##### 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)
 (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 $0.10 per share
(Class of Common Stock)
    
    11,912,521
Number of Shares




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##### 



DRI CORPORATION AND SUBSIDIARIES
 INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets  June 30, 2011 (Unaudited) and December 31, 2010
    
    
    3Consolidated Statements of Operations  Three and Six Months Ended June 30, 2011
and 2010 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2011 and 2010
(Unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27EX-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, 2011
    
    
    December 31, 2010(Unaudited)
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,162
    
    
    $
    1,391Trade accounts receivable, net
    
    
    18,526
    
    
    
    15,678Note receivable
    
    
    86
    
    
    
    86Other receivables
    
    
    39
    
    
    
    300Inventories, net
    
    
    14,416
    
    
    
    15,134Prepaids and other current assets
    
    
    1,627
    
    
    
    1,389Deferred tax assets, net
    
    
    758
    
    
    
    613Total current assets
    
    
    36,614
    
    
    
    34,591Property and equipment, net
    
    
    1,394
    
    
    
    1,388Software, net
    
    
    6,610
    
    
    
    5,757Goodwill
    
    
    1,177
    
    
    
    10,398Intangible assets, net
    
    
    631
    
    
    
    651Other assets
    
    
    544
    
    
    
    1,045Total assets
    
    $
    46,970
    
    
    $
    53,830LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    9,973
    
    
    $
    8,454Loans payable
    
    
    149
    
    
    
    442Current portion of long-term debt
    
    
    6,467
    
    
    
    944Foreign tax settlement
    
    
    418
    
    
    
    550Accounts payable
    
    
    9,639
    
    
    
    8,703Accrued expenses and other current liabilities
    
    
    5,874
    
    
    
    6,354Preferred stock dividends payable
    
    
    305
    
    
    
    19Total current liabilities
    
    
    32,825
    
    
    
    25,466Long-term debt and capital leases, net
    
    
    551
    
    
    
    6,239Deferred tax liabilities, net
    
    
    94
    
    
    
    84Liability for uncertain tax positions
    
    
    944
    
    
    
    723Commitments and contingencies (Notes 7 and 8)Shareholders EquitySeries 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
    
    
    
    1,957Series 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
    
    
    
    337Series 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
    
    
    
    2,398Series 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
    
    
    
    332Series 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
    
    
    
    830Common 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
    
    
    
    1,184Additional paid-in capital
    
    
    30,288
    
    
    
    30,374Accumulated other comprehensive income  foreign currency translation
    
    
    4,546
    
    
    
    3,180Accumulated deficit
    
    
    (30,089
    )
    
    
    (20,121
    )Total DRI shareholders equity
    
    
    11,790
    
    
    
    20,471Noncontrolling interest  Castmaster Mobitec India Private Limited
    
    
    766
    
    
    
    847Total shareholders equity
    
    
    12,556
    
    
    
    21,318Total liabilities and shareholders equity
    
    $
    46,970
    
    
    $
    53,830
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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Net sales
    
    $
    20,302
    
    
    $
    25,559
    
    
    $
    39,391
    
    
    $
    47,688Cost of sales
    
    
    13,389
    
    
    
    17,789
    
    
    
    26,346
    
    
    
    34,594Gross profit
    
    
    6,913
    
    
    
    7,770
    
    
    
    13,045
    
    
    
    13,094Operating expensesSelling, general and administrative
    
    
    5,832
    
    
    
    5,834
    
    
    
    11,859
    
    
    
    11,815Research and development
    
    
    55
    
    
    
    158
    
    
    
    211
    
    
    
    266Goodwill
impairment
    
    
    9,911
    
    
    
    
    
    
    
    9,911
    
    
    
    Total operating expenses
    
    
    15,798
    
    
    
    5,992
    
    
    
    21,981
    
    
    
    12,081Operating income (loss)
    
    
    (8,885
    )
    
    
    1,778
    
    
    
    (8,936
    )
    
    
    1,013Other income
    
    
    51
    
    
    
    15
    
    
    
    53
    
    
    
    14Foreign currency gain (loss)
    
    
    146
    
    
    
    55
    
    
    
    (143
    )
    
    
    144Interest 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
    )
    
    
    449Income tax expense
    
    
    (234
    )
    
    
    (383
    )
    
    
    (87
    )
    
    
    (131
    )Net income (loss)
    
    
    (9,477
    )
    
    
    1,103
    
    
    
