SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ______________
Commission file number 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer as specified in its charter)
North Carolina 56-1362926
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4900 Prospectus Drive, Suite 1000
Research Triangle Park, North Carolina 27709-4068
(Address of principal executive offices)
(919) 361-2155
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock: 2,674,075 shares outstanding
as of July 31, 1996
Transitional Small Business Disclosure Format (check one);
Yes No X
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Financial Statements
Item Page
Financial Statements:
Balance Sheets........................................................... 3
Statements of Operations................................................. 4
Statements of Cash Flows................................................. 5-6
Notes to Financial Statements............................................ 7-8
2
<PAGE>
DIGITAL RECORDERS, INC.
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 December 31,
Assets (unaudited) 1995
-------------- --------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 428,976 1,175,775
Investments 1,977,156 2,113,030
Trade accounts receivable 1,659,375 1,828,726
Other receivables 208,706 118,173
Inventories 1,290,413 1,087,503
Prepaids and other current assets 73,302 78,151
-------------- --------------
Total current assets 5,637,928 6,401,358
Property and equipment, net 331,557 311,120
Goodwill, net 1,746,765 1,666,944
Intangible assets, net 369,984 252,227
Other assets 7,099 6,901
============== ==============
$ 8,093,333 8,638,550
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 233,231 340,778
Accrued expenses 151,787 135,282
Accrued commissions 121,740 97,340
Accrued warranty reserve 109,195 111,462
Current portion of long-term debt - 709,000
Dividends payable 81,900 54,900
-------------- --------------
Total current liabilities 697,853 1,448,762
-------------- --------------
Total liabilities 697,853 1,448,762
-------------- --------------
Stockholders' equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value
20,000 shares authorized; 354 shares issued and outstanding at
June 30, 1996 and December 31, 1995 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding
at June 30, 1996 and December 31, 1995 267,407 267,407
Additional paid-in capital 12,552,708 12,552,708
Property held for resale (550,000) (550,000)
Translation adjustment (366) -
Accumulated deficit (4,874,304) (5,080,362)
-------------- --------------
Net stockholders' equity 7,395,480 7,189,788
============== ==============
$ 8,093,333 8,638,550
============== ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
DIGITAL RECORDERS, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $ 2,173,448 1,554,510 3,924,016 2,311,517
Cost of sales 1,032,685 700,429 1,796,472 1,154,123
-------------- ------------- ------------- --------------
Gross profit 1,140,763 854,081 2,127,544 1,157,394
Selling, general and administrative expenses 906,029 737,604 1,652,578 1,282,806
Research and development expenses 162,356 119,716 250,088 177,399
-------------- ------------- ------------- --------------
Operating profit (loss) 72,378 (3,239) 224,878 (302,811)
Other income (expense):
Interest income 36,581 77,080 84,573 165,198
Interest expense (1,113) (39,597) (3,743) (48,657)
-------------- ------------- ------------- --------------
Total other income (expense) 35,468 37,483 80,830 116,541
Income (loss) before income taxes 107,846 34,244 305,708 (186,270)
Income tax expense 10,000 - 20,000 -
-------------- ------------- ------------- --------------
Net income (loss) $ 97,846 34,244 285,708 (186,270)
============== ============= ============= ==============
Net income (loss) per common and common equivalent share $ 0.02 0.00 0.08 (0.09)
============== ============= ============= ==============
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,660,773 2,674,075 2,641,742
============== ============= ============= ==============
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
DIGITAL RECORDERS, INC.
Statements of Cash Flows (unaudited)
For the six month periods ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $285,708 (186,270)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization of
property and equipment 49,607 16,800
Amortization of goodwill and intangible assets 94,517 57,390
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 169,351 (258,715)
Increase in other receivables (88,797) (270,010)
Increase in inventories (202,910) (407,721)
Decrease in prepaids and other current assets 4,849 108,157
Increase in intangible assets (148,660) -
Increase in other assets (198) (62,497)
Decrease in accounts payable (111,504) (99,485)
Increase in accrued expenses 38,638 22,653
Decrease in other liabilities - (4,961)
----------------- -----------------
Net cash provided (used) by operating activities 90,601 (1,084,659)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (59,521) (155,436)
Purchases of short-term investments (64,126) -
Sales of short-term investments 200,000 955,826
Payment for business acquired, net of cash received (34,560) (1,171,000)
-----------------
-----------------
Net cash provided (used) by investing activities 41,793 (370,610)
----------------- -----------------
Cash flows from financing activities:
Principal payments on long-term debt (709,000) (58,658)
Principal payments on short-term bank borrowings (117,177) -
Principal payments on capital lease obligations - (7,910)
Payment of additional public offering expenses - (30,283)
Payment of dividends on preferred stock (52,650) (52,650)
Proceeds from exercise of warrants - Series AAA - 179,116
----------------- -----------------
Net cash provided (used) by financing activities (878,827) 29,615
----------------- -----------------
----------------- -----------------
Effect of exchange rate changes (366) -
----------------- -----------------
Net decrease in cash and cash equivalents (746,799) (1,425,654)
Cash and cash equivalents at beginning of year 1,175,775 1,589,997
----------------- -----------------
Cash and cash equivalents at end of year $ 428,976 164,343
================= =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 3,743 48,657
================= =================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
DIGITAL RECORDERS, INC.
Statements of Cash Flows, Continued (Unaudited)
For the six month periods ended June 30, 1996 and 1995
Supplemental disclosures of noncash financing and investing activities:
During the six months ended June 30, 1996 and 1995, the Company declared
dividends on Series AAA Preferred Stock in the amount of $79,650 and $70,650,
respectively. The Company paid $52,650 in cash dividends in each of the six
month periods ended June 30, 1996 and 1995.
During 1996, the Company acquired Transit-Media GmbH ("Transit-Media"). The
Company paid $35,000 for all of Transit-Media's stock at closing. The Company
recorded cash (valued at $440), other receivables (valued at $1,736), fixed
assets (valued at $10,523), accounts payable (valued at $3,957), short-term
bank borrowings (valued at $117,177), and certain intangible assets (valued
at $143,435).
During 1995, the Company acquired certain assets, net of liabilities of Digital
Audio Corporation, Inc. The Company acquired inventory (valued at $100,000),
fixed assets (valued at $10,000) and certain intangible assets (valued at
$1,990,000) in exchange for cash of $1,171,000, a note payable for $709,000, and
common stock of $220,000.
6
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Financial Statements
June 30, 1996 and 1995
(1) Basis of Presentation and Disclosure
The unaudited interim condensed financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) considered
necessary to present fairly the results for the interim periods presented.
The accompanying condensed financial statements and related notes should be
read in conjunction with the Company's 1995 audited financial statements
included in its Annual Report on Form 10-KSB dated March 28, 1996. The
results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full calendar
year.
(2) Per Share Amounts
Net income (loss) per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares outstanding
from convertible preferred stock and the exercise of stock options and
warrants. Stock, options and warrants issued in the twelve month period
preceding the initial filing of the Registration Statement for the Company's
initial public offering have been treated as outstanding for all reported
periods. A treasury stock approach has been used in determining the
incremental shares outstanding. For 1996 and 1995, the common stock
equivalent shares had no impact on the per share amounts. Cash dividends
declared on the preferred stock during the period are deducted from net
income or added to net loss to determine the net income (loss) per share.
Cash dividends declared were $79,650 and $70,650 for the six months ended
June 30, 1996 and 1995, respectively.
(3) Acquisition of Transit-Media Gmbh
On April 30, 1996, the Company acquired Transit-Media Gmbh ("Transit-Media")
in a transaction accounted for using the purchase method of accounting and
accordingly, the assets and liabilities of the acquired entity were recorded
at their fair market value at the date of acquisition. Transit-Media
assembles and markets proprietary on-board, electronic destination signs for
mass-transit systems in Europe. The Company paid $35,000 for all of
Transit-Media's stock at closing. The Company recorded cash (valued at
$440), other receivables (valued at $1,736), fixed assets (valued at
$10,523), accounts payable (valued at $3,957), short-term bank borrowings
(valued at $117,177), and certain intangible assets (valued at $143,435). In
addition, the Company's results of operations for the six months ended June
30, 1996 include the operations of Transit-Media from May 1, 1996 to June 30,
1996.
The following unaudited proforma results of operations assume the transaction
described above occurred as of January 1, 1996 after giving the effect of
certain adjustments, including the amortization of goodwill.
