and inventory of the Swedish subsidiary, Mobitec AB;
bears average interest rate of 5.87% and 7.32% in 2010 and 2009,
respectively
    
    
    335
    
    
    
    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 $4,649, inclusive of interest at 8.0%
    
    
    103
    
    
    
    132Term loan with HDFC Bank, dated November 14, 2009; payable in
monthly installments of $502, inclusive of interest at 9.51%
    
    
    21
    
    
    
    22Term loan with Banco Finesa, dated May 28, 2010; payable in
monthly installments of $1,871, inclusive of interest at 20.10%
    
    
    47
    
    
    
    Total long-term debt
    
    
    6,881
    
    
    
    7,324Term loan termination fee accrual
    
    
    522
    
    
    
    346Less current portion
    
    
    (6,133
    )
    
    
    (960
    )Less debt discount
    
    
    (83
    )
    
    
    (166
    )1,187
    
    
    
    6,544Long-term portion of capital leases
    
    
    17
    
    
    
    28Total long-term debt and capital leases, less current portion
    
    $
    1,204
    
    
    $
    6,572
 (8) PREFERRED STOCK
   12




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(9) PER SHARE AMOUNTS
  Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited)(In thousands, except share amounts)Net income (loss) applicable to common shareholders of DRI Corporation
    
    $
    (545
    )
    
    $
    842
    
    
    
    (777
    )
    
    $
    768Effect of dilutive securities on net income (loss) of DRI Corporation:Convertible preferred stock
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    Net income (loss) applicable to common shareholders of DRI Corporation,
assuming conversions
    
    $
    (545
    )
    
    $
    922
    
    
    
    (777
    )
    
    $
    768Weighted average shares outstanding  Basic
    
    
    11,826,249
    
    
    
    11,522,979
    
    
    
    11,792,501
    
    
    
    11,498,333Effect of dilutive securities on shares outstanding:Options
    
    
    
    
    
    
    37,933
    
    
    
    
    
    
    
    6,199Warrants
    
    
    
    
    
    
    122,488
    
    
    
    
    
    
    
    62,350Convertible preferred stock
    
    
    
    
    
    
    1,712,430
    
    
    
    
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    11,826,249
    
    
    
    13,395,830
    
    
    
    11,792,501
    
    
    
    11,566,882
  (10) SHAREHOLDERS EQUITY, COMPREHENSIVE INCOME (LOSS) AND NONCONTROLLING INTERESTS
  13




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##### Table of Contents



DRI Shareholders EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    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
    
    
    
    
    
    
    5
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    91Issuance of Series K Preferred Stock, net of issuance costs
    
    
    683
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    683
    
    
    
    
    
    
    
    683Issuance of Series G Preferred Stock dividend
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    190Issuance of Series H Preferred Stock dividend
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Conversion of Series K Preferred Stock, net of issuance costs
    
    
    (67
    )
    
    
    4
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (381
    )
    
    
    
    
    
    
    
    
    
    
    (381
    )
    
    
    
    
    
    
    (381
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    279Comprehensive income (loss):Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (396
    )
    
    
    
    
    
    
    (396
    )
    
    
    524
    
    
    
    128Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    
    1,322
    
    
    
    
    
    
    
    1,322Balance as of September 30, 2010
    
    $
    5,749
    
    
    $
    1,184
    
    
    $
    30,440
    
    
    $
    (18,672
    )
    
    $
    3,298
    
    
    $
    21,999
    
    
    $
    1,279
    
    
    $
    23,278
 DRI Shareholders EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    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
    
    
    
    
    
    
    7
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    74Issuance of Series G Preferred Stock dividend
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    135Issuance of Series H Preferred Stock dividend
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Reclassification of warrant liability
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207Modification of warrants
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (234
    )
    
    
    
    
    
    
    
    
    
    
    (234
    )
    
    
    
    
    
    
    (234
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    269Purchase of noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    (2,707
    )
    
    
    
    
    
    
    
    
    
    
    (2,707
    )
    
    
    (243
    )
    
    
    (2,950
    )Comprehensive income (loss):Net Income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,002
    
    
    
    
    
    
    
    1,002
    
    
    
    (207
    )
    
    
    795Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,214
    
    
    
    2,214
    
    
    
    
    
    
    
    2,214Balance as of September 30, 2009
    
    $
    3,920
    
    
    $
    1,154
    
    
    $
    29,985
    
    
    $
    (19,104
    )
    
    $
    2,726
    
    
    $
    18,681
    
    
    $
    402
    
    
    $
    19,083
 COMPREHENSIVE INCOME (LOSS)
 Three months ending September 30,
    
    
    Nine months ending September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    (190
    )
    
    $
    1,086
    
    
    $
    128
    
    
    $
    795Other comprehensive income, net of tax:Foreign currency translation adjustment, net of tax
    
    
    2,758
    
    
    
    1,877
    
    
    
    1,322
    
    
    
    2,214Total other comprehensive income, net of tax
    
    
    2,758
    
    
    
    1,877
    
    
    
    1,322
    
    
    
    2,214Comprehensive income
    
    
    2,568
    
    
    
    2,963
    
    
    