    (10,049
    )
    
    
    318Less: 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 CorporationBasic
    
    $
    (0.81
    )
    
    $
    0.06
    
    
    $
    (0.87
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.81
    )
    
    $
    0.06
    
    
    $
    (0.87
    )
    
    $
    (0.02
    )Weighted average number of common shares outstandingBasic
    
    
    11,880,838
    
    
    
    11,797,095
    
    
    
    11,866,401
    
    
    
    11,775,348Diluted
    
    
    11,880,838
    
    
    
    14,322,759
    
    
    
    11,866,401
    
    
    
    11,775,348
  4




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Six Months Ended June 30,2011
    
    
    2010Cash flows from operating activitiesNet income (loss)
    
    $
    (10,049
    )
    
    $
    318Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activitiesDeferred income taxes
    
    
    (116
    )
    
    
    (591
    )Change in liability for uncertain tax positions
    
    
    102
    
    
    
    392Depreciation of property and equipment
    
    
    224
    
    
    
    215Amortization of software
    
    
    595
    
    
    
    419Amortization of intangible assets
    
    
    62
    
    
    
    54Amortization of deferred financing costs
    
    
    261
    
    
    
    277Amortization of debt discount
    
    
    34
    
    
    
    55Loan termination fee accrual
    
    
    303
    
    
    
    117Bad debt expense
    
    
    16
    
    
    
    22Share-based compensation
    
    
    243
    
    
    
    243Write-down of inventory for obsolescence
    
    
    42
    
    
    
    89Goodwill impairment
    
    
    9,911
    
    
    
    Loss on disposal of fixed assets
    
    
    4
    
    
    
    2Other, primarily effect of foreign currency (gain) and bank fees
    
    
    102
    
    
    
    (244
    )Changes in operating assets and liabilitiesIncrease 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
    
    
    
    460Increase in other assets
    
    
    
    
    
    
    (24
    )Increase in accounts payable
    
    
    693
    
    
    
    961Increase (decrease) in accrued expenses and other current liabilities
    
    
    (134
    )
    
    
    299Decrease in foreign tax settlement
    
    
    (244
    )
    
    
    (163
    )Net cash provided by (used in) operating activities
    
    
    1,205
    
    
    
    (1,404
    )Cash flows from investing activitiesProceeds 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 activitiesProceeds from bank borrowings and lines of credit
    
    
    39,600
    
    
    
    51,477Principal payments on bank borrowings and lines of credit
    
    
    (39,543
    )
    
    
    (49,667
    )Proceeds from issuance of preferred stock, net of costs
    
    
    
    
    
    
    716Payment of loan amendment fees
    
    
    (103
    )
    
    
    (5
    )Payment of dividends on preferred stock
    
    
    (51
    )
    
    
    (53
    )Net cash provided by (used in) financing activities
    
    
    (97
    )
    
    
    2,468Effect 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
    
    
    
    1,800Cash 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
    
    $
    
    
    
    $
    120Preferred stock dividends
    
    $
    304
    
    
    $
    115Conversion of preferred stock to common stock
    
    $
    
    
    
    $
    75
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##### Table of Contents



DRI CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (1) BASIS OF PRESENTATION AND DISCLOSURE
  ® ® ® ®
    Revenue Recognition
 Multiple-Deliverable Revenue Arrangements, Revenue Recognition.
   6




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Software Revenue Recognition
 Trade Accounts Receivable
  Product Warranties
  Six Months Ended June 30,2011
    
    
    2010(In thousands)Balance at beginning of period
    
    $
    809
    
    
    $
    805Additions charged to costs and expenses
    
    
    47
    
    
    
    238Deductions
    
    
    (59
    )
    
    
    (96
    )Foreign exchange translation loss
    
    
    50
    
    
    
    11Balance at end of period
    
    $
    847
    
    
    $
    958
 Recent Accounting Pronouncements
   Fair Value of Financial Instruments
  7




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Non-monetary Transactions
  (2) GOODWILL AND OTHER INTANGIBLE ASSETS
      (In thousands)Balance as of December 31, 2010
    
    $
    10,398Goodwill impairment
    
    
    (9,911
    )Effect of exchange rates
    
    
    690Balance as of June 30, 2011
    
    $
    1,177
  June 30, 2011
    
    
    December 31, 2010Weighted AverageRemaining 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
   (3) INVENTORIES
 June 30,
    