Six Months Ended
June 30, 1996
Net sales $ 3,924,016
Net income (loss) 212,898
Net income (loss) per common and
common equivalent share $ 0.05
7
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Financial Statements,
(4) Acquisition of Digital Audio Corporation
On February 28, 1995, the Company purchased certain assets and liabilities of
Digital Audio Corporation ("Digital Audio") in a transaction accounted for
using the purchase method of accounting and accordingly, the assets and
liabilities of the acquired entity were recorded at their fair market value
at the date of acquisition. Digital Audio designs, manufactures and markets
digital signal processing equipment to commercial and governmental
organizations. The purchase price was $2,100,000 with an earnout payment to
be made over two years if certain performance criteria are met. The Company
paid $1,171,000 at closing, recorded an unsecured note payable to the seller
of $709,000 and distributed 33,846 shares of the Company's Common Stock to
the seller in exchange for inventory (valued at $100,000), fixed assets
(valued at $10,000) and goodwill and intangible assets (valued at
$1,900,000). In addition, the Company's results of operations for the six
months ended June 30, 1995 include the operations of Digital Audio from March
1, 1995 to June 30, 1995.
The following unaudited proforma results of operations assume the transaction
described above occurred as of January 1, 1995 after giving the effect of
certain adjustments, including the amortization of the excess cost over the
fair value of the net assets acquired.
Six Months Ended
June 30,1995
Net sales $ 2,585,838
Net income (loss) (89,566)
Net income (loss) per common and
common equivalent share $ (0.03)
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company designs, manufactures and sells information technology for
use in various applications in individual vehicle transportation and the public
transit industry. Formed in 1983, the Company's activities through 1986
consisted primarily of organizational and development activities. Since 1987,
when the Company generated net sales of $348,000, net sales have increased each
year, reaching $6.362 million in 1995. The Company achieved its first year of
profitability in 1995 during which it earned a profit after income taxes of
$145,000. For the three months and six months ended June 30, 1996, net sales
were $2.173 million and $3.924 million, respectively. For the three months and
six months ended June 30, 1996, the Company recorded net income after taxes of
approximately $98,000 and $286,000, respectively.
The Company attributes its growth in sales to the introduction of
new products, increased market penetration, growing markets for its products and
the acquisition of Digital Audio in 1995. Sales to governmental and
quasi-governmental entities have exceeded 50% of total net sales during each
year since 1991, and such sales accounted for 65% of net sales during 1995.
Sales to governmental entities accounted for 25% and 29%, respectively, of net
sales during the three months and six months ended June 30, 1996. A significant
portion of the Company's sales have historically been attributable to a small
number of customers. During 1995, sales to three customers accounted for 35% of
net sales, during 1994, sales to three customers accounted for 44% of net sales,
and during 1993, sales to three customers accounted for 43% of net sales. A
single customer, the New Jersey Turnpike Authority, accounted for 11% of net
sales made in 1995, 1994 and 1993 on a combined basis. During the three months
and six months ended June 30, 1996, sales to three customers accounted for 55%
and 44%, respectively, of net sales.
The Company typically recognizes revenue from sales upon shipment of
products to customers. Because the Company's operations are characterized by
research and development expenses preceding a product introduction, net sales
and their related expenses may not be recorded in the same period, thereby
producing fluctuations in operating results. The Company's dependence on a small
number of relatively large customers or projects may increase the magnitude of
fluctuations in operating results.
The Company's financial statements contain a provision for income tax
expense for the year ended December 31, 1995 and for the three months and six
months ended June 30, 1996 due to alternative minimum tax. However, as a result
of the accumulated losses incurred in past years, the Company utilized
approximately $564,000 of its net operating loss carryover and had a net
operating loss carryover as of December 31, 1995 of approximately $4.087 million
which management expects will be available to offset federal taxable income, if
any, through 2009. Also as of December 31, 1995, the Company had a net economic
loss carryforward for state income tax purposes of approximately $1.915 million,
which is expected to be available to offset future state income taxes, if any,
through 1999. Following utilization of the existing state and federal tax
losses, the Company's future operations, if profitable, will be subject to
income tax expense.
On April 30, 1996, the Company acquired Transit-Media, GmbH
(Transit-Media), a company headquartered in Ettlingen, Germany, which assembles
and markets proprietary on-board, electronic destination signs for mass-transit
systems in Europe. Pursuant to the Agreement between the Company and
Transit-Media, the Company purchased all of the issued and outstanding stock of
Transit-Media for $35,000 cash. In connection with the acquisition, a finder's
fee was paid to a consulting firm controlled by David L. Turney. Mr. Turney,
currently a director, was a director nominee at the time of the acquisition.
Upon completing the acquisition, the Company invested $350,000 in Transit-Media
in order to pay off an existing bank credit line and to provide working capital.
9
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales .......................................... 100% 100% 100% 100%
Cost of sales ...................................... 48 45 46 50
Gross profit ....................................... 52 55 54 50
Operating expenses :
Selling, general and administrative .......... 42 47 42 55
Research and development ..................... 7 8 6 8
Total operating expenses ........................... 49 55 48 63
Operating profit (loss) ............................ 3 0 6 (13)
Other income (expense), net ........................ 2 2 2 5
Income (loss) before income taxes .................. 5 2 8 (8)
Income tax expense ................................. (1) 0 (1) 0
Net income (loss) .................................. 4 2 7 (8)
</TABLE>
Comparison of Three and Six Months Ended June 30, 1996 and 1995.
Net sales for the three months ended June 30, 1996 were $2.173
million, an increase of $618,000, or 40%, compared to $1.555 million for the
comparable three months in 1995. Net sales for the six months ended June 30,
1996 were $3.924 million, an increase of $1.612 million, or 70%, compared to
$2.312 million for the comparable six months in 1995. These increases were
attributable to increases in sales of TCS products and the addition of sales
from DAC and Transit-Media.
During the three months ended June 30, 1996, HAR sales decreased by
$292,000 to $429,000 or by 41% from the corresponding three months in the prior
year of $721,000. During the six months ended June 30, 1996, HAR sales decreased
by $170,000 to $900,000 or by 16% from the corresponding six months in the prior
year of $1.070 million. The decrease in HAR sales is primarily attributable to
reduced sales of the DR1025NW, a digital recorder designed principally for the
National Weather Service. The Company believes that it has completed sales of
the DR1025NW to potential users of the products, and that the Company will
therefore achieve nominal sales of this product in future periods. HAR sales in
future periods will depend largely on sales of other existing products as well
as the Company's ability to design and introduce new products.
During the three months ended June 30, 1996, TCS sales increased by
$876,000 to $1.300 million, or by 207%, from sales during the corresponding
three months in the prior year of $424,000. During the six months ended June 30,
1996, TCS sales increased by $1.470 million to $2.227 million, or by 194%, from
sales during the corresponding six months in the prior year of $757,000. The
increase in TCS sales is primarily attributable to the Company's success in
generating large orders for the DR500C Talking Bus(R) from transit system
customers.
10
<PAGE>
During the three months ended June 30, 1996, DAC sales decreased by
$15,000 to $395,000, or by 4%, from sales during the corresponding three months
in the prior year of $410,000. During the six months ended June 30, 1996, DAC
sales increased by $263,000 to $748,000, or by 54%, from sales during the
corresponding six months in the prior year of $485,000. Since DAC was acquired
February 28, 1995, the corresponding six months in the prior year included only
four month sales. During the three months and six months ended June 30, 1995,
Transit-Media sales were $49,000. Since Transit-Media was acquired April 30,
1996, comparison to prior periods are not available.
Cost of sales increased to $1.033 million for the three months
ended June 30, 1996 from $700,000 from the comparable three months in 1995, or
an increase of 48% on a period-to-period basis. For the six months ended June
30, 1996, cost of sales increased to $1.797 million from $1.154 million from the
comparable six months in 1995, or an increase of 56% on a period to period
basis.
Gross profit for the three months ended June 30, 1996 was $1.140
million, an increase of $286,000, or 33%, over gross profit of $854,000 in the
three months ended June 30, 1995. As a percentage of sales, gross profit during
the three months ended June 30, 1996 was 52% of net sales, as compared to 55%
during the corresponding three months in 1995. Gross profit for the six months
ended June 30, 1996 was $2.127 million, an increase of $970,000, or 84%, over
gross profit of $1.157 million in the six months ended June 30, 1995. As a
percentage of sales, gross profit during the six months ended June 30, 1996 was
54% of net sales, as compared to 50% during the corresponding six months in
1995. The fluctuation in gross profit percentages between the periods was caused
mainly by differences in product mixes and improvements in installation costs in
two of the Company's business groups.
