FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for
the transition period from ____________ to ____________
Commission file number: 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer in its charter)
NORTH CAROLINA 56-1362926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4900 PROSPECTUS DRIVE, SUITE 1000
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-4068
(Address of principal executive offices)
Issuer's telephone number: (919) 361-2155
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
COMMON STOCK, $.10 PAR VALUE Boston Stock Exchange, Inc.
WARRANTS TO PURCHASE COMMON STOCK Boston Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
State issuer's revenues for its most recent fiscal year: $ 9,200,269
As of February 28, 1997, 2,674,075 shares of the registrant's Common Stock were
outstanding. The aggregate market value of the 2,045,142 shares of Common Stock
held by non-affiliates was $6,646,712 as of February 28, 1997. The market value
of the shares was calculated based on the closing bid price of such shares on
The Nasdaq SmallCap MarketSM on such date.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this annual report is incorporated by
reference to the Registrant's definitive proxy statement if filed with the
Commission on or before April 30, 1997 or if such proxy statement is not filed,
will be filed with the Commission as an amendment to this Form 10-KSB under
cover of Form 10-KSB/A not later than April 30, 1997.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Digital Recorders, Inc. (the "Company") designs, manufactures or
contracts for the manufacture of, and sells information technology products
through its three business groups, consisting of Transit Communication Systems
("TCS"), Highway Information Systems ("HIS") and Digital Audio Company ("DAC"),
and its two wholly-owned subsidiaries, Transit-Media GmbH ("Transit-Media") and
TwinVision Corp. of North America, Inc. ("TwinVision"). The Company's products
are currently marketed to the mass transit market, the travelers information
station/highway advisory radio ("TIS/HAR") market and the law enforcement
market. Customers include municipalities, regional transportation districts,
federal, state, and local departments of transportation, turnpikes, bus
manufacturers, and law enforcement agencies or organizations.
The TCS group focuses on the means by which a transit authority
facilitates next stop announcements, passenger information, vehicle location and
other communications with riders. In May 1994, the Company introduced the
Talking Bus(R), Model DR500C, to the transit communication market. The DR500C is
a digital vehicle stop location announcement and passenger information system
which allows public transit vehicle operators to give audio next stop
announcements to assist visually-impaired passengers in arriving at their
destination. The Company believes that demand for open architecture transit
products, such as the DR500C, will increase in the future as transit authorities
seek to implement computer aided dispatch/automatic vehicle location ("CAD/AVL")
systems which may encompass a global positioning system ("GPS"), inertial
navigation, dead reckoning or other technologies for more efficient use and
monitoring of transit vehicles. Since 1988, the Company has sold over 1,900 TCS
products for use by 42 transit system customers in 20 states and 2 foreign
countries.
The HIS group develops radio broadcast systems, authorized by the
Federal Communications Commission ("FCC"), which permit broadcast of voice audio
over low-power AM radio stations. The Company's digital messaging systems for
the TIS/HAR market serve the communication needs of motorists for a variety of
purposes, such as advising of traffic and weather conditions, construction
delays and availability of alternate routes to a particular destination. The
Company has sold over 600 HAR systems in 46 states since its inception in 1983.
The DAC group was established in 1995 upon the Company's acquisition
of Digital Audio Corporation. The DAC group produces a line of digital filter
systems and tape transcribers used to improve the quality and intelligibility of
live and recorded voices. Products are marketed to law enforcement entities and
other customers in government organizations, both domestic and overseas.
Transit-Media became a wholly-owned subsidiary of Digital Recorders
after being acquired by the Company in May 1996. (See "Acquisitions".) Shortly
thereafter, the Company formed TwinVision as another wholly-owned subsidiary of
the Company. Both of these subsidiaries design, manufacture or contract for
manufacture of, sell and service a new generation of electronic destination sign
systems primarily used on transit bus vehicles worldwide. Transit-Media serves
the European and Far Eastern markets while TwinVision serves the North American
market. Customers include transit operating agencies which use mass transit
vehicles and the manufacturers of those vehicles.
INDUSTRY OVERVIEWS
The transit communication industry is a relatively new market,
growth in which is principally a result of the enactment of the Americans with
Disabilities Act ("ADA"), the Clean Air Act ("CAA"), the Intermodal Surface
Transportation Efficiency Act ("ISTEA") and Smart Highway initiatives. ADA
requires that fixed route transit systems announce major stops and transfer
points to assist visually-impaired passengers. Several lawsuits filed against
municipalities to enforce compliance with these and other provisions of ADA have
contributed to the growth in purchases of stop announcement systems by transit
operators. Public transit authorities typically draw between 80% and 90% of
funding for purchases of ADA compliant products from the Federal Transit
Administration, with the
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remainder of product acquisition funding being provided by state and local
sources. The CAA, which requires large employers to gather data concerning the
routes their employees travel to and from work and their methods of
transportation, is designed to develop more effective transportation routing
information for public transit agencies. The ISTEA, a $40 billion federal
funding initiative, promotes the development of a "smart highway" system in the
United States, which designates a wide range of devices, services and programs
intended to increase the capacity of the nation's highway system without adding
additional physical lanes of highway. The "smart highway" system is expected to
utilize sophisticated CAD/AVL software and hardware for "intelligent" transit
vehicles.
Based upon its analysis of companies known to sell TCS type products
and its experience and contacts in the transit market, management believes that
a significant market demand has begun to develop for TCS type products as
legislative and governmental initiatives take effect. The Company expects that
its transit products, which incorporate open architecture, real-time software
recording capabilities, high quality audio, memory efficiency, variable length
messaging, individual message access and integration capabilities with CAD/AVL,
GPS and other technologies, will capture significant market share of the transit
market as it develops. While the TCS group has had nominal international sales,
the Company believes the purchase of Transit-Media will enable the Company to
cross-sell TCS products overseas.
The TIS/HAR market consists of mobile and stationary broadcasting
systems which operate on the AM radio band. Although the FCC has considered
proposals to open TIS/HAR communications to the FM radio band, no such action
has been taken to date by the FCC. HAR products typically operate on battery or
electrical power, provide limited coverage of three to six miles and compete
with other methods of motorist communications such as variable message signs.
Technological advances in the TIS/HAR industry have expanded potential
applications as users can change messages or check the broadcasting unit by
remote control from any touch-tone telephone. Although the TIS/HAR market is
more mature than the transit communication market, management believes the
potential market for HAR systems will expand as computer-controlled systems such
as the Company's DR2000 achieve market acceptance. The Company believes that
solar-powered mobile HAR systems are better suited than traditional variable
message signs to provide information to motorists especially where power is
unavailable.
The DAC market consists of government organizations at the local,
state, and federal level. DAC also markets its products in twelve foreign
countries through a network of dealers. Approximately one-third of DAC sales are
international sales. DAC's digital filter and tape transcriber technology is
applicable to recorded and live voice signals and reduces background noises that
might otherwise make the audio unintelligible. Additionally, DAC's products are
applicable to the vibration, acoustic, and communications disciplines in the
commercial sector.
The electronic destination sign industry, which is the primary
market for Transit-Media and TwinVision, is a highly competitive, mature market
with growth limited to overall industry growth or that which is precipitated by
technological advances. Virtually, all transit buses manufactured worldwide have
some form of destination signs and the percentage of those signs that are
electronic signs is approximately 60% and 90% in Europe and the United States,
respectively. A single competitor in the domestic electronic destination sign
market controls a significant market share, while no one supplier dominates the
worldwide market.
PRODUCTS AND PRODUCT DESIGN
The Company's current products include the DR500C Talking Bus(R), a
broad line of HAR broadcasting systems which operate on the AM radio band, DAC's
product line, which includes ten digital filter instruments and two digital tape
transcription machines, and light-emitting diode flip-dot electronic destination
signs being marketed by Transit-Media and TwinVision. During 1996, 1995 and
1994, TCS accounted for 57%, 36% and 42% of the Company's net sales,
respectively. During the same periods, HIS accounted for 13%, 40% and 58% of the
Company's net sales, respectively. DAC accounted for 26% and 24% of net sales in
1996 and 1995, respectively. In addition, Transit-Media accounted for 4% of net
sales in 1996, and TwinVision did not have any sales in 1996.
TCS PRODUCT LINE. The Talking Bus(R) is an automated next stop
announcement and passenger information system which is designed for use
in transit buses, light rail vehicles, trains or subway cars, people
movers, monorails, airport vehicles and tour buses. The Talking Bus(R)
adheres to the American public transit
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industry's recognized standards, the Society of Automotive Engineers
J1708, J1587, and J1455. It uses an open architecture computer-based
electronics system design which accommodates the addition of new
features and capabilities, including interoperability with third-party
equipment. In the case of the Talking Bus(R), the open architecture
permits the expansion of memory capacity to the size required by the
transit customer and the integration of the Talking Bus(R) with
CAD/AVL, GPS receivers, internal and external signs, and other future
electronic systems. The Talking Bus(R) offers easy downloading or
transfer of software using an industry standard personal computer
memory card international association ("PCMCIA"). Also, by installing a
modem, software can be downloaded by radio frequency. The Talking
Bus(R) is designed to meet the operating standards for temperature,
humidity, shock, vibration and other environmental conditions found in
transit applications, and to satisfy all ADA requirements for internal
and external stop announcements. The Talking Bus(R) is manufactured in
an ISO 9002 compliant facility which is an internationally accepted
standard for manufacturing quality.
When activated by a transit operator or by an automatic trigger such as
GPS or signpost radio, the Talking Bus(R) provides a high quality
digital audio announcement which can be recorded in any language. The
Talking Bus(R) uses the vehicle's power supply and can be wired for a
12-volt or 24-volt source. The Talking Bus(R)' memory is provided by
expandable memory cards with up to 40 megabyte capacity. The audio
messages are stored in flash memory, which does not require battery
backup.
HIS PRODUCT LINE. The Company markets a line of stationary and mobile
HAR products. Each HAR product is manufactured in compliance with FCC
rules and regulations and provides the maximum transmission power
permitted by the FCC. The various models of the HAR products offered by
the Company can be generally divided into two classes of products, the
Solar Max and stationary highway advisory radio systems. The Solar Max
operates from a solar power system including battery backup which is
mounted on a trailer for easy transportation and setup. With the
exception of this trailer, the Solar Max includes no moving parts,
which limits the amount of maintenance which may be required. The Solar
Max can be programmed and on the air within ten minutes and can be
controlled remotely using the built-in cellular telephone. Stationary
highway advisory radio products offered by the Company can be directly
linked to nearby utilities or can be installed using solar power and
battery options.
DAC PRODUCT LINE. The Company markets an extensive line of digital
signal processing ("DSP") instruments that are used by law enforcement
agencies and organizations to enhance forensic tape recordings
collected from a variety of sources. Voices on such recordings are
often obscured by hum, room noises, acoustic resonances, muffling,
crosstalk, background music, and street noises. To enhance such
recordings and make them understandable, the tape's audio is played
through a sequence of audio filters. These real-time devices have
substantial computational power with the typical digital filter
employing 20 microprocessors.
DAC's most popular product is the Personal Computer Audio Processor
("PCAP"). The PCAP is a mouse driven, Windows(TM)-based processor used
to reduce non-voice sounds on an audio source. This PC-controlled
digital processor implements up to five different digital filters
simultaneously and has built-in dual channel spectral analysis. An
expanded version, the Multi-Channel Audio Processor ("MCAP") was
introduced in 1996 and is a compliment to the PCAP for the more
sophisticated user.
TRANSIT-MEDIA AND TWINVISION PRODUCT LINE. The Company's electronic
destination sign products include various models which cover the vast
majority of all known applications. These products adhere to ADA
requirements and function under most industry recognized protocol
standards. They possess an open architecture, microprocessor-based
system incorporating a new generation display device. This new
generation display device improves distance of readability while
reducing end user maintenance expense. Destination message programming
is accomplished via proprietary software developed by the Company
through PCMCIA memory card download. The product is manufactured under
various contracts in ISO certified facilities.
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MARKETING AND SALES
All of the Company's products are marketed on a direct basis by the
Company's sales and marketing personnel. The Company's marketing activities
combine data base marketing, selective media advertising, publication of a
periodic newsletter directed to customers, participation in trade shows and
industry conventions, cooperative activities with system integrators, and, in
the case of DAC, a one-week DAC SCHOOL. This school offers end users
opportunities to understand DSP technology and to learn DAC product operation
via hands-on instruction. The DAC school was conducted four times in 1996. In
addition, the Company's TCS products are marketed by four outside sales
representatives. These sales representatives are compensated through commissions
and reimbursement of certain business expenses. HIS products are also marketed
in California and Nevada by a manufacturer's sales representative company. DAC
products are sold directly by the Company in the United States and through a
network of dealers internationally. The Company's electronic destination sign
products are marketed both direct by the Company and through independent sales
representatives to vehicle manufacturers and the end user transit operating
agencies. Several of HIS's and DAC's products have been approved for purchase by
the General Services Administration of the U.S. Government, which the Company
believes enhances its sales opportunities to federal agencies because the agency
can, if they so chose, purchase scheduled products from the Company at a
specified negotiated price.
The Company anticipates that a significant portion of its revenues
will continue to be accounted for by relatively few key customers, the identity
of which may vary from year to year. Revenues from three major customers
accounted for approximately 34%, 35%, and 44% of net sales during 1996, 1995
and 1994, respectively. The Company's most significant customer during the past
three years accounted for approximately 13% of the total combined sales during
those years.
The Company's customer base has a significant number of governmental
and quasi-governmental entities. The Company derived approximately 48%, 65% and
83% of its net sales from purchases by governmental and quasi-governmental
entities in 1996, 1995 and 1994, respectively. Sales to these customers are
characterized by a lengthy sales cycle which generally extends for a period of
two to twenty-four months. The Company's sales cycle is also characterized by
higher sales during the third and fourth quarters. In addition, purchases by
these customers are dependent on federal, state and local funding, which may
vary from year to year. The Company's sales and marketing staff will generally
attempt to assist customers in the preparation of transportation improvement
plans which are used to prepare budgets for submission to governmental and
legislative bodies.
RESEARCH AND DEVELOPMENT
The Company is committed to the continued enhancement of all of its
products and to the development or acquisition of products having related
applications. The Company's objective is to develop products that are considered
to be high quality, technically advanced and capable of capturing a share of the
applicable market.
In the transit market, enhancement of the Talking Bus(R) will
continue over the next year to increase the Company's ability to integrate TCS
products with other technologies such as CAD/AVL, GPS, dead reckoning, and other
on-vehicle electronic systems. The Company believes that the convergence of core
technologies, combined with the need for capital improvements in the transit
industry, will justify continuing high levels of research and development in the
TCS area. TCS research and development will primarily focus on the ability to
integrate technologies such as GPS and inertial navigation into the Company's
stop announcement system, thereby providing an "automatic trigger" of a stop
announcement without need for human intervention.
The Company's research and development in the TIS/HAR area will be
more limited, and will focus primarily on the continued development of the
DR2000 series of computer-controlled HAR products and the TR 10 class `E'
transmitter as well as ways to reduce product costs and improve product
reliability. The DR2000 is a computer-controlled HAR digital messaging system
which will permit multiple HAR stations to be networked together for operation
from a central traffic operation center.
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DAC currently has development contracts with several government
agencies to design products for specific DSP applications. In addition, DAC is
continuing to upgrade and enhance designs of existing products to incorporate
new technology and to meet customer requirements.
In October 1996, the Company introduced a new generation display
element in its TwinVision LeDot(TM) destination sign system. This new generation
display combines known and proven benefits of light-emitting diodes with proven
electromagnetic flip-dot elements to enhance product performance. These
enhancements improve distance of readability and reduce maintenance expense.
The Company's research and development costs increased in 1996 as
development activities continued in all business groups and in the Transit-Media
and TwinVision subsidiaries. The Company attempts to maximize its use of the
funds available for research and development by following strategies to
accelerate the development of new products, reduce product costs, focus on
systems integration and accelerate new product introductions. Research and
development expenses were $643,223, $379,870 and $587,067 in 1996, 1995 and
1994, respectively.