    
    December 31,2011
    
    
    2010(In thousands)Raw materials and system components
    
    $
    11,940
    
    
    $
    11,962Work in process
    
    
    
    
    
    
    17Finished goods
    
    
    2,476
    
    
    
    3,155Total inventories, net
    
    $
    14,416
    
    
    $
    15,134
 (4) PROPERTY AND EQUIPMENT
 EstimatedDepreciable
    
    
    June 30,
    
    
    December 31,Lives (years)
    
    
    2011
    
    
    2010(In thousands)Leasehold improvements
    
    
    3-10
    
    
    $
    380
    
    
    $
    370Automobiles
    
    
    4-6
    
    
    
    384
    
    
    
    382Computer and telecommunications equipment
    
    
    2-5
    
    
    
    1,336
    
    
    
    1,223Test equipment
    
    
    3-7
    
    
    
    176
    
    
    
    180Furniture and fixtures
    
    
    2-10
    
    
    
    3,163
    
    
    
    2,9395,439
    
    
    
    5,094Less accumulated depreciation
    
    
    
    
    
    
    (4,045
    )
    
    
    (3,706
    )Total property and equipment, net
    
    
    
    
    
    $
    1,394
    
    
    $
    1,388
 8




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(5) SOFTWARE
 EstimatedDepreciable
    
    
    June 30,
    
    
    December 31,Lives (years)
    
    
    2011
    
    
    2010(In thousands)Software
    
    
    5
    
    
    $
    9,940
    
    
    $
    9,335Software projects in progress
    
    
    
    
    
    
    2,833
    
    
    
    1,73212,773
    
    
    
    11,067Less accumulated amortization
    
    
    
    
    
    
    (6,163
    )
    
    
    (5,310
    )Total software, net
    
    
    
    
    
    $
    6,610
    
    
    $
    5,757
  (6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 June 30,
    
    
    December 31,2011
    
    
    2010(In thousands)Salaries, commissions, and benefits
    
    $
    2,399
    
    
    $
    2,516Taxes  payroll, sales, income, and other
    
    
    986
    
    
    
    1,375Warranties
    
    
    847
    
    
    
    809Current portion of capital leases
    
    
    16
    
    
    
    17Interest payable
    
    
    120
    
    
    
    135Deferred revenue
    
    
    945
    
    
    
    639Customer rebates and credits
    
    
    140
    
    
    
    320Other
    
    
    421
    
    
    
    543Total 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
   9




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b) International lines of credit and loans payable
      10




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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
    
    
    $
    2,841Line 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
    
    
    
    2,301Line 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
    
    
    
    2,575Line 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
    
    
    
    737Total lines of credit
    
    $
    9,973
    
    
    $
    8,454
  11




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(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
    
    
    $
    4,750Term 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
    
    
    
    277Term 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
    
    
    
    1,463Term loan with HDFC Bank, dated October 5, 2009; payable in monthly
installments of $4,601, inclusive of interest at 8.0%.
    
    
    65
    
    
    
    90Term loan with HDFC Bank, dated November 14, 2009; payable in
monthly installments of $497, inclusive of interest at 9.51%.
    
    
    17
    
    
    
    19Term loan with Banco Finesa, dated May 28, 2010; paid in full June
2011.
    
    
    
    
    
    
    44Total long-term debt
    
    
    6,148
    
    
    
    6,643Term loan termination fee
accrual
    
    
    884
    
    
    
    581Less current portion
    
    
    (6,467
    )
    
    
    (944
    )Less debt discount
    
    
    (21
    )
    
    
    (55
    )544
    
    
    
    6,225Long-term portion of capital
leases
    
    
    7
    
    
    
    14Total long-term debt and capital leases, less current portion
    
    $
    551
    
    
    $
    6,239
 (9) PREFERRED STOCK
   (10) PER SHARE AMOUNTS
  12




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##### 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
    
    
    
    11,775,348Effect 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
  (11) SHAREHOLDERS EQUITY, COMPREHENSIVE INCOME (LOSS) AND NONCONTROLLING INTEREST
  DRI Shareholders EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    Compre-
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    hensive
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Equity
    
    
    Interest
    
    
    Income (loss)
    
    
    EquityBalance as of December 31, 2010
    
    $
    5,854
    
    
    $
    1,184
    
    
    $
    30,374
    
    
    $
    (20,121
    )
    
    $
    3,180
    
    
    $
    20,471
    
    
    $
    847
    
    
    
    
    
    
    $
    21,318Issuance of common stock
    
    
    