Selling, general and administrative expenses during the three
months ended June 30, 1996 were $906,000, an increase of $168,000 or 23%, as
compared to expenses of $738,000 during the three months ended June 30, 1995.
Approximately $75,000 of the increase is attributable to the additional general
and administrative expenses associated with the Transit-Media acquisition on
April 30, 1996. Selling, general and administrative expenses during the six
months ended June 30, 1996 were $1.653 million, an increase of $370,000, or 29%,
as compared to expenses of $1.283 million during the six months ended June 30,
1995. This increase is primarily attributable to a write off of a $115,000
account receivable and to general and administrative expenses related to
Transit-Media, which was acquired on April 30, 1996, and to DAC, which was
acquired on February 28, 1995. This increase is attributable to the expansion of
the Company's sales and marketing activities and to the additional general and
administrative expenses associated with the DAC acquisition on February 28,
1995.
Research and development expe
three months ended June
30, 1996 were $162,000, an increase of $42,000 or 35%, as compared to expenses
of $120,000 during the three months ended June 30, 1995. Research and
development expenses for the six months ended June 30, 1996 were $250,000, an
increase of $73,000 or
compared to expenses of $177,000 during the six
months ended June 30, 199
Liquidity and Capital Resources
From 1990 and through completion of the Company's public offering in
November 1994, the Company financed its operations primarily through the private
issuance of debt and equity securities. In December of 1994, the Company
completed its initial public offering of 1,265,000 Units (the "Units"), each
Unit consisting of one share of Common Stock and one warrant to purchase one
share of Common Stock. The Company realized gross proceeds of approximately
$7.274 million and net proceeds of approximately $5.562 million after deducting
offering costs of approximately $1.712 million. The Company has also received
proceeds of approximately $465,000 from the exercise of warrants.
11
<PAGE>
As of June 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $429,000, investments of $1.977 million
(consisting primarily of U.S. Treasury obligations) and accounts receivable of
$1.659 million. The Company's current assets less current liabilities provide a
net working capital of $4.940 million. As of June 30, 1996, the Company had no
long-term debt. On May 24, 1996, the Company closed a $2 million unsecured
credit agreement with a financial institution. The agreement is for short-term
borrowings and import letters of credit, subject to certain loan covenants, and
bears interest at a rate of LIBOR +2.3%, interest payable quarterly. At June 30,
1996, there were no advances outstanding under the credit agreement.
The Company's operating activities provided cash of $91,000 during
the six months ended June 30, 1996 and used cash of $1.085 million during the
six months ended June 30, 1995. For the six months ended June 30, 1996,
decreases in accounts receivable of $169,000, increases in other receivables of
$89,000, increases in inventories of $203,000, increases in intangible assets of
$149,000, and decreases in accounts payable of $112,000, were the primary
components of changes in cash from operating activities. For the six months
ended June 30, 1995, increases in accounts receivable of $259,000, increases in
inventories of $408,000, decreases in prepaids and other current assets of
$108,000, increases in other receivables of $270,000, increases in other assets
of $62,000, and decreases in accounts payable of $99,000, were the primary
components of changes in cash from operating activities. Working capital
requirements increased with growth in the Company's sales, primarily due to the
time gap between the time the Company must pay its suppliers and the time the
Company receives payment from its customers, particularly its governmental
customers.
Investing activities during the six months ended June 30, 1996 included
the sale of short term investments of $200,000 and the purchases of short term
investments of $64,000. Investing activities for the six months ended June 30,
1995 consisted primarily of the acquisition of Digital Audio Corporation and
sales of short term investments of $956,000. At June 30, 1996, the Company had
commitments for capital investments of approximately $96,000 for renovation and
improvement of additional office and production space subleased by the Company.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new products and enhancement of existing
products; financing anticipated growth; and the possible acquisition of products
or technologies complementary to the Company's business. The Company believes
that its existing cash, cash equivalents and marketable securities, anticipated
cash generated from operations, and the $2 million credit agreement will be
sufficient to satisfy its currently anticipated cash requirements for the 1996
fiscal year.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 which are subject to the safe harbors created thereby.
These forward-looking statements include the plans and objectives of management
for future operations, including plans and objectives relating to (i) the
continued expansion of the Company's operations, (ii) the development and
introduction of new products, (iii) the continued successful operation of the
Company, and (iv) the Company's ability to maintain or increase the market share
of its various products.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements were based on assumptions that the Company would
continue to develop and introduce new products on a timely basis, that
competitive conditions within the industry would not change materially or
adversely, that demand for the Company's products would remain strong, and that
there would be no material change in the Company's operations or business.
12
<PAGE>
Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In the light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Adoption of Financial Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995,
and requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has adopted SFAS No. 121 and does not expect its
provisions to have a material effect on the Company's results of operations in
fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years
beginning after December 15, 1995, and will require that the Company either
recognize in its financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make pro
forma disclosures of such costs in a footnote to the financial statements. The
Company expects to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1996, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's results of operations or
financial position.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
13
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.9.2 Sublease, dated April 24, 1996, by and between
Family Health International and the Company.
10.21 Note, Commitment Letter, and Continuing Letter
of Credit Agreement, dated May 24, 1996, by
and between Wachovia Bank of North Carolina, N.A.
and the Company.
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K, dated May 15, 1996,
to report the acquisition of Transit-Media Gmbh.
The Company filed a report on Form 8-K/A-1, dated July 15,
1996, in order to amend the Form 8-K described above.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-QSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: August 14, 1996 By: /s/ J. PHILLIPS L. JOHNSTON
----------------------------
J. Phillips L. Johnston, Chairman of the Board,
Chief Executive Officer, and Acting Principal
Financial Officer
14
<PAGE>
SUBLEASE
This Agreement is made this 24th day of April 1996, by and between
FAMILY HEALTH INTERNATIONAL, a North Carolina nonprofit corporation with
principal offices at 2222 Chapel Hill-Nelson Highway, Durham, North Carolina
(hereinafter called the "Sublessor"), and DIGITAL RECORDERS, INC., a North
Carolina corporation with offices at 4900 Prospectus Drive, Suite 1000, Durham,
North Carolina 27713 (hereinafter called the "Sublessee").
WHEREAS, Sublessor is presently a tenant in a building known as 4900
Prospectus Drive in Commercial Park West, Durham County, North Carolina,
occupying space commonly known as Suite 108 and comprising approximately 5,068
square feet of space;
WHEREAS, Sublessor occupies said space pursuant to that certain lease
dated 23 October 1989 (hereinafter called the "Overlease"), providing for the
lease of the space commonly known as Suite 108 comprising approximately 5,068
square feet of space, which Overlease is attached as Exhibit "A" annexed hereto
and made a part hereof; and
WHEREAS, Sublessor's Landlord and Sublessor amended the Overlease by
First Lease Amendment dated 11 May 1990 (hereinafter referred to as the
"Amendment"), a copy of which Amendment is attached as Exhibit "B" annexed
hereto and made a part hereof; and
WHEREAS, Sublessor's Landlord and Sublessor further amended the
Overlease by Lease Renewal Agreement dated 8 December 1994 (hereinafter referred
to as the "Renewal"), providing for the extension of the Lease Expiration Date
dated 30 April 2000 and establishing the Minimum Rent for the remainder of the
:ease term as extended therein, a copy of which Renewal is attached as Exhibit
"C" annexed hereto and made a part hereof.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, it is mutually agreed as follows:
1. Sublet Premises: Sublessor hereby leases Suite 108 in 4900 Prospectus Drive
comprising approximately 5,068 square feet of space (hereinafter referred to as
the "Sublet Premises") to Sublessee, and Sublessee hereby leases the Sublet
Premises from Sublessor. Sublessee shall use the Sublet Premises for uses of
office space, light assembly, and warehouse, and no other uses without the
written consent of the Sublessor's landlord (hereinafter referred to as the
"overlandlord"). This Sublease shall not take effect until execution of this
Sublease by Overlandlord, evidencing Overlandlord's consent to this Sublease and
to the Sublessee's intended uses of the Sublet Premises.
2. Term: The initial term of this Sublease shall commence on the first day of
June, 1996 and shall continue up to and including 11:59 P.M. on the 30th day of
April, 2000.