ACQUISITIONS
On April 30, 1996, the Company acquired all of the outstanding stock
of Transit-Media, a company which assembles and markets proprietary on-board,
electronic destination signs for mass transit systems in Europe and the Far
East. The Company paid $35,000 for all of Transit-Media's stock at closing. The
Company recorded cash ($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). Upon completing the acquisition, the Company invested $350,000 in
Transit-Media to pay off an existing bank credit line and provide working
capital.
On February 28, 1995, the Company entered into and closed an Asset
Purchase and Sale Agreement (the "Agreement") with Digital Audio Corporation
("Digital Audio"). Pursuant to this Agreement, the Company obtained
substantially all of the assets of Digital Audio for a purchase price in the
aggregate amount of approximately $2,100,000 which consisted of cash in the
amount of $1,171,000, a promissory note in the amount of $709,000 and 33,846
shares of the Company's Common Stock valued at $220,000 ("Acquisition Shares").
As additional consideration, the Agreement provides for an earn-out payment
pursuant to which Digital Audio shall be entitled to receive a $200,000 increase
in the purchase price in the event, during the two-year period commencing on
February 28, 1995, total revenues attributable to the operations of Digital
Audio increase a minimum of 10% during each year of such two-year period, and
earnings before interest and taxes attributable to the operations of Digital
Audio equals or exceeds 59% of total revenues attributable to the operations of
Digital Audio during each year of such two-year period. The Company does not
anticipate any such earn-out payments will be made. The unsecured promissory
note payable to Digital Audio, which accrued interest at the rate of 6% per
annum, was paid in January 1996.
COMPETITION
The markets in which the Company participates are highly
competitive. The transit market in particular is characterized by rapid
technological advances, evolving industry standards and technological
obsolescence. The Company believes that the principal competitive factors in the
markets for the TCS, HIS, Transit-Media and TwinVision products include ease of
use, service and support, price and the ability to integrate these products with
GPS and other technologies. The Company currently views Luminator, an operating
division of Mark IV Industries, Inc., as its principal competitor in the transit
market. Luminator is a significant competitor in signage and announcements and,
while the Company believes that Luminator now purchases its stop announcement
technology from an outside party, it could either develop or acquire this
technology. The Company also recognizes Clever Devices Ltd. and Meister
Electronics, LC., a German company, as competitors in the transit market,
although neither of these competitors have the capital and other resources of
Luminator. In the TIS/HAR market, the Company's principal competitor is
Information Station Specialists ("ISS"). The Company also considers LPB, Inc. a
competitor in the TIS/HAR market, although with a significantly smaller market
share than ISS.
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Competition in the voice noise filtering business is limited, and
the Company believes that its DAC group is a leader among the small number of
participants in the industry. The Company will attempt to maintain that position
through frequent product improvements and new product introduction. Analog
filtering products produced for the commercial sound industry by companies such
as AKG are not specifically designed for voice filtering and are not considered
significant competition. The Company recognizes Adaptive Digital System, Inc.
as a competitor producing similar technology products.
MANUFACTURING
The Company's principal supplier for TCS products, Quality
Manufacturing and Design of Raleigh, North Carolina ("QMD"), is a contract
electronics manufacturing firm. QMD has achieved ISO 9002 certification for
manufacturing. The Company currently has an order to purchase from QMD certain
electronic components included in the Talking Bus(R). The Company believes that
QMD has sufficient manufacturing capacity to address the Company's short-term
requirements for the Talking Bus(R) and, by adding a second shift, could
significantly increase production if requested to do so by the Company. Some TCS
components, such as memory cards, may be subject to considerable variations in
price and availability from time to time. Although the Company has not
experienced production delays due to a lack of available parts, a significant
increase in the Company's sales could result in the Company having to increase
its inventory of certain key components in order to ensure their availability.
Although the Company is currently dependent on QMD as its sole
supplier for major electronic components included in the Talking Bus(R),
management believes that alternate suppliers are available. Nonetheless, the
loss of this supplier could have a short-term adverse effect on the Company's
ability to timely deliver products to its customers.
The Company's principal supplier for certain HIS products was
Multi-Technical Services, Inc. ("MTS") of Clayton, North Carolina. In 1994 the
Company entered into a blanket production purchase order agreement with MTS to
supply certain component parts and assembled HIS products. Starting in late
1996, the Company started to do some of its engineering and manufacturing work
for its HIS products internally.
The Company's DAC group manufactures its own products as well as,
starting in late 1996 some of those used by HIS. Printed circuit board and
enclosure fabrication is purchased from specialized vendors. The DAC group
utilizes proprietary circuits from Texas Instruments, Motorola, and Crystal
Semiconductor. Because of the rapid advances in technology, the Company believes
that this practice is necessary to maintain its competitive position and does
not place the Company at excessive supply risk.
The Company purchases most of its components for its electronic
destination signs from Lite Vision Corporation, a corporation based in Taiwan.
The Company has contracts with electronic manufacturing firms to manufacture
these products both domestically and overseas. The display element is
essentially a sole-source device, and the Company is managing its inventory
levels to minimize the risk of delays in parts availability.
PROPRIETARY RIGHTS
The Company currently relies on a combination of patent, copyright
and trade secret protection, nondisclosure agreements and licensing agreements
to establish and protect its ownership of proprietary rights. The Company will
attempt to keep the results of its research and development program proprietary,
but may not be able to prevent others from using some or all of such information
or technology. The Company has been issued two patents relating to the memory
efficiency and the power efficiency of its technology and a design patent on the
Solar Max HAR system. The Company has registered its Talking Bus(R) trademark
logo with the United States Patent and Trademark Office and has registered
various trademarks and logos for its new generation technology display element.
In addition, Digital Recorders and Solar Max are trademarks of the Company. The
Company intends to pursue patents covering new technologies and registration of
its other trademarks and service marks as advised by counsel. The Company
intends to maintain the integrity of its service marks, trade names and
trademarks and other proprietary names and marks against unauthorized use and to
protect against infringement and unfair competition where circumstances warrant.
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EMPLOYEES
As of February 28, 1997 the Company employed fifty-one people. The
Company's employees are not covered by any collective bargaining agreements and
the Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 5,400 and 4,600 square feet of
office space in two different locations in a building in Durham, North Carolina.
This space is leased under two separate lease agreements. One lease agreement
provides for monthly rental payments of $5,641 and expires in January 1998. The
second agreement provides for monthly rental payments ranging from $2,800 to
$2,920 and expires in April 2000. The Company also leases approximately 2,700
square feet of office and manufacturing space in Raleigh, North Carolina. That
lease, which expired on February 28, 1996 and was extended on a month to month
basis, provides for monthly rental payments of $1,733. Subsequent to December
31, 1996, the Company entered into a new lease agreement which increased the
office space under this lease from approximately 2,700 square feet to
approximately 4,700 square feet. This new lease agreement contains rental rates
ranging from $4,241 to $5,013 per month and runs from April 1997 through
December 2002.
Management believes that, if necessary, additional office and
manufacturing space will be available in or adjacent to its existing facilities
at a cost approximately equivalent to or slightly higher than that now paid by
the Company for its existing facilities.
On July 1, 1994, the Company entered into an agreement pursuant to
which William H. Wilson and Linda E. Wilson (the "Sellers") agreed to transfer
ownership to the Company of a condominium located in the Wailea resort
development known as the Polo Beach Club at 20 Makena Road, in Wailea, Maui,
Hawaii (the "Property"). In exchange for the Property, the Sellers received a
total of 120 shares of Series AAA Preferred Stock and warrants to acquire 54,284
shares of Common Stock at a price of $2.95 per share.
The Company had the Property listed for sale from 1994 until
December 20, 1996 when the Company sold this property for net proceeds of
$467,625. (See Note 4 of the Notes to the Consolidated Financial Statements.)
The Company rented the property prior to this sale.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
threatened or pending legal action which would have a material adverse effect on
the Company's business, operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq SmallCap MarketSM
under the symbol "TBUS" and on the Boston Stock Exchange under the symbol "TBU".
Quotations commenced following the Company's initial public offering on November
8, 1994. The following table sets forth the range of high and low closing bid
prices, as reported by The Nasdaq SmallCap MarketSM, from January 1, 1995
through February 28, 1997. The prices set forth reflect interdealer quotations,
without retail markups, markdowns or commissions, and do not necessarily
represent actual transactions.
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HIGH LOW
1995
First Quarter......................... $7.00 6.00
Second Quarter........................ 7.75 6.50
Third Quarter......................... 7.38 6.75
Fourth Quarter........................ 7.50 6.13
1996
First Quarter......................... $6.75 6.00
Second Quarter........................ 6.75 5.38
Third Quarter......................... 6.75 4.69
Fourth Quarter........................ 5.13 3.25
1997
First Quarter (through February 28, 1997).$4.00 3.13
On February 28, 1997, the closing bid price of the Common Stock was
$3.25. As of February 28, 1997, the number of beneficial holders of the
Company's Common Stock was approximately 1,200.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Digital Recorders, Inc. is an international, high technology
microelectronics company serving the mass transit, highway advisory radio and
law enforcement markets using proprietary software applications. From its
inception in 1983 through 1986, the Company's activities 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
$9,200,269 in 1996. The Company achieved its second consecutive year of
profitability in 1996 during which it earned a profit after income taxes of
$639,385. The Company attributes its growth primarily to the introduction of new
products, increased market penetration, growing markets for its products, and
strategic acquisitions of companies with complementary technologies.
The Company typically recognizes revenue upon shipment of products to
customers. Because the Company's operations are characterized by significant
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 of $20,000 and $10,000 for the years ended December 31, 1996 and 1995,
respectively due to alternative minimum tax. As a result of the accumulated
losses incurred in past years, the Company utilized $1,335,939 of its net
operating loss carryforward during 1996 and had a net operating loss
carryforward as of December 31, 1996 of $2,751,134. Management expects this
carryforward will be available to offset federal taxable income, if any, through
2009. Also, as of December 31, 1996, the Company had a net economic loss
carryforward for state income tax purposes of $820,565, which is expected to be
available to offset future state taxable income, if any, through 1999. Following
utilization of the existing federal and state loss carryforwards, the Company's
future operations, if profitable, will be subject to income tax expense.
9
<PAGE>
The following discussion provides an analysis of the Company's results
of operations and liquidity and capital resources and should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto. The operating results of the periods presented were not significantly
affected by inflation.
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
Consolidated Statements of Operations:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ------ ------
Net sales....................................100% 100% 100%
Cost of sales................................ 44 50 57
-- -- ---
Gross profit................................. 56 50 43
-- -- ---
Operating expenses:
Selling, general and administrative....... 43 45 44
Research and development.................. 7 6 18
-- - ---
Total operating expenses..................... 50 51 62
-- -- ---
Operating income (loss) ..................... 6 (1) (19)
Other income (expense), net.................. 1 3 (2)
--- --- -----
Income (loss) before income taxes............ 7 2 (21)
Income tax expense........................... * * 0
--- --- ----
Net income (loss)............................ 7% 2% (21)%
=== = ====
* - represents less than 1%.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995.
Net sales for 1996 were $9,200,269, an increase of $2,837,840, or 45%,
as compared to $6,362,429 for 1995. This increase was attributable primarily to
increases in sales in the TCS and DAC business groups being offset by a decline
in sales in the HIS business group. TCS revenues increased by $2,984,691 or
131%, primarily because of increased sales of the DR500C. DAC's revenues
increased by $850,696, or 55%, primarily because of increased sales of the PCAP
and MCAP products as well as the inclusion of twelve months of DAC's operations
in the Company's Statement of Operations in 1996 versus only ten months in 1995.
HIS sales decreased by $1,376,619, or 54%, due to lower sales to the National
Weather Service and of DR1000 products.
Gross profit for 1996 was $5,183,607, an increase of $1,991,349, or
62%, over gross profit of $3,192,258 in 1995. As a percentage of sales, gross
profit during 1996 was 56% of net sales, as compared to 50% during 1995. The
increase in gross profit percentage was caused mainly by the change in sales mix
towards higher margin products in the Company's TCS and DAC business groups.
Selling, general and administrative expenses during 1996 were
$4,014,466, an increase of $1,148,840, or 40%, as compared to selling, general
and administrative expenses of $2,865,626 during 1995. This increase is
attributable to expansion of the Company's sales and marketing activities as
well as the expenses incurred in the Company's two new wholly-owned subsidiaries
during 1996. These expenses as a percentage of net sales were 43% in 1996 as
compared to 45% during 1995.
Research and development expenses for 1996 were $643,223, an increase
of $263,353, or 69%, as compared to research and development expenses of
$379,870 during 1995. This increase reflects the continuing development costs
incurred by the Company across all of its business groups.
Operating income increased by $579,516 to $525,918 in 1996 from an
operating loss of $53,238 in 1995 primarily due to the factors set forth above.
10
<PAGE>
Total other income (expense) for 1996 was $133,467, a decrease of
$74,674, or 36%, as compared to total other income (expense) for 1995 of
$208,141. This decrease was due primarily to changes in interest income and
interest expense. Interest income for 1996 was $130,083, a decrease of $176,588,
or 58%, as compared to interest income for 1995 of $306,671. This decrease was
primarily attributable to the Company having lower cash balances to invest
during 1996. Interest expense for 1996 was $10,888, a decrease of $102,186, or
90%, as compared to interest expense for 1995 of $113,074. This decrease was
primarily due to acquisition-related interest expense not being incurred in
1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994.
Net sales for 1995 were $6,362,429, an increase of $3,127,098, or 97%,
as compared to $3,235,331 for 1994. This increase was primarily due to the
addition of the DAC group in February 1995, which accounted for $1,551,492 or
24% of net sales, and an increase in sales of HIS and TCS products, which
accounted for $2,534,490 and $2,276,447, or 40% and 36%, respectively, of net
sales during 1995. HIS revenues increased by approximately $636,000 or 34% over
1994 sales due mainly to sales of approximately $900,000 to the National Weather
Service. TCS revenues increased by approximately $939,000 or 70% over 1994 sales
because of increased market penetration of the DR500C.
Gross profit for 1995 was $3,192,258, an increase of $1,810,635, or
131%, over gross profit of $1,381,623 in 1994. As a percentage of sales, gross
profit during 1995 was 50% of net sales as compared to 43% during 1994. The
increase in gross profit percentage was caused principally by the addition of
the DAC group during 1995 and secondarily to improvements in the containment of
installation costs.
Selling, general and administrative expenses during 1995 were
$2,865,626, an increase of $1,437,412, or 101%, as compared to selling, general
and administrative expenses of $1,428,214 during 1994. This increase is
attributable primarily to the addition of the DAC group and the expansion of the
Company's sales and marketing activities. These expenses as a percentage of net
sales were 45% in 1995 as compared to 44% in 1994.
Research and development expenses for 1995 were $379,870, a decrease of
$207,197, or 35%, as compared to research and development expenses of $587,067
during 1994. This decrease is attributable to the winding down of costs
associated with the development of the DR500C.
Operating loss decreased by $580,420 to $53,238 in 1995 from $633,658
in 1994 primarily due to the factors set forth above.
Total other income (expense) for 1995 resulted in income of $208,141,
an increase of $267,102, as compared to total other income (expense) for 1994
which resulted in expense of $58,961. This increase was due primarily to changes
in interest income and interest expense. Interest income for 1995 was $306,671,
an increase of $278,418, or 985%, as compared to interest income for 1994 of
$28,253. This increase was primarily because of interest earned on the proceeds
received in the Company's November 1994 initial public offering. Interest
expense for 1995 was $113,074 an increase of $24,428, or 28%, as compared to
interest expense for 1994 of $88,646. This increase was primarily because
acquisition-related interest expense incurred in 1995 exceeded interest
expense incurred on subordinated debentures in 1994.