    
    
    
    7
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    
    
    
    
    
    
    
    
    (355
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    185Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,968
    )
    
    
    
    
    
    
    (9,968
    )
    
    
    (81
    )
    
    $
    (10,049
    )
    
    
    (10,049
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,366
    
    
    
    1,366
    
    
    
    
    
    
    
    1,366
    
    
    
    1,366Total
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 EquityAccumulatedAdditional
    
    
    Accum-
    
    
    Other
    
    
    Total DRI
    
    
    
    
    
    
    Compre-
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Noncontrolling
    
    
    hensive
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Interest
    
    
    Income (loss)
    
    
    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
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    (225
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184Comprehensive income (loss):Net Income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    325
    
    
    $
    318
    
    
    
    318Translation 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
 13




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##### Table of Contents



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
    )
    
    $
    318Other 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
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net salesNorth America
    
    $
    7,967
    
    
    $
    9,888
    
    
    $
    15,839
    
    
    $
    16,946Europe
    
    
    7,447
    
    
    
    6,900
    
    
    
    13,093
    
    
    
    11,563Asia-Pacific
    
    
    1,578
    
    
    
    5,194
    
    
    
    3,969
    
    
    
    13,208Middle East
    
    
    145
    
    
    
    136
    
    
    
    337
    
    
    
    359South 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 assetsNorth America
    
    $
    4,270
    
    
    $
    4,105Europe
    
    
    2,905
    
    
    
    2,619Asia-Pacific
    
    
    793
    
    
    
    957South America
    
    
    580
    
    
    
    509$
    8,548
    
    
    $
    8,190
  (13) INCOME TAXES
    14




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(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
 ® ® ® ®
  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.
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Recent Accounting Pronouncements
   Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.9
    
    
    
    69.6
    
    
    
    66.9
    
    
    
    72.5Gross profit
    
    
    34.1
    
    
    
    30.4
    
    
    
    33.1
    
    
    
    27.5Operating expenses:Selling, general and administrative
    
    
    28.7
    
    
    
    22.8
    
    
    
    30.1
    
    
    
    24.8Research and development
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.6Goodwill
impairment
    
    
    48.8
    
    
    
    
    
    
    
    25.2
    
    
    
    Total operating expenses
    
    
    77.8
    
    
    
    23.4
    
    
    
    55.8
    
    
    
    25.4Operating
income (loss)
    
    
    (43.7
    )
    
    
    7.0
    
    
    
    (22.7
    )
    
    
    2.1Total other income and expense
    
    
    (1.8
    )
    
    
    (1.1
    )
    
    
    (2.6
    )
    
    
    (1.2
    )Income (loss) before income tax expense
    
    
    (45.5
    )
    
    
    5.9
    
    
    
    (25.3
    )
    
    
    0.9Income tax expense
    
    
    (1.2
    )
    
    
    (1.5
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Net income (loss)
    
    
    (46.7
    )
    
    
    4.4
    
    
    
    (25.5
    )
    
    
    0.6Net (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.
  17




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Selling, General and Administrative.
 Research and Development .
 18




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Goodwill Impairment.
 Operating
Income (Loss).
 Other Income and Expense.
 Income
Tax Expense.
 Net Income (Loss) Applicable to Common Shareholders.
 COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 Net Sales and Gross Profit.
     19




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Selling, General and Administrative.
 Research and Development .
 Goodwill Impairment.
 Operating
Income (Loss).
 Other Income and Expense.
 Income Tax Expense.
 20




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##### Table of Contents



Net Income (Loss) Applicable to Common Shareholders.
 Industry and Market Overview
     LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows for the Six Months Ended June 30, 2011 and 2010
  21




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Significant Financing Arrangements
  
    
    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.
  22




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##### Table of Contents



Management Conclusion
  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 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;
 23




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##### Table of Contents




    
    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
   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
 We may be unable to make payment on our domestic line of credit and term loan which mature in
April 2012.
 24




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##### Table of Contents



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.
 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.
 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.
  
 25




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##### Table of Contents



ITEM 6. EXHIBITS
  Exhibit No.
    
    Document10.1
    
    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 Companys 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 Companys 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 Companys 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).
 26




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##### Table of Contents



SIGNATURES
  DRI CORPORATIONSignature:By:

    /s/ Kathleen B. OherKathleen B. OherTitle:

    Chief Financial Officer   (Principal Financial and Accounting Officer)
 Date:
 27