3. Rental: Sublessee hereby agrees to pay to Sublessor an annual rental, payable
in equal monthly installments in advance on the first day of each month
according to the following schedule of rent:
Term Annual Rent Monthly Rent
- ---- ----------- ------------
6/1/96 - 4/30/97 $36,996.40 ($7.30 per sq. ft.) $3,083.03
5/1/97 - 4/30/98 $37,503.20 ($7.40 per sq. ft.) $3,125.27
5/1/98 - 4/30/99 $38,010.00 ($7.50 per sq.ft.) $3,167.50
5/1/99 - 4/30/2000 $38,516.80 ($7.60 per sq.ft.) $3,209.73
Any rent requirement to be paid pursuant to this Sublease shall be in addition
to other amounts by whatever name called with respect to the Sublet Premises
payable pursuant to the Overlease, Amendment or renewal, including without
limitation the Additional rent payable to the Overlandlord as provided in
Article 2 of the Overlease, provided that all such amounts payable (or overages
returnable) of Additional Rent shall be pro-rated for the year 1996, with
Sublessor responsible for 5/12ths of all such payments and Sublessee responsible
for 7/12ths of all such payments.
4. Representations: Sublessor hereby warrants and represents that it is now
leasing the Sublet Premises pursuant to the terms and provisions set forth in
the Overlease, amendment and Renewal; that the Overlease, Amendment and Renewal
are in full force and
<PAGE>
effect; that Sublessor has a valid leasehold interest in the Sublet Premises
under the Overlease, Amendment and Renewal; that neither the Overlease,
Amendment nor Renewal nor any of the obligations, duties, and Responsibilities
of the Sublessor or of the Sublessor's landlord (hereinafter referred to as the
"Overlandlord") under the Overlease, Amendment and Renewal have been amended,
modified, or altered in any manner whatsoever unless as shown herein; and that
there exists no circumstance, condition, or act of default which would entitle
or permit the Overlandlord to terminate the Overlease, Amendment or Renewal or
to abridge any rights of Sublessor as Lessee thereunder. Sublessor covenants
that during the term of this Sublease it will not surrender the Overlease,
Amendment or renewal with respect to the Sublet Premises without the prior
written consent of Sublessee, and represents that it has full right, power and
authority under the Overlease, Amendment and renewal to otherwise to enter into
this Sublease. Sublessor hereby reserves the right to modify the Overlease,
Amendment and Renewal so long as such modification or sublease does not
materially affect the use and occupancy of the Sublet Premises by Sublessee.
5. Utilities: Beginning on the date of its access, June 1, 1996, Sublessee shall
be responsible for and will contract in its name for all utilities to service
the Sublet Premises including without limitation power, gas, telephone and
water.
6. Overlease, Amendment and Renewal:
A. All the obligations, rights and privileges contained in the
Overlease, Amendment and Renewal for the Sublet Premises conferred and imposed
upon Sublessor (as tenant therein) except as specifically modified and amended
by this Sublease are hereby conferred and imposed upon Sublessee. Sublessor
covenants and agrees it will make payment of the rentals payable under this
Agreement and the additional rentals payable under the Overlease as and when
due. Sublessee covenants and agrees to otherwise fully and faithfully perform
the terms and conditions of the Overlease, Amendment and Renewal with respect to
the Sublet Premises and the Sublease on its part o be performed. Sublessee shall
not do or cause to be done or suffer or permit any act to be done which would or
might cause the Overlease, Amendment or Renewal, or the rights of Sublessor as
tenant under the Overlease, Amendment or Renewal to be endangered, canceled,
terminated, forfeited or surrendered, or which would or might cause Sublessor to
be in default thereunder or liable for any damage, claim or penalty. Sublessee
agrees, as an express inducement for Sublessor executing this Sublease, that if
there is an conflict between the provisions of this Sublease and the provisions
of the Overlease, Amendment or Renewal which would permit Sublessee to do or
cause to be done or suffer or permit any act or thing to be done which is
prohibited by the Overlease, Amendment or Renewal then the provisions of the
Overlease, Amendment or renewal shall prevail.
B. Sublessee shall pay the monthly rentals and other amounts due to
Sublessor, within ten (10) days after demand therefore by Sublessor, including
any and all sums due pursuant to the Overlease, Amendment or renewal. Sublessor
shall not demand such payment prior to the date which is thirty (30) days before
the date any such sum shall be due and owing under the Overlease, Amendment or
Renewal. Notwithstanding the foregoing, in the absence of any demand, rents for
each calendar month shall be payable in advance on the first day such calendar
month.
C. Notwithstanding anything to the contrary herein contained, Sublessor
shall have no duty itself to perform any obligations of the Overlandlord, nor
shall such default of the Overlandlord affect this Sublease or waive or defer
the performance of any of Sublessee's obligations hereunder; provided,
nevertheless, that in the event of any such default or failure of performance by
Overlandlord, Sublessor agrees, upon notice from Sublessee, to make immediate
demand upon Overlandlord to perform its obligations under the Overlease,
Amendment and renewal, and if Overlandlord shall thereafter fail or refuse to
remedy such default or failure of performance within a period of thirty (30)
days following the notice given by Sublessor then Sublessee shall be entitled as
its sole remedy to terminate this Sublease.
7. Default:
A. If Sublessee defaults in the performance of any of its obligations
hereunder and such default continues for ten (10) days after the giving of
notice of such default with respect to the failure to pay any monies, or fifteen
(15) days after the giving of notice of default with respect to the failure to
perform or comply with any non-monetary obligations of Sublessee hereunder, then
Sublessor may cure any such default and add the cost thereof (including
reasonable attorneys' fees) to rent due under this Sublease or terminate this
Sublease upon giving three (3) days notice of termination to Sublessee.
Sublessee shall have reasonable additional time beyond fifteen (15) days to cure
a non-monetary default if Sublessee has commenced to cure same within said
fifteen (15) days and thereafter with due diligence to cure same.
<PAGE>
B. Notwithstanding anything on the contrary contained herein, Sublessor
may terminate this Sublease on three (3) days notice of termination (without
having given prior notice of default) if in the reasonable apprehension of
Sublessor the act or omission of Sublessee would cause a default under the
Overlease such as would entitle the Overlandlord within said period to terminate
the Overlease, Amendment or Renewal.
C. In the event of termination hereunder Sublessee shall remain liable
for all rent and other sums due under this Sublease for the remainder of what
would have been the term (less the amount of any net rentals collected upon a
reletting for any part of such period), for all damages arising out of its
default and for all costs incurred in connection with any reletting of the
Sublet Premises . Sublessor shall have the right to re-enter and take possession
of the Sublet Premises in the event of a termination for default. In addition to
any and all remedies set forth herein Sublessor shall have all remedies
available at law or in equity and any and all remedies shall be cumulative and
non-exclusive.
8. No Representations: Sublessor makes no representations with respect to this
transaction or the Sublet Premises except as specifically set forth herein, and
Sublessee expressly acknowledges that no such representations have been made.
Sublessee takes the Sublet Premises in an "as is" condition, subject to
reasonable wear and tear. Sublessor warrants that the Premises shall at the time
of possession as delivered to Sublessee be in substantially the same condition
as the date of execution to this Sublease and Sublessor shall have leave the
Sublet Premises broom swept.
9. Mechanics Lien: Sublessee shall permit no mechanics liens to be placed
against the Premises or any portion thereof; provided Sublessee shall have the
right to contest the correctness or validity of any such lien if, immediately
upon demand by Sublessor, Sublessee procures and records a lien release bond in
form and substance sufficient under the General Statutes of North Carolina to
release the Premises or portion thereof from such lien.
10. Indemnity: Sublessee hereby agrees to defend, indemnify and hold Sublessor
harmless from and against any and all expense, including, but not limited to
reasonable attorneys' fees, loss, claims or liability for injury to person or
property arising out of its use and possession of the Sublet Premises, or for
its breach of the Sublease.
11. Restoration: Sublessee shall immediately prior to the expiration or sooner
termination of this Sublease restore the Sublet Premises to the condition that
Sublessor is required to surrender same under the Overlease. Sublessee shall
remove all of its fixtures, upfit and equipment prior to the expiration or
sooner termination of the term hereof and shall repair all damage caused by such
removal.
12. Notices: All notices, demands, submissions and consents required hereunder
shall be in writing and shall be deemed given if sent by certified mail, return
receipt requested postage prepaid (a) to Sublessee, at the address of Sublessee
as hereinabove set forth or such other address as Sublessee may designate by
notice to Sublessor, or (b) to Sublessor at the following address: Family Health
International, Attn: Robert W. Hughes, Post Office Box 13950, Research Triangle
Park, NC 27709, or such other address as Sublessor may designate by notice to
Sublessee.