LIQUIDITY AND CAPITAL RESOURCES
From 1990 through completion of the Company's initial 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, which included an
over-allotment of 165,000 Units. The Company realized gross proceeds of
$7,273,750 and net proceeds of $5,562,225 after deducting offering costs of
$1,711,525.
In 1994 and 1995, holders of certain warrants which had been issued
prior to the public offering exercised their right to purchase 152,311 shares of
restricted Common Stock and the Company received $465,254 as the exercise price
of such warrants.
11
<PAGE>
On May 24, 1996, the Company obtained a $2,000,000 unsecured credit
facility from a financial institution. The agreement provides for short-term
borrowings and import letters of credit, is subject to certain loan covenants,
and bears interest at a rate of LIBOR plus 2.3%, payable quarterly. At December
31, 1996 there were no borrowings outstanding under this credit agreement. At
December 31, 1996, there was $460,425 committed under an import letter of credit
for inventory purchases from an overseas supplier.
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $1,328,944, investments of $1,606,422 and
accounts receivable of $2,090,881, providing the Company with net working
capital of $5,722,265. While the Company had no outstanding borrowings at
December 31, 1996, it anticipates that it will need to borrow money under its
credit facility to fund inventory purchases and continued growth in 1997.
The Company's operating activities provided cash of $545,506 during
1996 and used cash of $421,562 during 1995. For 1996, increases in inventories
of $802,403, increases in accounts payable of $486,148 and increases in accounts
receivable of $262,155 were the primary components of changes in working
capital. For 1995, increases in accounts receivable of $476,644, increases in
inventories of $172,008, increases in prepaids and other assets of $65,015 and
decreases in accounts payable of $68,732 were the primary components of changes
in working capital. The Company anticipates that its working capital needs will
continue to increase as the Company implements its expansion plans. Working
capital requirements will increase 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.
The Company's investing activities provided cash of $106,306 during
1996 and used cash of $37,097 during 1995. Investing activities during 1996
related primarily to capital expenditures of $365,742 being offset by net sales
of short-term investments totaling $506,608. Investing activities during 1995
included the sale of short-term investments of $2,275,000 and the purchases of
short-term investments of $905,322. Investing activities in 1995 also included
the purchase of Digital Audio for consideration which included cash of
$1,171,000, and capital expenditures which totaled $236,975.
The Company's financing activities used cash of $488,852 during 1996
and provided cash of $44,437 during 1995. In 1996, principal payments on
long-term debt of $709,000, net payments on short-term borrowings of $117,177
and dividend payments on preferred stock of $105,300 all used cash while
$442,625 of proceeds were received from the sale of resort property. In 1995,
proceeds from the exercise of warrants totaling $246,588 offset cash used for
the payment of $105,300 in dividends, $66,568 of long-term debt and capital
lease obligations and $30,283 of additional public offering expenses.
The Company's cash requirements, other than for normal operating
expenses, will relate primarily to the 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 net working capital, as
well as the borrowing capacity available under the Company's $2,000,000 credit
facility, will be sufficient to satisfy its currently anticipated cash
requirements for 1997.
FORWARD-LOOKING STATEMENTS
The statements contained herein that are not purely historical are
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, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward-looking statements
12
<PAGE>
include expectations of trends to continue through the remainder of the current
and the forthcoming fiscal year, including the development and introduction of
new products. Forward-looking statements involve a number of risks and
uncertainties. Among other factors that could cause actual results to differ
materially are the following: business conditions and growth in the markets in
which the Company participates and the general economy; competitive factors,
such as the entry of new competitors into any of the markets in which the
Company participates; price pressures and increased competition in those
markets; inventory risks due to shifts in market demand and/or price erosion of
purchased components; changes in product mix; that the Company's working
capital and existing credit arrangement will be adequate to fund its
operation; and the risk factors listed from time to time in the Company's SEC
reports, including but not limited to the Company's reports on Form 10-QSB,
8-K, 10-KSB, Annual Reports to Shareholders, and reports or other documents
filed pursuant to the Securities Act of 1933 or the Securities Exchange Act of
1934. All forward-looking statements included herein are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements due to the factors cited above. As a result of
these factors, there can be no assurance the Company will not experience
material fluctuations in future operating results on a quarterly or annual
basis, which would materially and adversely affect the Company's business,
financial condition and results of operations.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements follow this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
DIGITAL RECORDERS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................................................15
Consolidated Balance Sheets - December 31, 1996 and 1995................................................16
Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994....................17
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1995 and 1994 .........18
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 .................. 19-20
Notes to Consolidated Financial Statements..............................................................21-34
</TABLE>
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Digital Recorders, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Recorders, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Recorders, Inc. and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
March 17, 1997
15
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,328,944 1,175,775
Investments 1,606,422 2,113,030
Trade accounts receivable 2,090,881 1,828,726
Other receivables 120,014 118,173
Inventories 1,889,906 1,087,503
Prepaids and other current assets 51,329 78,151
---------------- ----------------
Total current assets 7,087,496 6,401,358
Property and equipment, less accumulated depreciation and amortization
of $341,181 and $200,402 at December 31, 1996 and 1995, respectively 458,011 311,120
Goodwill, less accumulated amortization of $239,628 and $98,056
at December 31, 1996 and 1995, respectively 1,668,807 1,666,944
Intangible assets, less accumulated amortization of $145,428 and $62,910
at December 31, 1996 and 1995, respectively 403,900 252,227
Other assets 7,099 6,901
================ ================
$ 9,625,313 8,638,550
================ ================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 830,883 340,778
Accrued expenses 172,892 135,282
Accrued commissions 199,485 97,340
Accrued warranty reserve 161,971 111,462
Current portion of long-term debt - 709,000
Dividends payable - 54,900
---------------- ----------------
---------------- ----------------
Total current liabilities 1,365,231 1,448,762
---------------- ----------------
Total liabilities 1,365,231 1,448,762
---------------- ----------------
Stockholders' Equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value, 20,000
shares authorized; 354 shares issued and outstanding at
December 31, 1996 and 1995, respectively 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding at December 31,
1996 and 1995, respectively 267,407 267,407
Additional paid-in capital 12,602,708 12,552,708
Property held for resale - (550,000)
Translation adjustment (9,791) -
Accumulated deficit (4,600,277) (5,080,362)
---------------- ----------------
Total stockholders' equity 8,260,082 7,189,788
---------------- ----------------
================ ================
$ 9,625,313 8,638,550
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 9,200,269 6,362,429 3,235,331
Cost of sales 4,016,662 3,170,171 1,853,708
----------------- ---------------- ----------------
Gross profit 5,183,607 3,192,258 1,381,623
Selling, general and administrative expenses 4,014,466 2,865,626 1,428,214
Research and development expenses 643,223 379,870 587,067
----------------- ---------------- ----------------
Operating income (loss) 525,918 (53,238) (633,658)
Other income (expense):
Interest income 130,083 306,671 28,253
Interest expense (10,888) (113,074) (88,646)
Other income, net 14,272 14,544 1,432
----------------- ---------------- ----------------
Total other income (expense) 133,467 208,141 (58,961)
Income (loss) before income taxes 659,385 154,903 (692,619)
Income tax expense 20,000 10,000 -
----------------- ---------------- ----------------
Net income (loss) 639,385 144,903 (692,619)
Preferred dividend requirements (159,300) (154,800) (64,631)
----------------- ---------------- ----------------
Net income (loss) applicable to common stockholders $ 480,085 (9,897) (757,250)
================= ================ ================
Net income (loss) per common and common equivalent share $ 0.18 0.00 (0.91)
================= ================ ================
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,652,892 834,605
================= ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Number Additional Property Total
of shares paid-in held for Translation Accumulated stockholders'
issued Par value capital resale adjustment deficit equity
------------ ------------- ----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1993 1,000,245 $ 100,025 4,787,906 -- -- (4,377,846) 510,085
Issuance of common stock 1,296,199 129,620 5,484,313 -- -- -- 5,613,933
Common stock dividends 22,488 2,248 (2,248) -- -- -- --
Conversion of preferred stock to common stock 156,980 15,698 (15,698) -- -- -- --
Cash dividends declared and paid -- -- (64,631) -- -- -- (64,631)
Dividends payable -- -- (5,400) -- -- -- (5,400)
Exercise of options and warrants 85,131 8,513 223,499 -- -- -- 232,012
Net loss -- -- -- -- -- (692,619) (692,619)
----------- ----------- ---------- -------- ------- ----------- ----------
Balance as of December 31, 1994 2,561,043 256,104 10,407,741 -- -- (5,070,465) 5,593,380
Issuance of common stock 33,846 3,385 216,615 -- -- -- 220,000
Reclassification of Series AAA Preferred stock 354 35 1,719,965 (550,000) -- -- 1,170,000
Additional public offering expenses -- -- (30,283) -- -- -- (30,283)
Cash dividends declared and paid -- -- -- -- -- (105,300) (105,300)
Dividends payable -- -- -- -- -- (49,500) (49,500)
Exercise of warrants 79,186 7,918 238,670 -- -- -- 246,588
Net income -- -- -- -- -- 144,903 144,903
----------- ----------- ---------- -------- ------- ----------- ----------
Balance as of December 31, 1995 2,674,429 267,442 12,552,708 (550,000) -- (5,080,362) 7,189,788
Cash dividends declared and paid -- -- -- -- -- (105,300) (105,300)
Dividends payable -- -- -- -- -- (54,000) (54,000)
Sale of property held for resale -- -- 50,000 550,000 -- -- 600,000
Net income -- -- -- -- -- 639,385 639,385
Translation adjustment -- -- -- -- (9,791) -- (9,791)
----------- ----------- ---------- -------- ------- ----------- ----------
Balance as of December 31, 1996 2,674,429 $ 267,442 12,602,708 -- (9,791) (4,600,277) 8,260,082
=========== =========== ========== ======== ======= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 639,385 144,903 (692,619)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of
property and equipment 140,779 78,085 34,329
Amortization of goodwill and intangible assets 224,090 142,748 1,226
Accrued interest on long-term debt - - (104,061)
Loss on sale of property and equipment - 1,272 -
Changes in operating assets and liabilities:
Increase in trade accounts receivable (262,155) (476,644) (479,239)
Decrease in other receivables 48,370 33,482 38,345
Increase in inventories (802,403) (172,008) (343,537)
Decrease (increase) in prepaids and other current assets 26,822 (65,015) 26,975
Increase in intangible assets (234,191) (57,400) -
Increase in other assets (198) (800) (250)
Increase (decrease) in accounts payable 486,148 (68,732) 280,495
Increase in accrued expenses 190,264 35,953 170,964
Decrease in other liabilities - (17,406) (10,650)
---------------- ------------- ---------------
Net cash provided (used) by operating activities 456,911 (421,562) (1,078,022)
---------------- ------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (277,147) (236,975) (73,858)
Proceeds from sale of property and equipment - 1,200 -
Purchases of short-term investments (121,725) (905,322) (3,407,708)
Sales and maturities of short-term investments 628,333 2,275,000 -
Payments for businesses acquired, net of cash received (34,560) (1,171,000) -
---------------- ------------- ---------------
Net cash provided (used) by investing activities 194,901 (37,097) (3,481,566)
---------------- ------------- ---------------
Cash flows from financing activities:
Principal payments on long-term debt (709,000) (58,658) (647,210)
Principal payments on capital lease obligations - (7,910) (6,433)
Proceeds from short-term bank borrowings 520,000 - -
Principal payments on short-term bank borrowings (637,177) - -
Proceeds from sale of property held for resale 442,625 - -
Proceeds from issuance of common stock - - 5,592,225
Payment of additional public offering expenses - (30,283) -
Payment of dividends on preferred stock (105,300) (105,300) (84,221)
Proceeds from issuance of preferred stock - Series AAA - - 305,000
Proceeds from exercise of warrants - Series AAA - 179,116 218,666
Proceeds from exercise of warrants - Series AA - 67,472 -
Proceeds from exercise of options - common stock - - 13,346
---------------- ------------- ---------------
Net cash provided (used) by financing activities (488,852) 44,437 5,391,373
---------------- ------------- ---------------
Effect of exchange rate changes (9,791) - -
---------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents 153,169 (414,222) 831,785
Cash and cash equivalents at beginning of year 1,175,775 1,589,997 758,212
---------------- ------------- ---------------
Cash and cash equivalents at end of year $ 1,328,944 1,175,775 1,589,997
================ ============= ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 10,888 113,074 195,001
================ ============= ===============
Cash paid during the year for income taxes $ 15,000 - -
================ ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
Supplemental disclosures of noncash investing and financing activities:
During 1996, 1995 and 1994, the Company declared dividends on Series AAA
Preferred Stock in the amount of $159,300, $154,800, and $88,229, respectively.
During 1996 and 1995, the Company paid $105,300 in cash dividends relating to
the 1996 and 1995 dividends declared. During 1994, the Company paid $55,501 in
common stock dividends and $27,328 in cash dividends relating to the 1994
dividends declared.
During 1994 the Company declared dividends on Series AA Preferred Stock in the
amount of $106,194. During 1994, the Company paid $68,891 in common stock
dividends and $37,303 in cash dividends relating to the 1994 dividends declared.
During 1994, the Company paid $19,590 in cash dividends relating to the 1993
dividends declared.
During 1996, the Company acquired Transit-Media GmbH. The Company paid $35,000
for all of Transit-Media's stock at closing. The Company recorded cash ($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 of Digital Audio Corporation.
The Company acquired inventory (valued at $100,000), fixed assets (valued at
$10,000) and goodwill and intangible assets (valued at $1,990,000) in exchange
for cash of $1,171,000, a note payable for $709,000 and common stock valued at
$220,000.
During 1994, the Company issued 80 shares of Series AAA Preferred Stock and an
unissued subscription of 40 shares of Series AAA Preferred Stock in exchange for
resort property with an estimated fair market value of $550,000. During 1995,
the 40 shares of subscribed Series AAA preferred stock were issued. On December
20, 1996, the Company closed on the sale of the resort property. The Company
received net proceeds of $467,625 of which $25,000 was outstanding at December
31, 1996. Because the property was sold for less than $600,000, all dividends
declared and payable to this shareholder who received Series AAA Preferred Stock
in exchange for the resort property will be forfeited back to the Company until
the difference between the net sales price and $600,000 is reduced to zero. At
December 31, 1996, $108,900 in Series AAA Preferred Stock dividends were
forfeited back to the Company, and a receivable was established for $23,475 for
the remaining difference between the net sales price, the forfeited dividends,
and $600,000.
During 1994, the Company issued $21,708 of Common Stock in exchange for the
redemption of accrued expenses in an equal amount.
During 1994, the Company issued $10,000 of Series AAA Preferred Stock in
exchange for future services to be rendered in an equal amount.
20
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Digital Recorders, Inc. (the "Company") designs, manufactures or contracts
for the manufacture of, and sells information technology products to the mass
transit market, the travelers information station/highway advisory radio
market and the law enforcement market. Customers include municipalities,
regional transportation districts, federal, state and local departments of
transportation, turnpikes, bus manufacturers, and law enforcement agencies or
organizations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(d) Investments
The Company's investments consist primarily of U.S. Treasury obligations
which the Company has classified as available-for-sale securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". These
securities are carried at fair value based on quoted market prices at
December 31, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. At December 31, 1996 and 1995,
there were immaterial unrealized gains and losses on the Company's
investments.
The Company also includes certificates of deposit with maturities between
three months and one year in its investments. The certificates of deposit are
stated at cost which approximates market.
(e) Trade Accounts Receivable
Management believes all outstanding receivables are collectible at December
31, 1996. Therefore, no allowance for doubtful accounts has been provided.
(f) Inventories
Inventories, consisting principally of component parts and work-in-process,
are stated at the lower of cost or market, with cost determined by the
first-in, first-out method.
21
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, Continued
(g) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (which
range from three to ten years).
(h) Property Held for Resale
Property held for resale is stated at lower of cost or market. The Company
obtained the property in exchange for Series AAA Preferred Stock and
immediately listed the property for sale. As discussed in Note 4, the Company
sold this property on December 20, 1996.