    1,450
    
    
    
    3,009Comprehensive income (loss) attributable to the noncontrolling interest
    
    
    219
    
    
    
    (598
    )
    
    
    623
    
    
    
    (243
    )Comprehensive income attributable to DRI Corporation
    
    $
    2,349
    
    
    $
    3,561
    
    
    $
    827
    
    
    $
    3,252
 (11) SEGMENT AND GEOGRAPHIC INFORMATION
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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net salesNorth America
    
    $
    9,512
    
    
    $
    8,197
    
    
    $
    26,458
    
    
    $
    24,187Europe
    
    
    4,849
    
    
    
    6,787
    
    
    
    16,412
    
    
    
    20,054Asia-Pacific
    
    
    2,236
    
    
    
    4,120
    
    
    
    15,444
    
    
    
    6,567Middle East
    
    
    110
    
    
    
    191
    
    
    
    469
    
    
    
    291South America
    
    
    3,153
    
    
    
    2,260
    
    
    
    8,765
    
    
    
    5,172$
    19,860
    
    
    $
    21,555
    
    
    $
    67,548
    
    
    $
    56,271
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)(In thousands)Long-lived assetsNorth America
    
    $
    4,140
    
    
    $
    3,670Europe
    
    
    2,541
    
    
    
    1,948Asia-Pacific
    
    
    352
    
    
    
    313South America
    
    
    457
    
    
    
    225$
    7,490
    
    
    $
    6,156
 (12) INCOME TAXES
    (13) SOFTWARE DEVELOPMENT
  (14) NON-MONETARY TRANSACTION  ADVERTISING RIGHTS
  15




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(15) SUBSEQUENT EVENT
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business  General
 ® ® ® ®
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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
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.2
    
    
    
    66.8
    
    
    
    71.0
    
    
    
    68.9Gross profit
    
    
    32.8
    
    
    
    33.2
    
    
    
    29.0
    
    
    
    31.1Operating expenses:Selling, general and administrative
    
    
    28.8
    
    
    
    23.2
    
    
    
    26.0
    
    
    
    26.0Research and development
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.7Total operating expenses
    
    
    29.4
    
    
    
    23.9
    
    
    
    26.6
    
    
    
    26.7Operating income
    
    
    3.4
    
    
    
    9.3
    
    
    
    2.4
    
    
    
    4.4Total other expense
    
    
    (3.8
    )
    
    
    (3.3
    )
    
    
    (2.0
    )
    
    
    (2.7
    )Income (loss) before income tax expense
    
    
    (0.4
    )
    
    
    6.0
    
    
    
    0.4
    
    
    
    1.7Income tax expense
    
    
    (0.5
    )
    
    
    (1.0
    )
    
    
    (0.3
    )
    
    
    (0.3
    )Net income (loss)
    
    
    (0.9
    )
    
    
    5.0
    
    
    
    0.1
    
    
    
    1.4Net (income) loss attributable to noncontrolling interests
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.8
    )
    
    
    0.4Net income (loss) attributable to DRI Corporation
    
    
    (1.9)
    %
    
    
    4.3
    %
    
    
    (0.7)
    %
    
    
    1.8
    %
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COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 Net Sales and Gross Profit.
       Selling, General and Administrative.
 18




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Research and Development .
 Operating Income.
 Other Expense.
 Income Tax Expense.
 Net Income (Loss) Applicable to Common Shareholders.
 COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 Net Sales and Gross Profit.
  19




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Selling, General and Administrative.
 Research and Development .
 20




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Operating Income.
 Other Expense.
 Income Tax Expense.
 Net Income (Loss) Applicable to Common Shareholders.
 Industry and Market Overview
    21




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LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows for the Nine Months Ended September 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,
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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 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 September 30, 2010, the outstanding principal
balance on the revolving credit facility was approximately $3.3 million and remaining borrowing
availability under the revolving credit facility was approximately $2.4 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 34.5 million krona, or approximately US$5.1 million (based on exchange rates at September
30, 2010) through December 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$1.3
million (based on exchange rates at September 30, 2010). At September 30, 2010, borrowings due
and outstanding under these credit facilities totaled 29.5 million krona (approximately US$4.4
million, based on exchange rates at September 30, 2010). Additional borrowing availability
under these agreements at September 30, 2010 amounted to approximately US$447,000. 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 may currently borrow up to a maximum of 912,000 euro (approximately
US$1.2 million, based on exchange rates at September 30, 2010). At September 30, 2010,
borrowings due and outstanding under this credit facility totaled 577,000 euro (approximately
US$785,000 based on exchange rates at September 30, 2010) and additional borrowing
availability amounted to approximately US$456,000. 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.
  Fixed ChargeFiscal Quarter Ending:
    
    Coverage Ratio:
    
    Leverage Ratio:
    
    EBITDA:September 30, 2010
    
    0.70 to 1.0
    
    8.85 to 1.0
    
    $
    4,750,000December 31, 2010
    
    0.85 to 1.0
    
    8.25 to 1.0
    
    $
    4,250,000March 31, 2011
    
    1.00 to 1.0
    
    7.25 to 1.0
    
    $
    5,000,000June 30, 2011
    
    1.05 to 1.0
    
    7.00 to 1.0
    
    $
    5,000,000
  Management Conclusion
  23




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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;
    