13. Insurance:
A. Sublessee shall, during the term of this Sublease and at its sole
cost and expense, maintain and deliver to Sublessor fully paid public liability
and property damage insurance policies (or certificates thereof) with respect to
the Sublet Premises and any adjoining sidewalks, passageways, parking areas,
driveways or other Common areas (naming Sublessor as an additional insured) with
limits of at least $1,000,000.00 for injury or death to any one person,
$1,000,000.00 for injury or death in any one occurrence and $1,000,000.00 for
damage to property. Such policy or policies shall include a provision that at
least ten (10) days prior written notice of cancellation be given to Sublessor.
Such policies shall be carried by solvent and responsible insurance companies
licensed to do business in North Carolina. At least ten (10) days before the
expiration of any such policy, Sublessee shall provide Sublessor with a copy of
a fully paid renewal.
B. Sublessee shall, during the term of this Sublease and at its sole
cost and expense, maintain and deliver to Sublessor fully paid insurance
policies (or certificates thereof) upon its fixtures, trade fixtures, personal
property and any and all other property of Sublessee or of any third party which
may from time to time be stored or maintained in, on or around the Sublet
premises an amount necessary to cover the replacement cost thereof.
<PAGE>
14. Waiver of Subrogation: Sublessor hereby releases Sublessee, but only to the
extent of Sublessor's insurance coverage, from any liability for loss or damage
caused by fire or any of the extended coverage perils included in Sublessor's
insurance policies covering the Demised Premises even if the insured peril shall
be brought about by default, negligence or other action of the Sublessee, its
tenants, employees or any of them; provided, this release shall be in effect
only with respect to an insured loss and only so long as Sublessor's policy
applicable to such loss shall contain a clause to the effect that this release
shall not affect the right of Sublessor to recover under such policy. Sublessor
does not waive and hereby reserves the right to secure compensation from
Sublessee for any uninsured loss, any amounts not paid because of deductibles
and other amounts not paid for any reason whatsoever.
Sublessee hereby releases Sublessor, but only to the extent of Sublessee's
insurance coverage, from any liability for loss or damage caused by fire or any
of the extended coverage perils included in Sublessee's insurance policies
covering any property of Sublessee stored at the Demised Premises even if the
insured peril shall be brought about by the default, negligence or other action
of the Sublessor, its agents, employees or any of them; provided, this release
shall be in effect only with respect to an insured loss and only so long as
Sublessee's policy applicable to such loss shall contain a clause to the effect
that this release shall not affect the right of Sublessee to recover under such
policy. Sublessee does not waive and hereby reserves the right to secure
compensation from Sublessor for any uninsured loss, any amounts not paid because
of deductibles and other amounts not paid for any reason whatsoever.
15. Alterations: Sublessee shall not make any alterations or additions to the
Sublet Premises without first obtaining Sublessor's consent, which shall not
unreasonably be withheld, and Overlandlord's consent as provided in the
Overlease.
16. Condemnation: If, during the term of this Sublease, any part or the whole of
the Sublet Premises shall be taken by any competent authority under the power of
eminent domain, Sublessor may execute such conveyances as may be required; and
this Lease shall be affected as follows:
A. If any portion of the Sublet Premises be taken, and if the remainder
of the Sublet Premises is not suitable for Sublessee's purposes, then in that
event Sublessee may elect to terminate this Sublease or may elect to continue
this Sublease, in which event the monthly rental payable shall be adjusted and
prorated in the ratio which the value of the Sublet Premises remaining after
such taking bears to the value of the Sublet Premises immediately preceding the
taking.
B. In the event that all or substantially all of the Premises shall be
taken, then in that event upon notice from any competent authority for such
taking, this Sublease may be canceled upon notice in writing by either party,
and this Sublease shall terminate on the date when title to the Sublet Premises
vests in the condemning authority.
C. Sublessee shall have no claim against Sublessor or the condemning
authority for any portion of the amount that may be awarded as damages as a
result of such taking or condemnation or for the value of any unexpired term of
this Sublease.
17. Destruction or Damage: In the event of damage by fire or other casualty to
the Sublet Premises or to the building in which the Sublet Premises are located
materially interfering with Sublessee's use of the Sublet Premises, Sublessor
may, at its sole option, repair said Sublet Premises to as good condition as
that existing immediately prior to said fire or other casualty, and this
Sublease shall not terminate except that the rent shall abate for the period
when, and to the extent that, the Sublet Premises were untenantable for the
purposes of this Sublease. In the event Sublessor does not elect to rebuild or
restore said Sublet Premises within thirty (30) days of the date of said
casualty, Sublessee shall have the right to terminate this Sublease as of the
date of said casualty. In the event that Sublessor timely elects to rebuild or
restore said Sublet Premises but shall not have completed such rebuilding or
restoration within ninety (90) days of said casualty, Sublessee shall have the
right to terminate this Sublease as of the date of said casualty, but shall so
notify Sublessor within one hundred and five (105) days of the date of said
casualty.
18. Assignment: Without the previous
consent of Sublessor, not unreasonably to be withheld, and the Overlandlord, as
may be required by the Overlease, neither Sublessee, nor Sublessee's legal
representatives or successors in interest by operation of law or otherwise,
shall assign or mortgage this Sublease, or sublet or license the whole or any
part of the Sublet Premises or permit the Sublet Premises or any part thereof to
be used or occupied by others. Any consent by Sublessor to any act of assignment
or subletting shall be held to apply only to the specific transaction thereby
authorized. Such consent shall not be construed as a waiver of duty of
Sublessee, or the legal representatives or assigns of Sublessee, to obtain from
Sublessor consent to any other or subsequent assignment or subletting, or as
modifying or limiting the rights of Sublessor under the foregoing covenant by
the Sublessee not to assign or sublet without such consent. Any violation of any
provision of this Sublease, whether by act or omission, by any assignee,
subtenant or undertenant or occupant, shall
<PAGE>
be deemed a violation of such provisions of Sublease it being the intention and
meaning of the parties hereto that Sublessee shall assume and be liable to
Sublessor for any and all acts and omissions of any and all assignees,
subtenants, undertenants and occupants. If this lease is assigned, Sublessor may
and is hereby empowered to collect rent from the undertenant or occupant. In
either of such events, Sublessor may apply the net amount collected by it to the
rent herein reserved, and no such collection shall be deemed a waiver of the
covenant herein against assignment and underletting, or the acceptance of the
assignee, undertenant or occupant as Sublessee, or a release of Sublessee from
the further performance of the covenants herein contained on the part of
Sublessee.
19. Consents: With respect to any provision of this Sublease which provides, in
effect, that Sublessor shall not unreasonably withhold or unreasonably delay any
consent or any approval, Sublessee shall in no event be entitled to make, nor
shall Sublessee make, any claim for money damages based upon any claim or
assertion by Sublessee that Sublessor has unreasonably withheld or unreasonably
delayed any consent or approval. Sublessee hereby waives any claim for money
damages, whether by way of setoff, counterclaim, defense or otherwise which is
based upon any claim or assertion by Sublessee that Sublessor has unreasonably
withheld or unreasonably delayed any consent or approval; and Sublessee
acknowledges that its sole remedy shall be an action or proceeding to enforce
any such provisions, or for specific performance, injunction or declaratory
judgment. Notwithstanding any other provision of this Agreement, Sublessor's
failure to consent shall not be deemed to be unreasonable when such consent is
also required of Overlandlord by the Overlease, and such consent is not granted
by the Overlandlord.
20. Liability of Sublessor: In the event of a transfer of Sublessor's interest
in the Overlease, Amendment, Renewal or in this Sublease, it shall be deemed
without further agreement between the parties and such transferee that Sublessor
is released from further obligations and that the transferee has assumed and
agreed to observe and perform all obligations of the Sublessor hereunder.
Notwithstanding any such transfer, Sublessee shall be and remain liable to the
transferee for the observance and performance of all obligations of the
Sublessee hereunder, and for breach of any of the representations and warranties
made by Sublessee herein.
21. Waiver: One or more waivers of any covenant or condition by Sublessor shall
nit be construed as a waiver of s subsequent breach of the same or any other
covenant or condition, and the consent or approval by Sublessor to or of any act
by Sublessee requiring Sublessor's consent or approval shall not be construed to
waive or render unnecessary Sublessor's consent or approval to or of any
subsequent similar act by Sublessee.