(i) Goodwill
Goodwill was recorded as part of the acquisitions of Transit-Media GmbH
("Transit-Media") and Digital Audio Corporation ("Digital Audio"). Goodwill
is amortized using a straight-line method over 4 to 15 years. The Company
periodically evaluates the recoverability of its goodwill. If facts and
circumstances suggest that the excess of cost over net assets acquired will
not be recoverable, as determined , based on the undiscounted cash flows of
the entity acquired over the remaining amortization period, the Company's
carrying value of the excess cost over net assets acquired will be reduced by
the estimated shortfalls of cash flows.
(j) Intangible Assets
Intangible assets consist of certain deferred costs recorded as part of the
acquisitions of Transit-Media and Digital Audio and costs incurred to apply
for and obtain patents on internally developed technology. Intangible assets
are amortized using a straight-line method over 3-17 years. The Company
periodically evaluates the recoverability of its intangible assets. If facts
and circumstances suggest that the intangible assets will not be recoverable,
as determined, based on the undiscounted cash flows of the entity acquired
and the patented products over the remaining amortization period, the
Company's carrying value of the intangible assets will be reduced by the
estimated shortfalls of cash flows.
(k) Revenue Recognition
The Company typically recognizes revenue upon shipment of products to
customers.
(l) Research and Development Costs
Research and development costs are charged to operations as incurred.
22
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, Continued
(m) 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 common
stock equivalent shares outstanding. For 1996, the impact of the common stock
equivalent shares was anti-dilutive. For 1995, the common stock equivalent
shares had no impact on the per share amount. For 1994, the impact of the
common stock equivalent shares was anti-dilutive because the Company reported
net losses. Cash dividends declared on preferred stock during the respective
year were deducted from net income or added to net loss to determine the net
income (loss) per share. Cash dividends declared on preferred stock were
$159,300, $154,800, and $64,631 for the years ended December 31, 1996, 1995,
and 1994, respectively.
(n) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
(o) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compansation", encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board No. 25, "Accounting for Stock Issued To Employees", and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair value of the Company's
stock at the date of grant over the amount an employee must pay to acquire
the stock.
(p) Translation of Foreign Currency
Foreign currency assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are
translated using the average exchange rate prevailing throughout the year.
The effects of unrealized exchange rate fluctuations on translating foreign
currency assets and liabilities into U. S. dollars are accumulated as the
cumulative translation adjustment in stockholders' equity. Realized gains and
losses on foreign currency transactions, if any, are included in operations
for the year.
23
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
(a) Acquisition of Transit-Media GmbH
On April 30, 1996, the Company acquired 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 and the Far East. The Company paid $35,000 for all of
Transit-Media's stock at closing. The Company recorded cash ($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). Upon completing the
acquisition, the Company invested $350,000 in Transit-Media to pay off an
existing bank credit line and provide working capital. The Company's results
of operations for the twelve months ended December 31, 1996 include the
operations of Transit-Media from May 1, 1996 to December 31, 1996.
The following unaudited pro forma results of operations assume the
transaction described above occurred as of January 1, 1995 after giving
effect to certain adjustments, including the amortization of the excess
cost over the fair value of the net assets acquired.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,1996 December 31, 1995
<S> <C> <C>
Net sales $ 9,200,269 6,362,429
Net income $ 566,575 2,976
Net income per common and common equivalent share $ 0.15 (0.06)
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined during the years presented and is not intended to be a projection of
future results or trends.
(b) Acquisition of Digital Audio Corporation
On February 28, 1995, the Company purchased certain assets of Digital Audio
in a transaction accounted for using the purchase method of accounting and,
accordingly, the assets of the acquired entity were recorded at their
estimated 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 does not believe any earn-out payments pursuant
to this agreement will be made. The Company paid $1,171,000 at closing,
recorded an unsecured note payable to the seller of $709,000 and issued
33,846 shares of the Company's Common Stock (valued at $220,000) to the
seller in exchange for inventory (valued at $100,000), fixed assets (valued
at $10,000) and goodwill and intangible assets (valued at $1,990,000).
The Company's 1995 results of operations include the operations of
Digital Audio from March 1, 1995 through December 31, 1995.
24
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions, Continued
The following unaudited pro forma results of operations assume the
transaction described above occurred as of January 1, 1994 after giving
effect to certain adjustments, including the amortization of the excess cost
over the fair value of the net assets acquired.
<TABLE>
<CAPTION>
Twelve months ended
December 31, 1995 December 31, 1994
<S> <C> <C>
Net sales $ 6,636,749 5,575,242
Net income $ 228,662 584,909
Net income per common and common equivalent share $ 0.09 0.67
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined during the years presented and is not intended to be a projection of
future results or trends.
(3) Property and Equipment
Property and equipment consists of the following:
December 31,
1996 1995
Leasehold improvements $ 137,544 5,578
Automobiles 43,731 40,653
Computer equipment 360,890 269,948
Test equipment 125,707 113,735
Furniture and fixtures 131,320 81,608
------- ------
799,192 511,522
Less accumulated depreciation and amortization 341,181 200,402
------- -------
$ 458,011 311,120
(4) Property Held for Resale
During 1994, the Company issued 80 shares of Series AAA Preferred Stock and a
subscription for 40 shares of Series AAA Preferred Stock in exchange for
resort property, which the Company listed for sale. During 1995, the 40
shares of subscribed Series AAA Preferred Stock were issued. The fair market
value of the property was estimated at $550,000 and, therefore, both the
property and equity exchanged were recorded at $550,000. On December 20,
1996, the Company closed on the sale of the resort property. The Company
received net proceeds of $467,625 of which $25,000 was outstanding at
December 31, 1996. Based on the original agreement, since the property sold
for less than the initial $600,000 stock valuation, all dividends declared
and payable to this shareholder will be forfeited back to the Company until
the difference between the net sales price and $600,000 is reduced to zero.
At December 31, 1996, $108,900 in Series AAA Preferred Stock dividends were
forfeited back to the Company, and a receivable was established for $23,475
for the remaining difference between the net sales price, the forfeited
dividends, and $600,000.
25
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(5) Leases
The Company leases its premises under various operating leases which expire
at various times through 2001. Rent expense under these operating leases was
$162,736, $84,869 and $68,417 for the years ended December 31, 1996, 1995 and
1994, respectively.
At December 31, 1996, future minimum lease payments under the noncancellable
operating leases are as follows:
Year ending December 31,
1997 $ 154,960
1998 81,591
1999 70,827
2000 38,528
2001 10,715
--------------
Total minimum lease payments $ 356,621
============
(6) Debt
On May 24, 1996, the Company obtained a $2,000,000 unsecured credit facility
from a financial institution. The agreement provides for short-term
borrowings and import letters of credit, is subject to certain loan
covenants, and bears interest at a rate of LIBOR plus 2.3%, payable
quarterly. At December 31, 1996, there were no outstanding borrowings under
the credit agreement, but there was $460,425 committed under an import letter
of credit for inventory purchases from an overseas supplier.
At December 31, 1995, the Company had $709,000 outstanding under an unsecured
6% note incurred in the Digital Audio acquisition. The note was repaid in
January 1996.
The $2,000,000 credit facility requires the Company to meet certain financial
ratios, maintain minimum levels of cash and investments and prohibits certain
transactions. At December 31, 1996, the Company was in compliance with all of
these covenants.
26
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(7) Initial Public Offering of Stock
On November 8, 1994, the Company closed its initial public offering of
1,100,000 units at $5.75 per unit. Each unit consisted of one share of Common
Stock and one warrant to purchase one share of Common Stock. On December 27,
1994, the Company closed on an additional 165,000 units issuable upon
exercise of the underwriter's over-allotment option. The net proceeds of the
offering were $5,562,225 after deducting applicable issuance costs and
expenses. In conjunction with the offering, all of the Series AA and Series A
Preferred Stock then outstanding converted to 775,735 shares of Common Stock.
Prior to the offering, the Company's Articles of Incorporation were amended
to decrease the authorized preferred stock of the Company to 1,000,000 shares
and increase the authorized Common Stock of the Company to 10,000,000 shares.
(8) Preferred Stock
The Company has the authority to issue 1,000,000 shares of preferred stock of
which 700,000 shares have been designated Series A Convertible Preferred
Stock and 10,000, 7,500, 10,020 and 20,000 shares have been designated Series
B, Series C, Series AA and Series AAA Redeemable Nonvoting Preferred Stock,
respectively. In addition, 252,480 shares of undesignated preferred stock are
authorized and unissued.
Series AAA Preferred shares are cumulative, nonvoting, fully participating
and redeemable at the Company's discretion with the redemption price equal to
the liquidation preference. The liquidation preference equals $5,000 per
share, plus all accrued and unpaid dividends. Dividends accrue at a quarterly
rate of $112.50 per share. The Company, at its option, may redeem these
shares at any time but no later than the fifth anniversary of the latest date
of issuance of any shares of Series AAA Preferred Stock or June 30, 1998,
whichever is earlier.
In 1994, the Company offered the investors in the Series AAA Preferred Stock
the opportunity to rescind their purchase of the Series AAA Preferred Stock.
This offer was made because the private placement memorandum contained
certain projections of the Company's future performance and operating results
that were not achieved. The rescission offer, which extended through October
12, 1994, resulted in the Company repurchasing 16 shares of Series AAA
Preferred Stock for $80,000 plus interest. Generally, statutes of limitation
exist for enforcement of rights by a shareholder seeking to rescind the
purchase of shares sold in violation of the securities law. One hundred
percent (100%) of the Series AAA Preferred shareholders who elected not to
rescind have subsequently exercised all of their warrants, thereby purchasing
additional shares of stock. Since the federal statutes of limitations expired
in 1995, the Company reclassified the Series AAA Preferred Stock into
stockholders' equity.
Series AA Preferred shares are cumulative, nonvoting, fully participating and
redeemable at the Company's discretion with the redemption price equal to the
liquidation preference. The liquidation preference equals $100 per share,
plus all accrued and unpaid dividends. Dividends accrue at a quarterly rate
of $3.50 per share. All dividends are in the form of cash and/or common stock
at the option of the shareholder. The shareholders agreed to convert all
10,020 shares of outstanding Series AA Preferred shares to 167,000 shares of
Common Stock effective December 8, 1994.
27
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(8) Preferred Stock, Continued
Series A Preferred shares are noncumulative, voting, fully participating and
convertible at any time at a price equal to the liquidation preference. The
liquidation preference for the Series A Preferred shares equals approximately
$3.20 per share, plus all declared and unpaid dividends. All 608,735 shares
of Series A Preferred shares converted to 608,735 shares of Common Stock by
their terms on the close of the public offering on November 8, 1994.
(9) Common Stock Warrants
Each warrant granted in connection with the public offering allows the holder
to purchase one share of Common Stock at a price of $7.50 per share. These
warrants expire in November 1997. At December 31, 1996 and 1995, 1,265,000
warrants were outstanding, and no warrants had been exercised.
During 1996, 30,000 warrants were granted which allow the holder to purchase
one share of Common Stock for each warrant granted. Exercise of these
warrants into common shares is contingent upon the market price of the
Company's common shares exceeding prices ranging from $6.50 to $14.00 per
share for ninety consecutive calendar days prior to the exercise date. At
December 31, 1996, all 30,000 of these warrants were outstanding. These
warrants expire in April 2006.
Each warrant granted in connection with the Series AA Preferred Stock allowed
the holder to buy one share of Common Stock at a price of $3.68 per share. At
December 31, 1996, all remaining warrants expired. At December 31, 1995,
20,196 warrants were outstanding, and none were exercised during 1996. During
1995, 18,335 warrants were exercised. At December 31, 1994, 38,531 warrants
were outstanding. During 1994, 8,630 warrants were exercised.
Each warrant granted in connection with the Series AAA Preferred Stock allows
the holder to buy, based on the number of Series AAA Preferred Stock shares
purchased, up to 23,160 shares of Common Stock at a price of $2.95 per share
which price increases annually to a maximum of $11.79 per share. These
warrants expire in December 1998. At December 31, 1996 and 1995, there were
warrants outstanding to purchase 408 shares of Common Stock at $5.16 per
share. During 1995, warrants were exercised to purchase 60,851 shares of
Common Stock at $2.95 per share. At December 31, 1994, there were warrants
outstanding to purchase 37,991 shares of Common Stock at $2.95 per share.
During 1994, warrants were granted to purchase 23,268 shares of Common Stock
at $2.95 per share and warrants were exercised to purchase 64,495 shares of
Common Stock at $2.95 per share.
(10) Common Stock Options
(a) Incentive Stock Option Plan
The Company adopted an incentive stock option plan for employees in 1993.
Under the terms of the plan, options to purchase Common Stock are granted at
no less than the stock's estimated fair market value at the date of the grant
and may be exercised during specified future periods.
28
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(10) Common Stock Options, Continued
The following is a summary of incentive stock option transactions:
Exercise Price
Shares per share
Balance at December 31, 1994 204,471 $3.20 - 7.00
Granted 10,000 7.00
Cancelled (17,964) 4.50 - 7.00
-----------
Balance at December 31, 1995 196,507 3.20 - 7.00
Granted 69,800 3.75 - 7.25
Cancelled (47,750) 3.20 - 7.00
-----------
Balance at December 31, 1996 218,557 $3.20 - 7.25
==========
(b) Non-Qualified Stock Options
The Company has issued options to purchase Common Stock to certain key
executives and non-employee members of the Board of Directors which are
exercisable at times and in increments as specified by the individual
agreements.
The following is a summary of nonqualified stock options:
Exercise Price
Shares per share
Balance at December 31, 1994 34,041 $3.20 - 5.16
Cancelled (4,000) 4.50
-----------
Balance at December 31, 1995 30,041 3.20 - 5.16
Cancelled ( 2,339) 4.50 - 5.00
-----------
Balance at December 31, 1996 27,702 $3.20 - 5.16
===========
29
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(10) Common Stock Options, Continued
(c) Stock-Based Compensation
As described in Note 1, the Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations and, accordingly, no compensation cost
has been recognized for stock options issued under the Company's stock option
plans or stock warrant grants. Had compensation cost for the Company's stock
option plans and stock warrant grants been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company's pro forma net income (loss)
applicable to common stockholders and net income per common and common
equivalent share would have been as follows:
1996 1995
------------ -----------
Net income (loss) applicable to
common stockholders $ 480,085 (9,897)
Pro forma net income (loss) applicable
to common stockholders $ 319,870 (24,497)
Net income per common and common
equivalent share $ 0.18 0.00
Pro forma net income per common and
common equivalent share $ 0.12 (0.01)
In the pro forma calculations shown above, the Company used the
Black-Scholes option pricing model to calculate the fair value of the
stock options and stock warrants granted during 1996 and 1995. Significant
assumptions used by the Company for these pro forma calculations are as
follows:
1996 1995
------------- -----------
Risk-free interest rate 6.75% 6.50%
Expected life 7 years 7 years
Expected volatility 21.82% 21.82%
Expected dividends None None
(11) Income Taxes
(a) The components of income tax expense for the years ended December 31,
1996, 1995 and 1994 consisted of the following:
1996 1995 1994
--------------- ---------------- ----------
Current expense:
Federal $ 20,000 10,000 -
State - - -
--------------- ------------- -----------
20,000 10,000 -
Deferred expense:
Federal - - -
State - - -
--------------- -------------- -----------
Income tax expense $ 20,000 10,000 -
=============== ============== ===========
30
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
(b) The components of the net deferred tax assets as of December 31, 1996
and 1995 are as follows:
1996 1995
-------------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 978,104 1,487,531
Tax credits 109,898 117,563
Warranty reserve 63,355 43,598
Inventory reserve 82,142 154,504
Inventory capitalization 28,241 26,209
Accrued bonuses 24,922 -
Depreciation and amortization 29,248 -
Organization and start-up costs 72,563 -
Other accruals and reserves 18,207 36,765
------------ -----------
Total gross deferred tax assets 1,406,680 1,866,170
Less valuation allowance (1,406,680) (1,866,170)
------------ -----------
Net deferred tax assets $ - -
============== ============
The Company has determined that the need for a valuation allowance
arises due to the Company's history of operating losses.