    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.
  24




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ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Internal Control-Integrated Framework
   Material Weakness  Mobitec Brazil Ltda.
  25




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##### Table of Contents



Material Weakness  Revenue Recognition.
 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;
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##### Table of Contents




    
    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.
 We may be unable to obtain additional financing needed to support the working capital and
capital expenditure needs of our operations during the remainder of fiscal year 2010.
 The future of Castmaster Mobitec India Private Limited, our relatively new 51%-owned joint
venture in India, is uncertain.
 ITEM 5. OTHER INFORMATION
 Amendment to PNC Agreement.
   Fiscal Quarter Ending
    
    Fixed Charge Coverage RatioSeptember 30, 2010
    
    0.70 to 1.0December 31, 2010
    
    0.85 to 1.0March 31, 2011
    
    1.00 to 1.0June 30, 2011
    
    1.05 to 1.0
  Fiscal Quarter Ending
    
    Leverage RatioSeptember 30, 2010
    
    8.85 to 1.0December 31, 2010
    
    8.25 to 1.0March 31, 2011
    
    7.25 to 1.0June 30, 2011
    
    7.00 to 1.0
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##### Table of Contents



Fiscal Quarter Ending
    
    Minimum EBITDASeptember 30, 2010
    
    $
    4,750,000December 31, 2010
    
    $
    4,250,000March 31, 2011 and each fiscal quarter ending thereafter
    
    $
    5,000,000
   Amendment to BHC Agreement.
   Fiscal Quarter Ending
    
    Fixed Charge Coverage RatioSeptember 30, 2010
    
    0.70 to 1.0December 31, 2010
    
    0.85 to 1.0March 31, 2011
    
    1.00 to 1.0June 30, 2011
    
    1.05 to 1.0
  Fiscal Quarter Ending
    
    Leverage RatioSeptember 30, 2010
    
    8.85 to 1.0December 31, 2010
    
    8.25 to 1.0March 31, 2011
    
    7.25 to 1.0June 30, 2011
    
    7.00 to 1.0
  Fiscal Quarter Ending
    
    Minimum EBITDASeptember 30, 2010
    
    $
    4,750,000December 31, 2010
    
    $
    4,250,000March 31, 2011 and each fiscal quarter ending thereafter
    
    $
    5,000,000
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##### Table of Contents



ITEM 6. EXHIBITS
  Exhibit No.
    
    Document10.1
    
    Form of Subscription Agreement, dated as of August 18, 2010, by and
between DRI Corporation and the holder of Series K Senior
Convertible Preferred Stock of DRI Corporation (incorporated herein
by reference to the Companys current report on Form 8-K, filed with
the SEC on August 20, 2010).10.2
    
    Form of Registration Rights Agreement, dated as of August 18, 2010,
by and between DRI Corporation and the holder of Series K Senior
Convertible Preferred Stock of DRI Corporation (incorporated herein
by reference to the Companys current report on Form 8-K, filed with
the SEC on August 20, 2010).10.3
    
    Certificate of Designation of Series K Senior Convertible Preferred
Stock of DRI Corporation, as filed with the Secretary of State of
the State of North Carolina on August 16, 2010 (incorporated herein
by reference to the Companys current report on Form 8-K, filed with
the SEC on August 20, 2010).10.4
    
    Contract  Factoring Account (Credit SEK), dated as of October 22,
2010, by and between Mobitec AB and Svenska Handelsbanken AB
(English translation) (incorporated herein by reference to the
Companys current report on Form 8-K, filed with the SEC on October
25, 2010.10.5
    
    Contract A Supplementary Overdraft Facility, dated as of October 22,
2010, by and between Mobitec AB and Svenska Handelsbanken AB
(English translation) (incorporated herein by reference to the
Companys current report on Form 8-K, filed with the SEC on October
25, 2010).10.6
    
    Amendment No. 7 to Revolving Credit and Security Agreement, dated as
of November 12, 2010, by and between Digital Recorders, Inc.,
TwinVision of North America, Inc., DRI Corporation, the financial
institutions party hereto, and PNC Bank, National Association (filed
herewith).10.7
    
    Seventh Amendment to Loan and Security Agreement, dated as of November
12, 2010, by and between Digital Recorders, Inc., TwinVision of
North America, Inc., DRI Corporation, and BHC Interim Funding III,
L.P. (filed herewith).31.1
    
    Section 302 Certification of David L. Turney (filed herewith).31.2
    
    Section 302 Certification of Kathleen B. Oher (filed herewith).32.1
    
    Section 906 Certification of David L. Turney (filed herewith).32.2
    
    Section 906 Certification of Kathleen B. Oher (filed herewith).
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##### Table of Contents



SIGNATURES
  DRI CORPORATIONSignature:
    /s/ Kathleen B. OherBy:
    Kathleen B. OherTitle:
    Chief Financial Officer (Principal Financial and Accounting Officer)Date:
    November 15, 2010 30