22. Effect: This Agreement shall be binding upon the parties hereto, their
heirs, successors and permitted assigns, and may not be altered, amended,
terminated or modified except by written instrument executed by each of the
parties hereto.
23. Forum: This Agreement shall be governed by the laws of the State of North
Carolina.
IN WITNESS WHEREOF, the parties have hereunto affixed their hands and
seals the day and year first above written.
FAMILY HEALTH INTERNATIONAL DIGITAL RECORDERS, INC.
SUBLESSOR SUBLESSEE
By: /s/Robert W. Hughes By: /s/J. Phillips L. Johnston
Robert W. Hughes Name: J. Phillips L. Johnston
Senior Vice President Its: President & CEO
Attest: /s/ Marie F. Porter Attest: /s/ Michael J. Schierbeek
Marie F. Porter Assistant Secretary
Assistant Secretary
We consent to this Sublease, Sublessee's use of the Sublet Premises for office
space, light assembly and warehouse:
RESEARCH TRIANGLE INDUSTRIAL PARK WEST
ASSOCIATES JOINT VENTURE
Overlandlord
By: /s/ John M. Cambia, Jr.
Name: John M. Cambia, Jr.
Its: Asset Manager
<PAGE>
WACHOVIA
Note
Date May 24, 1996 $2,000,000.00 FOR
VALUE RECEIVED, the undersigned (hereinafter called the "Borrower") hereby
promises to pay in the order of WACHOVIA BANK OF NORTH CAROLINA, N.A.
(hereinafter called the "Lender") at its office where borrowed, in immediately
available funds, the sum of
Two Million and NO/100-------------------------------dollars together
with any unpaid interest hereon from date of advance, in accordance with the
terms contained in this Note. The optional provisions applicable to the Note are
checked below:
Repayment:
____ One payment in full of principal and unpaid interest due_______________
____ On demand______________________________________
_________Payments of $_____________beginning ______________and thereafter_______
___________________________________________________________________________until
______________________,____________, when the entire principal amount then
outstanding and all accrued but unpaid interest shall be paid in full.
X On Demand the principal amount set forth above or the unpaid principal
amount of all advances which the Lender actually makes hereunder to the
Borrower, whichever amount is less. each advance and each payment made on
account of the principal thereof, shall be evidenced on an attachment hereto;
provided, however, any such notation or the failure of the Lender or other
holder to make any such notation shall not limit or otherwise affect the
obligation of the Borrower with respect to repayment of all advances actually
made hereunder. This Note and any attachment hereto shall be used to record the
outstanding principal balance advanced hereunder until it is surrendered to the
Borrower by the Lender, and it shall continue to be used even though there may
be periods prior to such surrender when no amount of principal or interest is
owing hereunder. If advances of the principal amount hereof are to be made by
Lender to the Borrower after the date of this Note, Lender, at its sole
discretion, is hereby authorized to make such advances under this Note upon
telephonic or written communication of a borrowing request from any person
representing himself or herself to be the Borrower or, in the event the Borrower
is a partnership or corporation, a duly authorized officer or representative of
Borrower.
Interest:
Payable: X in arrears; ____in advance.
X in addition to the payments described above; ____included in the
payments described above.
Payable at the rate per annum of: ____ Prime Rate plus_____________%; ____
_____________% of Prime Rate; ____ ________% Fixed; ____ Those rates which may
be offered from time to time by the Lender and agreed to by the Borrower and so
noted by the Lender on an attachment hereto. In the event of a good faith
dispute among the parties to this Note as to rate under this rate option, the
rate shall be the Prime Rate, adjusted for any changes in the Prime Rate as of
the day such Prime Rate changes;
____ The rate(s) set forth in Schedule 1 attached to this Note and
incorporated herein by reference;
X Those rates which have been offered by the Lender to the Borrower in the
Loan Agreement or Commitment Letter checked below, the provisions of which shall
determine such rates, the procedure for the selection of such rates and the time
periods for which such rates shall apply. In no case shall interest exceed the
maximum rate permitted by applicable law.
To the extent not prohibited by law, a late charge not to exceed 4% of the
payment amount shall be assessed on any payment remaining unpaid on the
fifteenth day after the payment due date or 30 days in the case interest is
payable in advance.
If the interest is based upon the Prime Rate, such interest rate will be
adjusted on: ____ The day the Prime Rate changes; ___Other____________________.
Due: ____ On principal payment dates; ____
Other______________________________________. Interest will be calculated on the
basis of X A year of 360 days and paid for the actual number of days elapsed;
____Other____________________. After demand or maturity (whether by acceleration
or otherwise), as applicable, interest on any unpaid balance hereof shall be
payable on demand at a rate per annum equal to 150% of the Prime Rate, or if
greater, 2% above the rate applicable prior to demand or maturity, adjusted for
any changes in the Prime Rate as of the day such Prime Rate changes, not to
exceed the maximum rate permitted by applicable law.
As used herein, "Prime Rate" refers to that interest rate so denominated and set
by the Lender from time to time as an interest rate basis for borrowings. The
Prime Rate is one of several interest rate bases used by the Lender. The Lender
lends at interest rates above and below the Prime Rate.
All payments on this Note shall be applied first to accrued interest, then to
principal, and then to late charges.
X The terms and conditions in a Loan Agreement dated May 24, 1996 between the
parties hereto, as the same may be amended from time to time, shall be
considered a part hereof to the same extent as if written herein.
____ The terms and conditions in a Commitment Letter
dated_______________________from the Lender to the Borrower, as the same may be
amended, extended or replaced from time to time, shall be considered a part
hereof to the same extent as if written herein.
No waiver by the Lender of any default shall be effective unless in writing nor
operate as a waiver of any other default on a past or future occasion. To the
extent not prohibited by law, the Borrower hereby grants to the Lender and to
such Lender's Affiliates (as the case may be) a security interest in and
security title to and does hereby assign, pledge, transfer and convey to Lender
and such Lender's Affiliates (as the case may be) (i) all property of the
Borrower of every kind or description now or hereafter in the possession or
control of he Lender or of any of the Lender's Affiliates,
Wachovia Bank of Northe Carolina, N.A.
<PAGE>
exclusive of any such property in the possession or control of the Lender any of
the Lender's Affiliates as a fiduciary other than as agent, for any reason
including, without limitation, all cash, stock or other dividends and all
proceeds thereof, and all rights to subscribe for securities incident thereto
and any substitutions or replacements for, or other rights in connection with,
any such collateral and (ii) any balance or deposit accounts of the Borrower,
whether such accounts be general or special, or individual or multiple party,
and upon all drafts, notes, or other items deposited for collection or presented
for payment by the Borrower with the Lender or the Lender's Affiliates (as the
case may be), exclusive of any such property in the possession or control of the
Lender or any of the Lender's Affiliates as a fiduciary other than as agent, and
the Lender and the Lender's Affiliates (as the case may be) may at any time,
without demand or notice, appropriate and apply any of such to the payment of
any indebtedness, obligations and liabilities of the Borrower to the Lender or
to any of Lender's Affiliates (as the case may be), now existing or hereafter
incurred or arising (hereinafter sometimes referred to collectively as the
"Obligations"), whether or not due, with the exception of indebtedness,
obligations and liabilities owing to Lender or Lender's Affiliates that
constitute open-end credit under, or are subject to, the disclosure requirements
of the Truth -In-Lending Act and federal Reserve Board Regulation Z or any
applicable state consumer protection laws. As used herein, "Lender's Affiliates"
means any entity or entities now or hereafter directly or indirectly controlled
by Wachovia Corporation or any successor thereto. All parties to this Note,
including the makers, endorsers, sureties and guarantors, whether bound by this
or by separate instrument or agreement, shall be jointly and severally liable
for the indebtedness evidenced by this Note and hereby (1) waive presentment for
payment, demand, protest, notice of nonpayment or dishonor and of protest and
any and all other notices and demands whatsoever; (2) consent that at any time,
or from time to time, payment of any sum payable under this Note may be extended
without notice, whether for a definite or indefinite time; and (3) agree to
remain liable until the indebtedness evidenced hereby is paid in full
irrespective of any extension, modification or renewal. No conduct of the holder
shall be deemed a waiver or release of such liability, unless the holder
expressly releases such party in writing. Upon (i) any failure of any Obligor
(which term shall include the Borrower and each endorser, surety guarantor of
this Note) to pay any of the Obligations when due or to observe or perform any
agreement, covenant or promise hereunder or in any other agreement, note,
instrument or certificate of any Obligor to the Lender, or to any of Lender's
Affiliates, now existing or hereafter executed in connection with any of the
Obligations, including, but not limited to, a loan agreement, if applicable, and
any agreement guaranteeing payment of any of the Obligations; (ii) any default
of any Obligor in the payment or performance of any other liabilities,
indebtedness or obligations to any other creditor or to allow or permit any
other liabilities, indebtedness or obligations to any other creditor to be
accelerated; (iii) any failure of any Obligor to furnish Lender current
financial information upon request; (iv) any failure of any person to observe or
perform any agreement, covenant or promise contained in any agreement,
instrument or certificate executed in connection with the granting of a security
interest in property to secure the Obligations; (v) any warranty, representation
or statement made or furnished to the Lender by or on behalf of any Obligor in
connection with the extension of credit evidenced by this Note proving to have
been false in any material respect when made or furnished; (vi) the death,
dissolution, change of control, termination of existence, insolvency, business
failure or appointment of a receiver of any part of the property of, assignment
for the benefit of creditors by, or the commencement of any proceeding under any
bankruptcy or insolvency laws, state or federal, by or against, the Borrower or
any other Obligor; (vii) any discontinuance or termination or any guaranty of
any of the Obligations by a guarantor; or (viii) the Lender deeming itself
insecure, thereupon, or at any time thereafter, the Lender at its option may
terminate any obligation to extend any additional credit or make any other
financial accommodation to the Borrower and/or may declare all of the
Obligations to be immediately due and payable. If any Obligation (including but
not limited to the Note) is a demand instrument, the statement of a maturity
date, the requirement of periodic interest or the recitation of defaults and the
right of Lender to declare any Obligation due and payable shall not constitute
an election by Lender to waive its right to demand payment under a demand at any
time and in any event as Lender in its sole discretion may deem appropriate. In
the event the indebtedness evidenced hereby is collected by or through an
attorney, the holder shall be entitled to recover reasonable attorney's fees
(15% of the then outstanding principal and interest of the indebtedness, to the
extent not prohibited by law) and all other costs and expenses of collection.