(c) The reasons for the difference between actual income tax expense for
the years ended December 31, 1996 and 1995 and the amount computed by
applying the statutory federal income tax rate to earnings before
income taxes are as follows:
1996
% of
Pretax
Amount Earnings
Income tax expense at statutory rate $ 224,191 34.0%
Foreign subsidiary losses 132,227 20.1%
Change in the beginning-of-year balance of the
valuation allowance for deferred tax assets
allocated to the provision for income taxes (337,221) (51.1%)
Other 803 0.0%
----------- -------
Income tax expense $ 20,000 3.0%
=========== =======
31
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
1995
% of
Pretax
Amount Earnings
Income tax expense at statutory rate $ 52,667 34.0%
State income taxes, net of federal
income tax benefit 9,350 6.0%
Research and experimentation tax credits (62,228) (40.2%)
Change in the beginning-of-year balance of the
valuation allowance for deferred tax assets
allocated to the provision for income taxes (2,472) (1.5%)
Other 12,683 8.2%
---------- ---------
Income tax expense $ 10,000 6.5%
=========== =========
In 1994 the principal difference between the expected income tax benefit and the
actual income tax benefit of zero reflected in the Consolidated Statement of
Operations represents net operating losses that were included in the valuation
allowance for deferred tax assets.
(d) At December 31, 1996, the Company has net operating loss carryforwards
for federal income tax purposes of $2,751,134 which are available to
offset future federal taxable income, if any, through 2009. In
addition, the Company has net economic loss carryforwards for state
income tax purposes of $820,565 which are available to offset future
state taxable income, if any, through 1999.
The Company has research and development tax credits for federal income
tax purposes of $78,993 at December 31, 1996 which expire in various
years through 2009.
(12) Major Customers
The Company generates a significant portion of its revenues from a
relatively few key customers, the identity of which may vary from year
to year. Revenues from three major customers accounted for
approximately 34%, 35% and 44% of net sales during 1996, 1995 and 1994,
respectively.
(13) Related Party Transactions
Effective March 1996, the Company entered into various marketing,
distribution, licensing and management agreements with an affiliate of a
director of the Company. The Company paid fees and commissions earned under
these various agreements totaling $173,880 during 1996.
The Company has retained a director of the Company to perform certain
business consulting services for the Company. The Company paid fees under
this agreement totaling $67,000, $55,000 and $31,000 during 1996, 1995 and
1994, respectively.
32
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(13) Related Party Transactions, Continued
Effective March 1995, the Company entered into a lease agreement for an
office building with a stockholder. The Company paid $20,800 and $17,333 in
rental fees during 1996 and 1995 to this stockholder.
Effective June 1994, the Company entered into a distributor agreement with an
affiliate of a director and shareholder. Pursuant to such agreement, the
distributor has been appointed as the Company's non-exclusive distributor in
Canada and Puerto Rico and as the Company's exclusive distributor in all
other foreign countries. The agreement provides that the distributor will be
entitled to purchase products from the Company at 75% of the Company's
standard list price (or 60% of the standard list price in the case of initial
sales within a given country) for sale to the distributor's customers. No
sales were made by this distributor in 1995 and 1994. Effective July 1995,
the Company modified the agreement to change the work scope to acquisition
consulting services only. The agreement was renewed for an additional year in
April 1996. The Company paid fees under this agreement totaling $33,250 and
$23,750 during 1996 and 1995, respectively.
In January 1993, the Company redeemed all outstanding shares of Series C
Preferred Stock in exchange for 64,948 shares of Common Stock, a promissory
note in the principal amount of $85,843 payable to a shareholder who has
subsequently become a director of the Company, and $150,000 in cash paid as
dividends on the Series C Preferred Stock. The promissory note is unsecured,
bears interest at the rate of 6% per annum, and provides for 20 quarterly
payments of $5,000 which commenced on April 1, 1993. This note was paid in
full on March 6, 1995.
Effective February 1993, the Company engaged an affiliate of a director of
the Company as an independent sales representative in marketing the Company's
products. Pursuant to such agreement, as amended effective May 15, 1994, the
sales representative received a monthly draw of $3,000 against commissions
and reimbursement of certain business expenses. The Company paid fees under
this agreement totaling $26,179, $17,521 and $69,300 during 1996, 1995 and
1994, respectively.
During 1992, the Company raised approximately $250,000 through the sale of
12.5% subordinated debentures. The Company's Chairman of the Board and
President personally guaranteed $160,032 in principal amount of such
debentures. The Chairman of the Board and President received $6,000 in
consideration for such guaranty. The Company repaid the debentures in 1994.
(14) Subsequent Events
In January 1997, the Company's Board of Directors declared a dividend on
Series AAA Preferred Stock for shareholders of record as of December 31,
1996. The dividends totaled $39,825.
In March 1997, the Company entered into a new lease agreement for office and
manufacturing space with a stockholder. This lease agreement contains monthly
rental rates ranging from $4,241 to $5,013 during the life of the agreement,
which is from April 1997 to December 2002.
In March 1997, the Company amended the import letter of credit which existed
at December 31, 1996 and entered into a second import letter of credit
whereby the Company committed approximately $1,400,000 for inventory
purchases from an overseas supplier.
33
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(15) Quarterly Information (unaudited)
1996
Three months ended 3/31/96 6/30/96 9/30/96 12/31/96
Net sales $ 1,750,568 2,173,448 3,062,101 2,214,152
Gross profit 986,781 1,140,763 1,631,075 1,424,988
Net income 187,862 97,846 306,221 47,456
Net income applicable to
common stockholders 148,037 58,021 266,396 7,631
Net income per common and
common equivalent share $ 0.06 0.02 0.10 0.00
1995
Three months ended 3/31/95 6/30/95 9/30/95 12/31/95
Net sales $ 757,007 1,554,510 1,686,440 2,364,472
Gross profit 303,313 854,081 812,463 1,222,401
Net income (loss) (220,514) 34,244 33,204 297,969
Net income (loss) applicable to
common stockholders (255,839) (5,581) (6,621) 258,144
Net income (loss) per common and
common equivalent share $ (0.09) 0.00 0.00 0.10
34
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated herein by this reference:
EXHIBIT NO. DOCUMENT
+++ 2.1 Stock Acquisition Agreement, dated March 20, 1996, between the
Company and Transit-Media GmbH.
+++ 2.2 Notary Public Closing Document, dated April 30, 1996, between
the Company and Transit-Media GmbH.
* 3.1.1 Articles of Incorporation of the Company as filed on March 2,
1983 with the Secretary of State of the State of North Carolina.
* 3.1.2 Articles of Amendment to Articles of Incorporation of the
Company as filed on September 13, 1983 with the Secretary of
State of the State of North Carolina.
35
<PAGE>
EXHIBIT NO. DOCUMENT
* 3.1.3 Articles of Amendment to Articles of Incorporation of the
Company as filed on June 26, 1986 with the Secretary of State
of the State of North Carolina.
* 3.1.4 Articles of Amendment to Articles of Incorporation of the
Company as filed on November 19, 1986 with the Secretary of
State of the State of North Carolina.
* 3.1.5 Articles of Amendment to Articles of Incorporation of the
Company as filed on March 3, 1988 with the Secretary of State
of the State of North Carolina.
* 3.1.6 Amended and Restated Articles of Incorporation of the
Company as filed on December 28, 1990 with the Secretary of
State of the State of North Carolina.
* 3.1.7 Articles of Amendment to Articles of Incorporation of the
Company as filed on January 14, 1993, with the Secretary of
State of the State of North Carolina.
* 3.1.8 Articles of Amendment to Articles of Incorporation of the
Company as filed on February 4, 1993 with the Secretary of State
of the State of North Carolina.
* 3.1.9 Articles of Amendment to Articles of Incorporation of the
Company as filed on October 20, 1993 with the Secretary of State
of the State of North Carolina.
* 3.1.10 Form of Amended and Restated Articles of Incorporation to
be filed with the Secretary of State of the State of North
Carolina.
* 3.1.11 Form of Amendment to Articles of Incorporation to be
filed with the Secretary of State of the State of North
Carolina.
* 3.2.1 Form of Amended and Restated By-Laws of the Company.
* 4.1 Form of specimen certificate for Common Stock of the Company.
* 4.2 Form of specimen certificate for Warrants of the Company.
* 4.3 Form of Underwriter's Warrants to be issued by the Company to
the Underwriter.
* 4.4 Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company.
* 10.1.1 Form of Employment Agreement, by and between J. Phillips L.
Johnston and the Company.
* 10.1.3 Employment Agreement, dated June 26, 1986, by and between
Virgil D. Duncan and the Company.
* 10.2 Incentive Stock Option Plan, adopted April 27, 1993, authorizing
200,000 shares of Common Stock for issuance pursuant to the
Plan.
* 10.4 Form of 12.5% Subordinated Debentures, issued in the aggregate
principal amount of $250,050.
* 10.5 Promissory Note, dated January 1, 1993, payable to John M.
Reeves in the principal amount of $85,843.
* 10.6 Exclusive Marketing and Sales Agreement, dated February 1,
1992, by and between the Company and Federal Signal Corporation.
* 10.7 International Master Distributor Agreement, dated June 22,
1994, by and between First Exim Financial Limited and the
Company.
* 10.8 Form of domestic Sales Representative Agreement.
* 10.9 Office Lease Agreement, dated September 20, 1989, by and
between Research Triangle Industrial Park West Associates Joint
Venture and the Company.
36
<PAGE>
EXHIBIT NO. DOCUMENT
** 10.9.1 Commercial Lease Agreement, dated February 28, 1995, by and
between James E. Paul, Jr. and the Company.
++ 10.9.2 Sublease, dated April 24, 1996, by and between Family Health
International and the Company.
* 10.10 Technology Purchase and Consulting Agreement, dated July
17, 1987, as amended on July 10, 1990, by and between the
Company and Intermark Corp.
* 10.11 Representation Agreement, dated February 8, 1993 as amended
May 12, 1994, by and between Business Development Associates,
Inc. and the Company.
* 10.12 Highway Advisory Radio System Agreement, dated February 25,
1994, by and between the Company and the New Jersey Turnpike
Authority.
* 10.13 Memorandum concerning consulting services, dated as of
January 10, 1992, as amended on April 28, 1993, by and between
the Company and Curtis L. Kring.
* 10.14 Purchase Order, dated September 9, 1993, by and between the
Company and Harris Corporation.
* 10.15 Purchase Order, dated September 9, 1994, by and between New
Flyer Industries, Ltd. and the Company.
* 10.16 Purchase Order, dated September 15, 1994, by and between Gillig
Corporation and the Company.
* 10.17 Agreement for Transfer of Hawaii condominium, dated July 1,
1994, by and between William H. Wilson and Linda E. Wilson,
on the one hand, and the Company, on the other.
* 10.18 Apartment Deed, filed August 2, 1994, from William H. Wilson
and Linda E. Wilson to the Company.
* 10.19 Appraisal Report, dated as of May 10, 1994, from Island
Appraisals to the Company.
+ 10.20 Asset Purchase and Sale Agreement, dated February 28,
1995, by and between Digital Audio Corporation 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.
*** 10.22 Services Agreement, dated April 19, 1996, by and between the
Company and Robinson Turney International, Inc.
*** 10.22.1 Amendment to April 19, 1996 Services Agreement, dated July 29,
1996, by and between the Company and Robinson Turney
International, Inc.
*** 10.23 Exclusive Distribution and Sublicense Agreement, dated
June 1, 1996, by and between Robinson Turney
International, Inc. and TwinVision Corp. of
North America, Inc.
*** 10.23.1 Amendment and Supplement to June 1, 1996 Exclusive Distribution
and Sublicense Agreement, also dated June 1, 1996, by and
between Robinson Turney International, Inc. and TwinVision
Corp. of North America, Inc.
*** 10.23.2 Amendment to June 1, 1996 Exclusive Distribution and Sublicense
Agreement, dated July 29, 1996, by and between TwinVision
Corp. of North America, Inc. and Robinson Turney International,
Inc.
*** 10.24 Management Services Agreement, dated as of April 19,
1996, by and between the Company, Transit-Media GmbH and
Robinson Turney International, Inc.
*** 10.24.1 Amendment to April 19, 1996 Management Services
Agreement, also dated April 19, 1996, by and between the
Company, Transit-Media GmbH and Robinson Turney
International, Inc.
*** 10.25 Exclusive International Marketing Agreement, dated as of
April 19, 1996, by and between the Company, TwinVision Corp.
of North America, Inc. and Robinson Turney International, Inc.
*** 10.26 Common Stock Warrant Agreement by and between Robinson Turney
International, Inc. and the Company
37
<PAGE>
11 Not Applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
*** 21 Listing of Subsidiaries of the Company.
22 Not applicable.
* 23.4 Consent of Island Appraisals.
*** 27 Financial Data Schedule.
28 Not applicable.
99 Not applicable.
- -----------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (S.E.C. File No. 33-82870-A).
** Incorporated by reference from the Company's Form 10-KSB dated March 28,
1996.
*** Filed herewith.
+ Incorporated by reference from the Company's current Report on Form 8-K
dated on or about March 15, 1995.
++ Incorporated by reference from the Company's third quarter Form 10-QSB
date August 14, 1996.
+++ Incorporated by reference from the Company's Form 8-K dated May 15, 1996.
- ------------------
(B) REPORTS ON FORM 8-K
None
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Date: March 31, 1997 By: /s/ J. PHILLIPS L. JOHNSTON
------------------------------------------
J. Phillips L. Johnston, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ J. PHILLIPS L. JOHNSTON Chairman of the Board and March 31, 1997
- ------------------------------- Chief Executive Officer
J. Phillips L. Johnston (Principal Executive Officer)
/s/ JONATHAN E. KENNEDY Chief Financial Officer and March 31, 1997
- ------------------------------- Secretary (Principal Financial
Jonathan E. Kennedy and Accounting Officer)
/s/ JOHN M. COCHRAN, JR. Executive Vice President and March 31, 1997
- -------------------------------
John M. Cochran, Jr.
/s/ CURTIS I. KRING Director March 31, 1997
- -------------------------------
Curtis I. Kring
/s/ C. JAMES MEESE, JR. Director March 31, 1997
- -------------------------------
C. James Meese, Jr.
/s/ JOHN K. PIROTTE Director March 31, 1997
- -------------------------------
John K. Pirotte
/s/ JOHN M. REEVES, II Director March 31, 1997
- -------------------------------
John M. Reeves, II
/s/ JULIANN TENNEY Director March 31, 1997
- -------------------------------
Juliann Tenney
/s/ JOHN W. THOMAS, JR. Director March 31, 1997
- -------------------------------
John W. Thomas, Jr.
/s/ DAVID L. TURNEY Director March 31, 1997
- -------------------------------
David L. Turney
39
<PAGE>
SERVICES AGREEMENT
This Services Agreement is made effective as of April 19, 1996, by and between
DIGITAL RECORDERS, INC. ("Digital Recorders"), a North Carolina corporation with
offices at 4900 Prospectus Drive, Suite 1000, Durham, North Carolina 27713, USA,
and ROBINSON TURNEY INTERNATIONAL, INC. ("RTI"), a Texas corporation with
offices at 800 East Campbell Road, Suite 199, Richardson, Texas 75081, USA.
W I T N E S S E T H:
WHEREAS, RTI has knowledge and experience in and relating to the
worldwide public transportation and transit market and industry and is willing
to provide certain services to Digital Recorders based on such knowledge and
experience, as hereinafter set forth; and
WHEREAS, Digital Recorders desires to receive such services from RTI on
the terms and conditions specified in this Services Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DESCRIPTION OF SERVICES: Beginning on March 15, 1996, RTI will provide
advisory, consulting and management services to the Company, including oversight
and direction in areas such as business development, business and manufacturing
operations, marketing, sales, acquisitions, mergers, strategic planning and
implementation, and technology, all as related to the public transportation and
transit related products and services of Digital Recorders (collectively the
"Services").