Time is of the essence.
This Note, and the rights and obligations of the parties hereunder, shall be
governed and construed in accordance with the laws of the State of North
Carolina.
IN WITNESS WHEREOF, the Borrower has executed this Note under seal the day and
year set forth above.
Witness: ______________________________(Seal)
(Individual Borrower)
______________________________________ ______________________________(Seal)
(Individual Borrower)
______________________________________ Borrower:
Attest: Digital Recorders,
Inc.
(Name of Corporation or Partnership)
Michael J. Schierbeek By J. Phillips L. Johnston (Seal)
Title Asst Secretary Title President
[Corporate Seal]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCOUNT NUMBER NOTE LENDING FRB SECUR NOTE- REPAY NOTE TRANSACTION PRIME RATE CLASS BRAN
NUMBER OFFICER CODE CODE TYPE CODE QUAL DATE CODE-FACTOR
- --------------- ------ -------- ---- ----- ----- ------ ----- ----------- ----------- -------------
INTEREST PAID TO INT. INTEREST/DISCOUNT FEES COLLECTED COMMITTMENT COMMIT. C TAX BILLING
DATE BASE COLLECTED ACCOUNT NUMBER NUMBER BAL CODE CODE
- ---------------- ------ ------------------ -------------- ---------------- ------- --- ---- -------
</TABLE>
Wachovia Bank of North Carolina, N.A.
<PAGE>
WACHOVIA
Wachovia Bank of North Carolina, N.A.
Post Office Box 27886
Raleigh, North Carolina 27611-7886
May 24, 1996
Mr. J. Phillips L. Johnston
President and Chief Executive Officer
Digital Recorders, Inc.
P.O. Box 14068
Research Triangle Park, NC 27709-4068
Dear Phil:
Wachovia Bank of North Carolina, N.A. ("Bank"), is pleased to make available to
your company a Two Million dollar ($2,000,000.00) credit facility for Import
Letters of Credit and Line of Credit borrowings. This credit facility will
become effective upon your acceptance of this commitment letter, your return of
the executed copy of same to the Bank, and, subject to the conditions set forth
herein, a closing transaction in a manner satisfactory to the Bank. "Closing,"
"close, " or "closed," as used herein, shall mean the execution, recordation
where necessary, and delivery to the Bank of all documentation required by this
commitment letter. After closing, this line of credit will expire on May 23,
1997. This line of credit commitment is subject to the maintenance by your
company of a condition satisfactory to the Bank and the following terms and
conditions.
As used herein, the term "loan" shall include loan, line of credit, advance.
drawing, debit, liability, and any other obligation of your company to the Bank
arising out of this commitment.
1. Interest Rate: The rate of interest for the term of the loan shall be
a choice of the 30, 60 or 90 day "LIBOR Base Rate" plus 2.30%, subject
to change by the Bank from time to time. Rate of
interest shall be calculated on a basis of a 360 day a year for the
actual number of days in each interest period. As used herein, the
"LIBOR Base Rate" shall mean a rate for deposits in US dollars, with
maturities comparable to the selected LIBOR interest period that
appears on the displayed designated as page "3750" of the Telerate
Service (or as such page as may replace page 3750 of that service or
such other services or services as may be nominated by the British
bankers Association for the purpose of displaying London Interbank
offered rates for US dollar deposits) determined as of 1:00 p.m. New
York Time two business days prior to commencement of such interest
period.
2. Interest Payments and Principal Payments: At the end of each applicable
Interest period or quarterly, if earlier, calculated on an actual /360
day basis. Adjusted LIBOR Loans may not be prepaid before the end of
the Interest Period applicable to such Loans. Base Rate Loans may be
paid at any time on one Business Day's notice in a minimum amount of
$1,000,000.00 and any incremental multiple of $500,000.00.
3. Fees: The bank shall receive a commitment and documentation fee in
the amount of $500.00 to be paid to the Bank simultaneously with the
acceptance of this commitment by your Company, which commitment and
documentation fee shall be fully earned when paid and non-refundable.
In addition, there will be an unused fee of .20% annually on the
unused portion of the commitment amount, calculated and payable
quarterly in arrears.
4. Used of Proceeds: The loan will be used by your company for general
working capital purposes and Import Letters of Credit.
<PAGE>
5. Loan Covenants: Unless the Bank shall otherwise agree in writing, for
so long as this agreement shall remain in effect and until all of the
Obligations are paid in full, the Borrower agrees as follows:
1. Cash plus short term, liquid investments shall not be less than
$1,500,000.00 and shall at all times be at least 1.5 times greater
than the amount of cash borrowings outstanding under the line of
credit.
2. Each calendar quarter, Digital Recorders shall have a positive net
income; and total net income for the year shall be greater than
$500,000.00.
3. All of the assets of the Company are to remain unencumbered.
4. All changes in executive management require the prior approval of
the Bank and the President will maintain key man life insurance in
the amount of $1,000,000.00.
5. The Company will inform the Bank of any acquisitions insofar as
this information compliance with all SEC regulations.
6. The Bank will be provided with monthly internal financial
statements in addition to quarterly and annual financial reports on
the Company.
6. Applicable Law: This commitment shall be interpreted, construed,
enforced, and governed by the laws of the State of North Carolina.
Upon return by your company to the Bank of a fully-executed copy of
this commitment by its expiration date of June 7, 1996, this
commitment will be considered accepted and will constitute an agreement
obligating the Bank to make your company accept the loan in accordance
with the terms as conditions set forth above. If the executed copy is
not received by the Bank by the expiration date noted above, this
commitment shall be considered null and void.
Should you have any questions concerning the terms hereof, please do
not hesitate to call me at (919) 755-7628.
Very truly yours,
/s/ Tom Roberts
Thomas A. Roberts, III
Banking Officer
ACCEPTED THE 24TH DAY OF MAY, 1996.
DIGITAL RECORDERS, INC.
By: /s/ J. Phillips L. Johnston
Title: President
Accepted Copy Received by Bank
Date: May 24, 1996
By: /s/ Thomas A. Roberts, III
<PAGE>
WACHOVIA
International
CONTINUING LETTER OF CREDIT AGREEMENT
THIS AGREEMENT, dated the 24th day of May, 1994, and hereby executed by
Digital Recorders, Inc. (hereinafter called the "Company") for the benefit of
the Banks.