2. PERFORMANCE OF SERVICES: The manner in which the Services are to be
performed, and the specific hours to be worked by RTI, shall be determined by
RTI. Digital Recorders will rely on RTI to work as many hours as may be
reasonably necessary to fulfill RTI's obligations under this Services Agreement.
3. COMPENSATION: Digital Recorders will pay base compensation, and other
compensation, to RTI as described in Exhibit A attached hereto, for the
Services. This compensation shall be payable, and in termination of this
Services Agreement be treated, as stipulated in Exhibit A attached hereto.
4. ADDITIONAL PAYMENTS: In addition to the compensation payments under the
preceding paragraph, Digital Recorders will make or cause to be made certain
commission and other payments, as set forth in Exhibit B hereto, certain of
which will be based on a percentage of Net Sales. For purposes of this Services
Agreement, "Net Sales" means gross revenues derived by Digital Recorders and its
affiliates from direct or indirect sales, as contracted or invoiced, less
returns, allowances, and other adjustments determined in accordance with
generally accepted accounting principles, consistently applied, which is the
amount Digital Recorders or an affiliate enters in its records as the amount due
and payable by a customer.
a. PAYMENT SCHEDULE: The commission payments shall be payable, without
further action by RTI to prompt or collect same, within 15 days
following the end of the month in which receipt by Digital Recorders of
full or partial payment of amounts due and
-1-
<PAGE>
payable occurs; commission applied to amount actually received.
b. ACCOUNTING: Digital Recorders shall maintain records in sufficient
detail for purposes of determining the amount of the commissions
payable to RTI. Digital Recorders shall provide to RTI with each
commission payment a written accounting that sets forth, in such detail
as is reasonably satisfactory to RTI, the manner in which the
commission payment was calculated.
c. RIGHT TO INSPECT: RTI, or RTI's agent, shall have the right to inspect
Digital Recorder's records for the limited purpose of verifying
calculation of the commission payments, subject to such restrictions as
Digital Recorders may reasonably impose to protect the confidentiality
of those records. Such inspections shall be made during reasonable
business hours as may be set by Digital Recorders.
5. EXPENSE REIMBURSEMENT: Except as stipulated in Exhibit A or Exhibit B hereto
or herein limited, RTI shall be entitled to reimbursement from Digital Recorders
of all out-of-pocket expenses incurred in rendering the Services. However, RTI
will not be entitled to reimbursement of expenses incurred related specifically
to RTI actions which are independently taken not at the direction of Digital
Recorders, to produce sales for Digital Recorders products, where RTI would be
entitled to payment of a commission on such sales by Digital Recorders, under
commission arrangements stipulated in Section 4 and Exhibit B hereto.
6. NEW PROJECT APPROVAL: RTI and Digital Recorders recognize that the Services
may include the development and implementation by RTI of various new projects
for Digital Recorders. RTI shall obtain the approval of the chief executive
officer of Digital Recorders prior to the commencement of any new project.
7. TERM & TERMINATION: Except as provided in Exhibit A or Exhibit B hereto, this
Services Agreement may be terminated as follows:
a. By either party for any reason upon 90 days' written notice to the
other party;
b. By either party upon 30 days' written notice to the other party if the
other party commits any material default or breach of any of its
agreements, obligations, representations or warranties contained in
this Services Agreement; or
c. By either party upon 30 days' written notice to the other party if the
other party is declared bankrupt or becomes insolvent or voluntarily
institutes a bankruptcy proceeding under the Bankruptcy Code, or a
receiver is appointed for the assets of such other party, or such other
party makes a general assignment for the benefit of creditors or admits
in writing its inability to pay its debts as they become due;
PROVIDED, HOWEVER, that this Services Agreement will not be terminated as
provided in paragraph (b) or (c) if, within such 30-day period, such other party
cures such breach, default, act or circumstance giving rise to the right of
termination to the reasonable satisfaction of the party delivering the notice.
The term of this Services Agreement shall be a period of three years
commencing on the date of its execution by RTI and Digital Recorders. This
Services Agreement shall automatically be renewed for an additional three-year
term at the end of the initial and each successive term, unless either party
shall have given notice to the other party that it elects not to renew this
Services Agreement prior to end of the second year of the initial or any
subsequent three-year
-2-
<PAGE>
term.
8. RELATIONSHIP OF PARTIES: It is understood by the parties that RTI is an
independent contractor with respect to Digital Recorders, and not an employee,
partner or joint venturer of Digital Recorders. Unless otherwise specifically
agreed with respect to any specific individual, Digital Recorders will not
provide a salary, fringe benefits, including health insurance benefits, paid
vacation, or any other employee benefit, for the benefit of RTI or RTI's
employees.
9. DISCLOSURE: RTI is required to disclose any outside activities or interests
that, in the sole opinion of RTI, conflict or may conflict with the best
interests of Digital Recorders. Notwithstanding RTI's opinion on such, prompt
disclosure is specifically required under this section if the activity is
directly or indirectly competitive with the public transportation and transit
business of Digital Recorders. As of the date hereof, the only such item is the
beneficial holding, by David L. Turney, a principal of RTI, of less than 5,000
shares of Trans Industries common stock.
10. EMPLOYEES: RTI's and Digital Recorders' employees, if any, who perform
services under this Services Agreement, shall also be bound by the provisions of
this Services Agreement.
11. INJURIES: RTI acknowledges RTI's obligation to obtain appropriate insurance
coverage for the benefit of RTI (and RTI's employees, if any). RTI waives any
rights to recovery from Digital Recorders for any injuries that RTI (and/or
RTI's employees) may sustain while performing Services under this Services
Agreement or that are a result of the negligence of RTI or RTI's employees,
unless such injuries result from the intentional or reckless behavior or gross
negligence of Digital Recorders or its employees.
12. ASSIGNMENT AND RELIANCE ON CERTAIN PARTIES: Neither party's rights or
obligations under this Services Agreement may be assigned or transferred to any
other person, firm or corporation without the prior written consent of the other
party. RTI acknowledges that Digital Recorders is primarily, but not
exclusively, relying on the availability of David L. Turney to perform Services
under this Services Agreement. RTI understands that the lack of such
availability, at the sole discretion of Digital Recorders, may be reason for
termination of this Services Agreement by Digital Recorders upon 90 days'
written notice as provided in Section 7.
13. INTELLECTUAL PROPERTY: The following provisions shall apply with respect to
copyrightable works, trademarks, trade secrets, ideas, discoveries, inventions,
applications for patents, and patents of Digital Recorders and RTI
(collectively, "Intellectual Property"):
a. RTI's Intellectual Property: As of the effective date of this Services
Agreement, RTI does not hold any interest in any Intellectual Property
which relates to the products and technology of Digital Recorders to
which this Services Agreement applies other than RTI's exclusive
license and distribution rights granted to it by Lite Vision
Corporation relating to a device used in passenger information display
systems in public transit and transportation-related applications, in
accordance with that certain Exclusive Distribution and License
Agreement among RTI, Lite Vision Corporation and UTM, Inc. dated as of
April 19, 1996. RTI has granted to Digital Recorders a sublicense with
respect to its rights under such agreement, pursuant to an Exclusive
Distribution and Sublicense Agreement dated as of April 19, 1996, by
and between RTI and Digital Recorders (the "Sublicense").
b. Development of Intellectual Property: Any improvements to any existing
Intellectual Property of Digital Recorders, any other and further
inventions or improvements, and
-3-
<PAGE>
any new items of Intellectual Property relating to the products and
technology of Digital Recorders to which this Services Agreement
applies (collectively, "Improvements") shall be (a) the sole and
exclusive property of Digital Recorders if created, developed or
produced by RTI (or RTI's employees, if any) in the course of providing
the Services to Digital Recorders during the term of this Services
Agreement, or (b) the sole and exclusive property of RTI if created,
developed or produced by RTI (or RTI's employees, if any) other than in
the course of providing the Services to Digital Recorders during the
term of this Services Agreement, and in either case any and all such
Improvements shall be subject to an irrevocable, perpetual right and
license from the property holder to the other party to make, use, sell
or otherwise exploit products and services derived from such
Improvements without payment of royalties. Such rights and licenses
will be exclusive for the term of this Services Agreement, including
any extensions or renewals of such term. After termination of this
Services Agreement, such rights and licenses shall be nonexclusive, but
shall remain royalty-free. Each party shall execute such documents as
may be necessary to perfect and preserve the rights and interests of
either party with respect to any such Improvements and the licenses
therein as contemplated by this paragraph (b).
14. CONFIDENTIALITY: RTI and Digital Recorders each acknowledge that the other
has and will have trade secrets and other proprietary information (such as, but
not limited to, future plans, business affairs, process information, technical
information, customer lists, inventions, price lists and other pricing
information, and information relating to costs, apparatus, products and
machinery) (collectively, "Information") which are valuable, special and unique
assets of Digital Recorders or RTI, respectively. RTI and Digital Recorders each
agrees to not at any time or in any manner, either directly or indirectly,
divulge, disclose, or communicate in any manner any Information of the other
party to any third party without the prior written consent of the other. Each
party will protect the Information of the other and treat it as strictly
confidential. Notwithstanding the foregoing, neither party shall be obligated to
maintain any Information of the other party as confidential and refrain from
using or disclosing it, if (a) the Information was in the receiving party's
possession or was known to it prior to its receipt from the other party, (b) the
Information is independently developed or learned by the receiving party without
the utilization of any Information provided by the other party, (c) the
Information is or becomes public knowledge without fault of the receiving party
or (d) the receiving party is required by applicable law or court order to
disclose the Information.
15. UNAUTHORIZED DISCLOSURE OF INFORMATION: Each party acknowledges that a
violation by it of Section 14 would be a material violation of this Services
Agreement and would cause irreparable harm to the other party for which money
damages would be an inadequate remedy. Accordingly, except as provided otherwise
in Section 14, if it appears that RTI or Digital Recorders has disclosed (or has
threatened to disclose) Information in violation of this Services Agreement, the
other party shall be entitled to an injunction to restrain the disclosing party
from disclosing, in whole or in part, such Information, or from providing any
services to any party to whom such Information has been disclosed or may be
disclosed.
16. CONFIDENTIALITY AFTER TERMINATION: The confidentiality provisions of this
Services Agreement shall remain in full force and effect for a period of six
months after the termination of this Services Agreement.
-4-
<PAGE>
17. SERVICES TO OTHER PARTIES: Digital Recorders and RTI each acknowledge and
agree that RTI may provide consulting or other services to other parties during
the term of this Services Agreement. However, RTI is bound by the
confidentiality and disclosure provisions of this Services Agreement, and RTI
may not use the Information of Digital Recorders, directly or indirectly, for
the benefit of third parties in violation of this Services Agreement nor take
any action inconsistent with or in violation of the Sublicense.
18. NON-COMPETE AGREEMENT: RTI agrees and covenants that for a period of six
months following the termination of this Services Agreement, in the event of
RTI's voluntary termination of this Services Agreement, RTI will not directly or
indirectly engage in any business competitive with Digital Recorders' public
transportation and transit products and services business, as conducted on the
effective date of this Services Agreement. This covenant shall apply to the
geographical areas that include the USA, Europe, and Asia. Directly or
indirectly engaging in any competitive business means (i) engaging in a business
as owner, partner, or agent; or (ii) becoming an employee of any third party
that is engaged in such business; or (iii) soliciting any customer of Digital
Recorders for the benefit of a third party that is engaged in such business. In
the event of termination of this Services Agreement by Digital Recorders, RTI
shall not be subject to this section.
19. RETURN OF RECORDS: Upon termination of this Services Agreement, RTI shall,
upon request, deliver all records, notes, data, memorandum, models, and
equipment of any nature that are in RTI's possession or under RTI's control and
that are Digital Recorder's property or relate to Digital Recorder's business.
20. NOTICES: All notices required or permitted under this Services Agreement
shall be in writing and shall be deemed delivered when delivered in person or
deposited in the United States mail, postage prepaid, addressed as follows:
If to Digital Recorders:
Digital Recorders, Inc.
J. Phillips L. Johnston, Chairman and CEO
4900 Prospectus Drive, Suite 1000
Durham, NC 21713
If to RTI:
Robinson Turney International, Inc.
David L. Turney, Principal
800 East Campbell Road, Suite 199
Richardson, TX 75081
Such address may be changed from time to time by either party by providing
written notice to the other in the manner set forth above.
21. ENTIRE AGREEMENT: This Services Agreement contains the entire agreement of
the parties related to the Services. This Services Agreement supersedes any
prior written or oral agreements between the parties.
22. AMENDMENT: This Services Agreement may be modified or amended only by means
of a written instrument signed by both parties.
-5-
<PAGE>
23. SEVERABILITY: If any provision of this Services Agreement shall be held to
be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Services Agreement is invalid or unenforceable, but that by limiting such
provision it would become valid and enforceable, then such provision shall be
deemed to be written, construed, and enforced as so limited.
24. WAIVER OF CONTRACTUAL RIGHT: The failure of either party to enforce any
provision of this Services Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with such provision or any other provision of this Services
Agreement.
25. APPLICABLE LAW: This Services Agreement shall be governed by the laws of the
State of Texas.
26. DISPUTE RESOLUTION: Except for the provision for injunctive relief contained
in Section 15, the parties agree to engage in binding arbitration for resolution
of all disputes arising out of or relating to this Services Agreement or the
performance or failure of performance hereunder. Such arbitration shall be
conducted on or near the business premises of the aggrieved party pursuant to
the expedited procedures of and in accordance with the rules of the American
Arbitration Association. The arbitrator shall be mutually selected by the
parties or, if they cannot agree on such selection, Digital Recorders and RTI
each shall designate one arbitrator to represent it in the selection process and
the two arbitrators shall appoint a third arbitrator who shall arbitrate such
dispute. Such selection process shall be completed within 30 days from the date
on which arbitration is requested by either party. The arbitrator selected
shall, if reasonably possible, be one who is familiar with the commercial and
manufacturing practices of the public transportation and transit passenger
information display industry. The arbitrator's award shall be final and binding
on the parties hereto and enforceable by either party in any court of competent
jurisdiction. The parties agree that each party will bear its own costs of such
arbitration (including attorneys' fees and expenses), regardless of the decision
rendered by the arbitrator.
IN WITNESS WHEREOF, the parties hereto have executed this Services
Agreement as of the date first written above.
DIGITAL RECORDERS, INC.
By:
J. Phillips L. Johnston, Chairman and CEO
ROBINSON TURNEY INTERNATIONAL, INC.
By:
David L. Turney, Principal
Exhibits made a part of this Services Agreement and attached hereto:
EXHIBIT A - COMPENSATION
EXHIBIT B - ADDITIONAL PAYMENTS
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<PAGE>
EXHIBIT A - COMPENSATION
(CONSISTING OF PAGES 7 & 8)
I.) BASE COMPENSATION: RTI shall be paid $6,000 per month by Digital Recorder as
base compensation under this Services Agreement. This compensation will be paid
monthly by the 15th day of the month without further action by RTI to invoice or
collect. Upon termination of this Services Agreement, payments under this
paragraph shall cease; provided, however, that RTI shall be entitled to payments
for periods or partial periods that occurred prior to termination for which RTI
has not yet been paid. This base compensation is for the normal course of
business conduct in providing the Services. RTI will be entitled, subject to
written prior agreement with Digital Recorders, to collect additional base
compensation in the event that the parties agree to RTI performing more
time-consuming tasks such as, but not limited to, turn-around, restructuring, or
temporary direct management duties, of any Digital Recorders division or
business unit.
II.) SET-UP COMPENSATION: RTI shall be paid a $25,000 one-time set-up
compensation by Digital Recorders, due upon signing of this Services Agreement,
and upon submission of an invoice by RTI, with the plan noted below attached
thereto. This set-up compensation shall be for the purpose of RTI conducting a
thorough evaluation and study of Digital Recorders and Digital Recorders'
transit market-related business and products, and consultation with third
parties, all for the purpose of RTI becoming detail familiar with the business,
technology, and products of Digital Recorders. Digital Recorders will cooperate
with and assist RTI in this effort. RTI will submit to Digital Recorders a
written plan for conduct of this activity; Digital Recorders shall have the
right to delete from that plan any activity which it reasonably believes to not
be in the best interest of Digital Recorders. RTI will not be entitled to
reimbursement, under Section 5 of this Services Agreement, for expenses incurred
in connection with this specific one-time activity.
III.) ACQUISITION, MERGER, DIVESTITURE, FINANCING, OR INVESTMENT COMPENSATION:
RTI will be entitled to collect from Digital Recorders additional compensation
for any acquisition, merger, divestiture, financing transaction or investment
opportunity engaged in or pursued by Digital Recorders or its affiliates, where
such action was recommended or facilitated by RTI, and documented in advance and
in writing by RTI letter to Digital Recorders, stipulating that such
recommendation is to be subject to this compensation. Such compensation, and
actions to which applicable, will be negotiated and agreed in each instance and
documented in writing before becoming a binding obligation of Digital Recorders
and before substantive direct action by RTI in behalf of Digital Recorders on
same. This type compensation, in the event of expiration or termination of this
Services Agreement prior to the completion of related actions of RTI, will
remain due and payable by Digital Recorders, in any event, according to the
stipulations in the related agreement on same. While the parties recognize that
such compensation will be negotiated and agreed in each instance, it is
acknowledged that such compensation may be based on a percentage of the gross
value of the transaction in question and that such percentage may typically be
in the 2% to 5% range. As of the date of this Services Agreement, there is only
a certain compensation under a separate agreement dated January 22, 1996 between
RTI and TRANSIT-MEDIA GmbH ("Transit-Media"), which is to be paid by
Transit-Media, to which Digital Recorders would become a party should Digital
Recorders enter into an agreement to acquire Transit-Media (or to have a new
subsidiary of Digital Recorders acquire the assets of Transit-Media). In the
event of such acquisition agreement, Digital Recorders agrees to be bound by the
terms of the agreement between Transit-Media and RTI and to cause Transit-Media
or such new subsidiary of Digital Recorders to make the payment to RTI specified
therein.
-7-
<PAGE>
IV.) LONG TERM GAIN IN MARKET VALUE: Recognizing that the actions of RTI under
this Services Agreement will be intended to produce long-term gain in the market
value of the Common Stock of Digital Recorders, Digital Recorders will grant to
RTI, simultaneously with the execution of this Services Agreement, the option to
purchase, at an exercise price of $6.50 per share, not less than 30,000 shares
of the marketable Common Stock of Digital Recorders. RTI will be entitled to
purchase this stock, commencing after the end of the first year of this Services
Agreement, at any time, and in any purchase increments up to the currently
vested amount, over whatever time period desired, as RTI, in its sole
discretion, deems appropriate. The 30,000 shares will vest to RTI's interest and
availability for purchase at the rate of 50% on the date that is 13 months from
the date of execution of this Services Agreement, a further 30% on the date that
is 25 months from the date of such execution, and the final 20% on the date that
is 35 months from the date of such execution. However, this right to purchase
such shares will be contingent upon the market price of the Common Stock
exceeding, for a period of 90 consecutive calendar days, the following prices,
for each block of shares:
First 10,000 Share Block $6.50
Next 6,000 Share Block $9.50
Next 6,000 Share Block $11.00
Final 8,000 Share Block $14.00
For this purpose, "market price" means the closing sale price of the Common
Stock on the Nasdaq Stock Market over the counter trading system (Symbol TBUS),
or on such stock exchange or other stock market on which the Common Stock may
hereafter be listed or admitted for trading.
To the extent vested in accordance with the foregoing, such
option may be exercised, in RTI's discretion, in whole or in part, at any time
and from time to time, during the 10-year period commencing on the effective
date of this Services Agreement.
If this Services Agreement is terminated by Digital Recorders
pursuant to Section 7(a), or by RTI pursuant to Section 7(b) or (c) of this
Services Agreement, at any time during the period beginning three months after
the effective date of this Services Agreement and ending 36 months after such
effective date, the vesting of all remaining unvested portions of such option
shall be accelerated, and such option shall be and become exercisable in full
from and after the date of such termination, at any time and from time to time,
during the remainder of the 10-year term thereof. If this Services Agreement is
terminated at any time by RTI pursuant to Section 7(a), or by Digital Recorders
pursuant to Section 7(b) or (c) of this Services Agreement, the option shall be
exercisable by RTI, to the extent vested on the date of such termination, at any
time and from time to time, during the remainder of the 10-year term thereof,
and all unvested portions of the option on such date of termination shall
terminate.
-8-
<PAGE>
EXHIBIT B - ADDITIONAL PAYMENTS
(CONSISTING OF PAGES 9, 10 & 11)
I.) COMMISSION ON SALES OF EXISTING TRANSIT OR TRANSPORTATION PRODUCTS OF
DIGITAL RECORDERS TO CUSTOMERS OR ENTITIES LOCATED IN THE USA, MEXICO, AND
CANADA: The following Digital Recorders specific transit or transportation
market products, or derivatives thereof, are in existence as of the date of this
Services Agreement, and are subject to this type commission payment to RTI,
generally as stipulated in Section 4 of this Services Agreement:
- - The "TALKING BUS" family of voice announce products including products bearing
the following reference numbers or nomenclature:
_______________________________ ___________________________________
_______________________________ ___________________________________
_______________________________ ___________________________________
On these products, considering that RTI's Services under this Services Agreement
will include actions, plans, and strategies to increase the sales volume of
Digital Recorders of these products, RTI shall be entitled to a commission on
Net Sales in the United States, Mexico and Canada exceeding the actual Net Sales
in such territory for the preceding calendar year (the "Threshold"), calculated
on a quarterly annualized basis, and adjusted at the end of each year to actual
Net Sales. The rate of this commission shall be as provided in the rate schedule
in the following Part II (referred to below as the "Rate"). This commission
shall be due and payable by the 15th day of the month next following the end of
each calendar quarter to the extent that such amount due exceeds 50% of the base
compensation paid in accordance with Part I of Exhibit A to this Services
Agreement. Payment of this commission will continue for a period of six months
following termination of this Services Agreement and will be payable with
respect to all products ordered or shipped during such six-month period,
regardless of when payment therefor is received. The formula for calculation of
this commission is set forth below:
For Quarter #1:
(Net Sales in quarter x 4) - Threshold = Sales Subject to Commission (Sales
Subject to Commission x Rate) / 4 = Amount to credit RTI Amount to credit
RTI - 50% of Base Compensation paid in quarter = Commission Due RTI
(but not less than zero).
For Quarter #2:
(Net Sales in first two quarters x 2) - Threshold = Sales Subject to
Commission (Sales Subject to Commission x Rate) / 2 = Amount to credit RTI
Amount to credit RTI - 50% of Base Compensation paid in first two quarters -
commissions paid first quarter = Commission Due RTI (but not less than
zero).
For Quarter #3:
(Net Sales in first three quarters x 1.33) - Threshold = Sales Subject to
Commission (Sales Subject to Commission x Rate) / 1.33 = Amount to credit
RTI Amount to credit RTI - 50% of Base Compensation paid in first three
quarters - commissions paid first two quarters = Commission Due RTI (but not
less than zero).
For Quarter #4:
(Net Sales in four quarters - Threshold) x Rate = Amount to credit RTI.
Amount to credit RTI - 50% of Base Compensation paid in four quarters -
Commissions paid in first three quarters = Commission Due RTI (but not less
than zero).
-9-
<PAGE>
Notwithstanding the foregoing, it is agreed that the Threshold amount, for 1996
only, shall be construed to be an amount such that no payment above the base
compensation is required by this Part I for any quarter in 1996.
II.) COMMISSION ON SALES OF NEW TRANSIT OR TRANSPORTATION PRODUCTS TO CUSTOMERS
OR ENTITIES LOCATED IN THE USA, MEXICO, AND CANADA: Considering that RTI's
Services under this Services Agreement, related to new products of Digital
Recorders, will include actions, plans, and strategies to launch these products
for maximum sales volume, RTI will be entitled to a commission on all Net Sales
derived from sales of new products in the United States, Mexico and Canada, as
provided in Section 4 of this Services Agreement, according to the following
schedule of commission Rates, based on Net Sales volume achieved in each
calendar year:
First $2,000,000 Net Sales---------------- rate of 3%
Next $3,000,000 Net Sales---------------- rate of 2%
Net Sales exceeding $5,000,000-------- rate of 1%
Payment of this commission will be due by the 15th day of each month, with
respect to Net Sales received by Digital Recorders or any affiliate in the
preceding month, and will continue, following termination of this Services
Agreement, until commission has been paid on all contracts and purchase orders,
and contracts and purchase orders resulting from proposals, dated prior to the
date of termination of this Services Agreement.
For purposes of this Exhibit B, "new products of Digital Recorders"
means all products developed, sold or distributed by Digital Recorders and its
affiliates, directly or indirectly, for use in or relating to the transit or
transportation market initiated by RTI. Without limiting the foregoing, the
commission provided for in this Part II shall be payable with respect to
products containing the components and technology that are the subject of the
Sublicense, for so long as the Sublicense remains in effect, as contemplated by
Section 6.1 of the Sublicense.
III.) COMMISSIONS AND OTHER PAYMENTS ON ALL SALES OF ALL DIGITAL RECORDERS
TRANSIT OR TRANSPORTATION PRODUCTS (EXISTING AND NEW) TO ENTITIES LOCATED IN
EUROPE, ASIA, INDONESIA, SOUTH AMERICA AND AUSTRALIA: Digital Recorders agrees
to enter into a separate agreement or agreements with RTI for RTI to become the
sole and exclusive agent of Digital Recorders and its affiliates for purposes of
sales of existing or new Digital Recorders products initiated by RTI in Europe,
Asia, Indonesia, South America and Australia. RTI and Digital Recorders agree
that such separate agreement(s) will be negotiated and signed within 60 days of
the signing of this Services Agreement. The terms of such agreement(s), as
related to commission rates and payment, will be the same as provided in Part II
above, unless specifically agreed otherwise.
The parties acknowledge and agree that the agreement(s) implementing this Part
III may provide for compensation to RTI in the form of commissions, management
fees or other forms of compensation, as the parties may agree based on such
factors as they deem appropriate, including the nature and scope of the services
to be provided. Without limiting the foregoing, the parties will initially enter
into the following agreements:
(a) An agreement among Digital Recorders, Transit-Media and RTI (the
"Transit-Media Agreement") pursuant to which RTI will provide advisory,
consulting and management services to Transit-Media and receive a
management fee for such services determined using the Rates specified
in Part II of this Exhibit B. Such management fee will be calculated on
the basis of Transit-Media's Net Sales, derived from sales of existing
or new products, in Europe, Singapore and Hong Kong (the "Transit-Media
Territory"). The fee will be payable by Transit-Media and guaranteed by
Digital Recorders. RTI shall not be
-10-
<PAGE>
entitled to receive any additional fee or commission under the
following paragraph (b) with respect to Transit-Media's Net Sales in
the Transit-Media Territory for so long as the Transit-Media Agreement
is in effect; and
(b) An agreement between Digital Recorders and RTI providing for the
payment by Digital Recorders to RTI of a commission determined using
the Rates specified in Part II of this Exhibit B and calculated on the
basis of Net Sales derived from sales of existing or new products
anywhere in Europe, Asia, Indonesia, South America and Australia, but
excluding sales by Transit-Media in the Transit-Media Territory with
respect to which RTI receives compensation under the Transit-Media
Agreement.
As used in paragraphs (a) and (b) above, "Transit-Media" refers to Transit-Media
or a new subsidiary of Digital Recorders that acquires the assets of
Transit-Media, as the case may be, as contemplated by Part III of Exhibit A of
this Agreement.
Digital Recorders represents that, prior to the execution of this Services
Agreement, it had in process certain proposals or understandings with selected
specific customers which Digital Recorders believes may materialize into orders.
Therefore, notwithstanding the foregoing, no commission shall be due RTI under
this Part III on the following proposals, orders, or customers until after
expiration of the time period noted:
Customer, Proposal, or Order Time Period Ending
- -------------------------------------- ---------------
NONE
- -------------------------------------- ---------------
- -------------------------------------- ---------------
- -------------------------------------- ---------------
- -------------------------------------- ---------------
IV.) USE OF COMMISSIONED SALES AGENTS: Digital Recorders acknowledges that RTI
may utilize commissioned sales agents ("Agents") in carrying out this Services
Agreement. Such Agents being utilized, and arrangements related thereto, will be
subject to the approval of Digital Recorders. Once approved, such Agents, unless
otherwise agreed, will be directed by RTI and will be paid by the business group
of Digital Recorders without offset against any compensation due RTI.
"Transportation Products" pertain to bus, rail and vehicles throughout.
-11-
<PAGE>
AMENDMENT TO 19 APRIL 1996 SERVICES AGREEMENT
BETWEEN
DIGITAL RECORDERS AND RTI
Page #: 1
The following modifications to the above noted document were agreed and accepted
at time of execution of that document. These modifications are stated here for
record and clarity purposes; refer to the full agreement document where
indicated to see the exact context of the changes:
A.) PAGE EIGHT (8) UNDER EXHIBIT A - COMPENSATION: A sentence is added to state
that "any un-exercised options will expire in ten (10) years".
B.) PAGE TEN (10) UNDER EXHIBIT B - ADDITIONAL PAYMENTS; SUBPARAGRAPH II.); LAST
PARAGRAPH: The words "initiated by RTI" are added and the words "and that are
not subject to the commission provided for in Part I above" are deleted.
C.) PAGE TEN (10) UNDER EXHIBIT B - ADDITIONAL PAYMENTS; SUBPARAGRAPH III.);
FIRST PARAGRAPH: The words "initiated by RTI" are added.
D.) PAGE ELEVEN (11) UNDER EXHIBIT B - ADDITIONAL PAYMENTS; SUBPARAGRAPH III.);
SPACE AT THE END FOR LISTING: The word "NONE" is added.
E.) PAGE ELEVEN (11) UNDER EXHIBIT B - ADDITIONAL PAYMENTS; SUBPARAGRAPH IV: Two
sets of new words are added; one inserted in last sentence "the business group
of" and the second being addition of a new sentence at the end reading
"TRANSPORTATION PRODUCTS" pertain to Bus, Rail & vehicles throughout.
- ---------
The following modification to the above noted document was agreed and accepted
in principal at time of execution of that document but the associated wording
was not finalized. This new clarification is stated here for record purposes;
refer to the full agreement document where indicated to see the exact context of
the change:
F.) PAGE ELEVEN (11) UNDER EXHIBIT B - ADDITIONAL PAYMENTS; SUBPARAGRAPH IV:
Related to the words added as noted in (E.) above; it is understood that the
term "throughout" applies to the full Services Agreement and all Exhibits
thereto.
- -------------
The following modifications to the above noted document were agreed and accepted
at a meeting of the parties on 21 May 1996 and are documented here for record
purposes:
G.) THROUGHOUT THE ENTIRE AGREEMENT AND ALL ATTACHMENTS OR EXHIBITS THERETO,
where reimbursement of RTI business expenses is the subject, it is stipulated by
RTI that such
<PAGE>
AMENDMENT TO 19 APRIL 1996 SERVICES AGREEMENT
BETWEEN
DIGITAL RECORDERS AND RTI
Page #: 2
expenses will, in all instances, be "reasonable" and "commensurate with (Digital
Recorders) Corporate policy".
H.) PAGE THREE (3); PARAGRAPH 13(B): Reading in the last line at the bottom of
the page:
i.) Strike the letter "(a)"; and,
ii.) Add a period to end the sentence at the point immediately
following the words "Digital Recorders"; and,
iii.) Strike all words of that paragraph following the above noted
addition of a period and continuing with such strike-out through
the end of paragraph 13(b) as appears on page four.