RECITALS:
A. From time to time the Company and its Affiliates are required in the ordinary
course of business to obtain on short notice certain Credits and amendments
thereto, and the Company wishes to establish procedures to facilitate the
reasonably prompt issuance of such Credits by the Banks, or the remote
Correspondent Banks upon electronic instructions.
B. This Agreement sets forth the procedures pursuant to which such Credits and
amendments thereto shall be issued and certain other terms and provisions
applicable thereto.
NOW, THEREFORE, the Company agrees with and for the benefit of the
Banks as follows:
1(a). Definitions. As used herein:
"Affiliate" means (a) as to the Company, each corporation that
directly or indirectly through one or more intermediaries, controls, or is
controlled by or under common control with the Company; and (b) as to the
Principal Bank, any other bank that is, directly or indirectly, a wholly-owned
subsidiary of Wachovia Corporation. An Affiliate as to any of the Banks includes
without limitation all of the other banks.
"Authorized Representative" means the person or persons from
time to time designated to act on behalf of the Company by written certificate
in the form of Exhibit A attached hereto furnished to the Principal Bank. Once
such a certificate is submitted to the Principal Bank, the Company may
thereafter make no changes thereto except such changes as are specifically
acknowledged by the Principal Bank in writing.
"Banks" means Wachovia (GA), Wachovia (NC), Wachovia (SC),
Wachovia International Banking Corporation and any other banks or financial
institutions which are Affiliates of Wachovia (GA), Wachovia (NC) or Wachovia
(SC).
"Credit(s)" means Letters of Credit and includes both
Commercial and Standby Letters of Credit.
"Principal Bank" means the Bank listed on the signature page
to this Agreement.
"Remote Correspondent Bank" means any bank or trust company
with which any of the Banks may have contracted, or otherwise made arrangements,
to issue Credits for the account of any of the Banks or the Company or the
Company's Affiliates.
"Wachovia (GA)" means Wachovia Bank of Georgia, N.A., a
national banking association.
"Wachovia (NC)" means Wachovia Bank of North Carolina, N.A., a
national banking association.
"Wachovia (SC)" means Wachovia Bank of South Carolina, N.A., a
national banking association.
1(b). Other References. References in Exhibit B ("TERMS AND CONDITIONS
OF APPLICATION AND AGREEMENT FOR DOCUMENTARY LETTER OF CREDIT") to the
"undersigned," "we", "us", "our", "ourselves" and similar words shall be deemed
to refer to the Company. references in Exhibit B to "you", "your" and similar
words shall be deemed to refer to the Banks. references in Exhibit B to
"correspondents" shall be deemed to include any Remote Correspondent Banks.
References in Exhibit B to the "Application" shall be deemed with respect to a
Credit to refer to the instructions received by the Principal Bank pursuant to
paragraph 3 below from an Authorized representative with respect to such Credit.
references in Exhibit B to "your issuing office" or the "office" of any of the
Banks shall be deemed to refer to the Principal Bank's most recent address
furnished to the Company. References in Exhibit B to "agreement" shall be deemed
to refer to this Agreement, Exhibit B and, with respect to a Credit, the
instructions received by the Principal Bank pursuant to paragraph 3 below from
an Authorized Representative with respect to such Credit. Whenever used herein
or in Exhibit B, the singular shall be deemed to include the plural and the
plural the singular.
2. The Credits. At the Company's request, but in the Banks' sole
discretion, the Banks shall issue, or cause to be issued, Credits for the
account of the Company or the Company's Affiliates. The Principal Bank shall be
the issuer of each Credit unless the Principal Bank, in its sole discretion,
determines that an Affiliate of the Principal Bank or a Remote Correspondent
bank shall be the issuer of such credit. In the case of Credits issued by a
Remote Correspondent Bank, the applicant on such credits may appear as "Wachovia
Bank/for the account of [Company or the Company's Affiliate(s)]" or words of
similar import. The Company, however, shall be primarily obligated hereunder
with respect to, and liable for, each Credit issued, whether such Credit is
issued for the account of the Company or one or more of the Company's
Affiliates, and whether issued by one of the Banks or by a Remote Correspondent
Bank.
3. Instructions to Issue Credits and Amendments. The Company hereby
authorizes the Banks to issue, or cause to be issued, Credits and amendments
thereto upon receipt of instructions from an Authorized Representative of the
Company. Such instructions shall specify the amount, beneficiary, and terms of
the requested Credit. Such instructions may be communicated to the Principal
Bank by means of data transmission (telex, telecopier, terminals, telephone or
otherwise) at the most recent address furnished to the Company by or on behalf
of the Principal Bank or by means of direct telephonic instructions from an
Authorized Representative. The Company agrees to promptly confirm to the
Principal Bank in writing any verbal instructions, but the failure of the
Company to confirm such instructions shall not impair or diminish the Company's
duties and obligations to the Banks hereunder arising on account of such
instructions.
<PAGE>
4. Company's Covenants. Except as otherwise provided herein, the
Company hereby agrees that as to each Credit issued hereunder, the terms and
provisions set forth on Exhibit B attached hereto shall apply to such Credit and
shall bind the Company with respect to such Credit.
5. Responsibility. The Banks shall be entitled to rely and act upon
instructions from any Authorized Representative. The Banks shall also be
entitled to rely and act upon the instructions of any person identifying himself
or herself as an Authorized Representative, whether or not such person is in
fact an Authorized Representative, and the Company shall be bound thereby in the
same manner and to the same extent as if such person was actually authorized.
The Company agrees to indemnify and hold the Banks harmless from any and all
claims, damages, losses, liability, costs and expenses (including reasonable
attorneys' fees) which may result from or arise out of or may be incurred by the
Banks, the Remote Correspondent Banks, or any of them, as a result of acceptance
of and reliance on instructions from or on behalf of the Company pursuant to the
provisions of this Agreement.
6. Examination of Documents by Company. Upon receipt by the Company,
the Company agrees to promptly examine all drafts and documents presented under
any credit and to notify the Principal Bank in writing of any alleged
discrepancies or irregularities. Failure of the Company to give such notice to
the Principal Bank within a reasonable time not to exceed five business days
shall be deemed to be a waiver by the Company (and any Affiliate of the Company)
of any such alleged discrepancies and/or irregularities.
7. Termination. This Agreement shall continue in effect until such date
of discontinuance as may be specified in a written notice from the Company to
the Principal Bank at the Principal Bank's most recent address furnished to the
Company; provided, however, that the date so specified shall be at least ten
(10) days after the receipt of such notice by the Principal Bank; and provided,
further, that notwithstanding any discontinuance or termination of this
Agreement, this Agreement shall apply to all Credits issued prior to the
effective date of such discontinuance or termination and to all obligations and
liabilities of the Company with respect to such Credits existing at such date.
Any security interests granted to the Banks hereunder and under Exhibit B shall
continue until such time as all obligations and liabilities of the Company
hereunder have been satisfied.
8. Construction and Interpretation. This Agreement (but not the Credits
or Exhibit B) shall be governed by and construed in accordance with the Laws of
the state where the Principal Bank has its principal office. The Credits and
Exhibit B shall be governed by and construed in accordance with the provisions
of Exhibit B.
9. Delay and Waiver. No delay on the part of the Banks or the Remote
Correspondent Banks in the exercise of any right or remedy shall operate as a
waiver thereof, and no single or partial exercise by the Banks or the Remote
Correspondent Banks of any right or remedy shall preclude other or further
exercise thereof, or the exercise of any other right or remedy. The Banks and
the Remote Correspondent Banks shall not be deemed to have waived any of their
rights hereunder unless they or their duly authorized agent shall have signed an
express waiver thereof in writing. No such waiver shall, unless expressly stated
therein, be effective as to any transaction or event which occurred subsequent
to the date of such waiver, nor as to any continuance of any breach.
10. Miscellaneous. This Agreement may not be amended or modified except
by a writing signed by the Company, the Principal Bank and any other Bank which
then has issued a Credit hereunder which remains outstanding. This Agreement
shall be binding upon the Company and its successors and assigns and shall inure
to the benefit of the Banks and their successors and assigns.
Digital Recorders, Inc.
(Corporation or Firm)
By: J. Phillips L. Johnston, President
(Authorized Signature & Title)
PRINCIPAL BANK:
Wachovia Bank of North Carolina, N.A.
- --------------------------------------
Address of Principal Bank:
Post Office Box 27886 Raleigh, North Carolina 27611
- ----------------------------------------------------
Telephone: (919) 755-7628
-------------------------
Telex: (919) 755-7722
-----------------------------
Telecopier:________________________
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
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