I.) PAGE EIGHT (8); EXHIBIT A; SUBPARAGRAPH IV: It is agreed and understood that
Digital Recorders will issue a Warrant in lieu of referenced stock options. This
Warrant will be in form not changing the terms, conditions, or value to RTI of
the options as referenced in Sub-paragraph IV of the Services Agreement as
executed on 19 April 1996. It is intended that shares of Digital Recorders'
common stock issuable under the Warrant ("the Warrant Shares") will be freely
tradeable by RTI immediately upon exercise of the Warrant with the only
restriction on such being those imposed by the Securities Exchange Commission
for otherwise immediately tradeable stock if not in the hands of an Officer or
Director of Digital Recorders, Inc. Accordingly, as soon as practicable after
execution of this Amendment, and in any event prior to the time the Warrant
first becomes exercisable, Digital Recorders will file (a) a registration
statement on Form S-8, or other available forms, with the United States
Securities and Exchange Commission registering the issuance to RTI of the
Warrant Shares pursuant to exercise of the Warrant and (b) a listing application
with the NASDAQ Stock Market covering the Warrant Shares. As long as the Warrant
is outstanding, Digital Recorders will maintain the effectiveness of such
registration statement, and of such state "blue sky" registrations and NASDAQ or
stock exchange listings as shall be necessary to permit the immediate resale of
the Warrant Shares by RTI. Digital Recorders will pay all fees and expenses in
connection with the registrations and listings referred to in this paragraph.
- -----------------------
The following modification to the above noted document is proposed at this date
by RTI following advise of legal counsel. This modification is stated here for
record and clarity
<PAGE>
AMENDMENT TO 19 APRIL 1996 SERVICES AGREEMENT
BETWEEN
DIGITAL RECORDERS AND RTI
Page #: 3
purposes and for acceptance by the parties; refer to the full agreement document
where indicated to see the exact context of the changes:
J.) PAGE THREE (3); PARAGRAPH 13(A): Considering that, as of the date of the
above noted document, the grant of Sublicense to the subsidiary of Digital
Recorders, Inc. had not occurred, and did not occur until 01 June 1996, the
entire last sentence (starting with the word "RTI...." and ending with the word
"........ (the "Sublicense")." of this Paragraph 13(a) is deleted.
Agreed and Accepted:
DIGITAL RECORDERS:
By: ___________________________________ Date: ______________
J. Phillips L. Johnston; Chairman & CEO
RTI:
By: ___________________________________Date: _______________
David L. Turney; Principal
<PAGE>
EXCLUSIVE DISTRIBUTION AND SUBLICENSE AGREEMENT
THIS EXCLUSIVE DISTRIBUTION AND SUBLICENSE AGREEMENT (this
"Sublicense") is made and entered into as of this 1st day of June, 1996, by and
between ROBINSON TURNEY INTERNATIONAL, INC. ("RTI"), a Texas corporation with
offices at 800 East Campbell Road, Suite 199, Richardson, Texas 75081, and
TWINVISION Corp. Of North America, Inc.("Sublicensee"), a North Carolina
corporation and wholly-owned subsidiary of Digital Recorders, Inc. ("Digital")
with offices at 4900 Prospectus Drive, Suite 1000, Durham, North Carolina 27713.
WITNESSETH:
WHEREAS, RTI, by virtue of an Exclusive Distribution and License
Agreement dated April 19, 1996 (the "License Agreement") by and between RTI,
Lite Vision Corporation ("Lite Vision"), a Taiwan corporation, and UTM, Inc.
("UTM", and collectively with Lite Vision, "Grantor"), a Texas corporation, has
the exclusive license and right to use, market, distribute, sell and otherwise
transfer the Product and the Licensed Technology, and to sublicense the Licensed
Technology, in the Field of Use throughout the Territory; and
WHEREAS, Sublicensee desires to receive the sublicense and rights with
respect to the Product and Licensed Technology as set forth below, and RTI
desires to grant such sublicense and rights;
NOW, THEREFORE, in consideration of the premises, the mutual agreements
set forth herein and other good and valuable good consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used but not defined in this Sublicense shall
have the meanings given to them in the License Agreement, a copy of which is
attached hereto.
ARTICLE II
GRANT OF SUBLICENSE AND DISTRIBUTION RIGHTS
2.1 Exclusive Distribution Rights. RTI hereby grants to Sublicensee the
exclusive right to use, market, distribute, sell and otherwise transfer the
Product in the Field of Use throughout the Territory.
2.2 Sublicense. RTI hereby grants to Sublicensee an exclusive right and
sublicense in the Licensed Technology to use, market, distribute, sell and
otherwise transfer the Licensed Technology in the Field of Use, throughout the
Territory, in connection with the distribution rights with respect to the
Products granted in Section 2.1. Sublicensee shall not have the right to
<PAGE>
sublicense any of its rights under this Sublicense without the prior written
consent of RTI and Grantor.
2.3 Included Sublicense Under Patent. RTI further grants to Sublicensee
the exclusive sublicense under any patents licensed to RTI by Grantor pursuant
to the License Agreement at any time during the term of this Sublicense to the
extent necessary for Sublicensee to exercise any right or sublicense granted to
Sublicensee hereunder.
2.4 Restrictions. During the period of time the rights granted to
Sublicensee in Section 2.1 are exclusive, RTI and its affiliates shall not (a)
market, sell, lease or otherwise distribute, or authorize or permit the
marketing, sale, lease or distribution of, the Product, or any technology,
product, system or device that embodies the Licensed Technology or that may be
competitive with the Product, or (b) sublicense the Licensed Technology to any
other person or entity, in either case in the Field of Use within the Territory
or to any person or entity that RTI or its affiliates knows or has reason to
know intends to distribute or use the Product or the Licensed Technology in the
Field of Use in the Territory.
2.5. Competing Products. During the period of time the rights granted
to Sublicensee in Section 2.1 are exclusive, neither Sublicensee nor any
affiliate of Sublicensee shall market, sell or otherwise distribute in the Field
of Use in the Territory any technology, product, system or device that performs
substantially the same functions as, or is competitive with, the Product or the
Licensed Technology, unless it is necessary to do so to meet a customer's
procurement specification that cannot be met with the Product without the
incurrence of unreasonable effort or expense. Subject to Section 2.4, RTI and
Grantor shall not be prohibited by this Sublicense from developing, acquiring,
marketing, selling or otherwise distributing the Product, or technology,
products, systems or devices that may be competitive with the Product, anywhere
in the world other than the Territory, for end use outside the Territory, or
within the Territory for end use other than in the Field of Use.
2.6. Market Share Targets. Sublicensee shall use its best efforts to
cause the Market Share targets set forth in Section 2.6 of the License Agreement
to be met. If Sublicensee, individually, fails to achieve a Market Share of 30%
in 1999 or any subsequent calendar year, then the rights and sublicense granted
to Sublicensee with respect to the Product and the Licensed Technology shall,
upon six months' written notice by RTI to Sublicensee, revert to non-exclusive
rights and a non-exclusive sublicense, which rights and sublicense shall remain
subject to all the other terms and provisions of this Sublicense; PROVIDED,
HOWEVER, that such reversion shall not occur if Sublicensee, individually, shall
achieve a Market Share of 30% for any period of three months during the
six-month period following Sublicensee's receipt of such notice from RTI. Any
such reversion shall be independent of, and shall not be contingent upon, any
reversion of RTI's rights and license under the License Agreement.
If Sublicensee, individually, fails to achieve a Market Share of 15% in
1999 or any subsequent calendar year, then this Sublicense and the rights and
sublicense granted to Sublicensee hereunder with respect to the Product and the
Licensed Technology, upon six months' written notice by RTI to Sublicensee,
shall terminate; PROVIDED, HOWEVER, that such termination shall not
2
<PAGE>
occur if Sublicensee, individually, shall achieve a Market Share of 15% for any
period of three months during the six-month period following Sublicensee's
receipt of such notice from RTI. Any such termination shall be independent of,
and shall not be contingent upon, any termination of RTI's rights and license
under the License Agreement.
Notwithstanding the foregoing, if Grantor does not fill all orders of
Sublicensee in full in any period, then the Market Share conditions for
continued exclusivity and continued effectiveness of this Sublicense set forth
in the preceding paragraphs of this Section 2.6 for such period shall be reduced
by multiplying the applicable percentage (i.e., 30% or 15%, respectively) by a
fraction, the numerator of which is the number of units of the Product actually
delivered by Grantor to Sublicensee during the period and the denominator of
which is the total number of units ordered by Sublicensee for such period.
ARTICLE III
PRICES AND PRODUCT PURCHASES
Products shall be purchased by Sublicensee directly from Grantor in
accordance with the provisions of, and at the prices contemplated in, Article
III of the License Agreement. Without limiting the foregoing, Sublicensee shall
participate in the quarterly meetings, and shall maintain the letter of credit,
contemplated by Section 3.1 of the License Agreement. Sublicensee acknowledges
that RTI is not a manufacturer of the Product and shall have no obligation to
supply Products to Sublicensee.
ARTICLE IV
MARKETING
4.1 Marketing Efforts. Sublicensee shall use its best efforts to
promote the sale of the Product in the Territory during the term of this
Sublicense. Subject to the terms and conditions of this Sublicense, Sublicensee
may promote, advertise, market and distribute the Product in such manner and on
such terms as Sublicensee, in its sole discretion, may deem advisable and
appropriate.
4.2 Advertising Materials. Print advertising materials, if any, used by
Sublicensee that refer to Grantor must be approved by Grantor prior to first
publication in accordance with Section 4.2 of the License Agreement.
Sublicensee, however, may market and distribute passenger information display
systems that contain the Product under its own name and, subject to Section 7.4,
shall have no obligation to use Grantor's or RTI's name in connection therewith.
3
<PAGE>
ARTICLE V
MAINTENANCE AND SUPPORT
5.1 End User Support. Sublicensee shall supply to end users of display
systems containing the Product such training, maintenance and support services
as shall be reasonably necessary to enable such end users to properly install,
apply, use and maintain the Product and such display systems. Sublicensee may
charge commercially reasonable fees for providing such services, provided such
fees do not adversely impact the marketing, distribution and sale of display
systems containing the Product. RTI shall have no responsibilities or
obligations of any kind to such end users.
5.2 Discontinuance of the Product by Grantor. If at any time during the
term of this Sublicense, RTI is granted a license to manufacture, and does
manufacture, the Product pursuant to Section 5.5 of the License Agreement, it is
intended that Sublicensee shall thereafter have substantially the same rights
with respect to Products manufactured by RTI as it does under this Sublicense
with respect to Products manufactured by Grantor, and RTI and Sublicensee shall
negotiate in good faith any revisions or supplements to this Sublicense as may
be necessary to further evidence such rights. Without limiting the foregoing,
the prices at which RTI shall sell units of the Product to Sublicensee will be
established by agreement of the parties.
ARTICLE VI
COMPENSATION
6.1 Initial Compensation. For so long as that certain Services
Agreement dated as of April 19, 1996 (the "Services Agreement") between Digital
and RTI remains in full force and effect, the compensation that RTI receives
under the Services Agreement shall constitute full compensation for RTI's grant
to Sublicensee of the rights and sublicense with respect to the Product and the
Licensed Technology hereunder, and Sublicensee shall not be obligated to pay to
RTI any separate license or other fees for such rights and sublicense.
6.2 Royalty Payments Upon Termination of Services Agreement. From and
after the date on which the Services Agreement terminates, Sublicensee shall
make to RTI quarterly payments in the amounts specified below ("Royalty
Payments"), in consideration for the sublicense and rights granted hereunder, as
follows:
(a) If the Services Agreement is terminated (i) by Digital
upon 90 days' notice to RTI as contemplated in Section 7(a) of the
Services Agreement (an "Elective Termination") or (ii) by RTI upon 30
days' notice to Digital by reason of an event or circumstance described
in Section 7(b) or (c) of the Services Agreement (a "Substantive
Termination"), then Sublicensee shall be obligated to make the Royalty
Payments to RTI indefinitely, for so long as Sublicensee receives
revenues in connection with this Sublicense;
4
<PAGE>
(b) If the Services Agreement is terminated (i) as a result of
an Elective Termination by RTI or (ii) as a result of a Substantive
Termination by Digital, then Sublicensee shall not be obligated to make
any Royalty Payments to RTI and the rights and sublicense granted to
Sublicensee hereunder shall be royalty free for so long as this
Sublicense thereafter remains in effect; or
(c) If the Services Agreement is terminated at the end of the
initial or any successive term thereof as a result of an election by
either party, given prior to the end of the second year of such term,
not to renew the Services Agreement, then Sublicensee shall be
obligated to make the Royalty Payments to RTI for a period of three
years after the date of termination of the Services Agreement;
following the end of such three-year period, the rights and sublicense
granted to Sublicensee hereunder shall be royalty free for so long as
this Sublicense thereafter remains in effect.
The Royalty Payments required to be paid by paragraph (a) above shall
be equal to 2% of the total Gross Sales of passenger information display systems
containing the Product by Sublicensee, which shall be payable with respect to
all revenues received by Sublicensee on or after the date of termination of the
Services Agreement, regardless of the date on which the related display systems
were ordered, contracted for or shipped. The Royalty Payments required to be
paid by paragraph (c) above shall be equal to 2% of Gross Sales, determined as
provided in the preceding sentence, for the first year of the three-year period
specified in paragraph (c), 1 1/2% of such Gross Sales for the second year of
such three-year period and 1% of such Gross Sales for the third year of such
three-year period. The Royalty Payments required to be paid by paragraph (c) for
each year in the three-year period shall be payable with respect to all revenues
received by Sublicensee relating to contracts and purchase orders, and contracts
and purchase orders resulting from proposals, dated prior to the end of such
year. "Gross Sales" means total gross revenues actually received by Sublicensee,
determined in accordance with generally accepted accounting principles,
consistently applied, without offset for any returns, allowances or any other
adjustments, costs or expenses. Payments required under this Section 6.2 shall
be in addition to, and not in lieu of, any payments required to be made by
Sublicensee to RTI under the Services Agreement for the same or any other
Products.
Within 15 days following the end of each calendar quarter, Sublicensee
shall pay to RTI the Royalty Payment required to be made to RTI for such
quarter, without further action by RTI to prompt or collect same, determined by
applying the specified percentage to Gross Sales received during such quarter.
Following any termination of this Sublicense, Sublicensee shall continue to make
Royalty Payments, to the extent required by this Section 6.2, on all Gross Sales
resulting from sales of passenger information display systems containing the
Product occurring before or after the date of such termination, as permitted
under Section 8.5 hereof or otherwise.
6.3 Accounting. Sublicensee shall maintain records in sufficient detail
for purposes of determining the amount of each Royalty Payment required under
Section 6.2. Each quarterly Royalty Payment shall be accompanied by a written
accounting (which shall be in such detail as is reasonably satisfactory to RTI)
prepared by Sublicensee that sets forth the determination of such Royalty
Payment and of the Gross Sales on which it is based.
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6.4 Right to Inspect. RTI, or RTI's agent, shall have the right to
inspect Sublicensee's records for the limited purpose of verifying calculation
of Royalty Payments, subject to such restrictions as Sublicensee may reasonably
impose to protect the confidentiality of those records. Such inspections shall
be made during normal business hours.
ARTICLE VII
INTELLECTUAL PROPERTY AND CONFIDENTIALITY
7.1 Intellectual Property Rights. Sublicensee acknowledges that, except
as may be expressly provided in this Sublicense, the Licensed Technology and all
intellectual property rights therein shall be and remain the property of Grantor
(or third parties who have granted Grantor the right to provide the Licensed
Technology, if applicable), and Sublicensee shall have no rights or interests
therein except as contemplated in this Sublicense and the License Agreement.
7.2 Confidentiality. All information relating to this Sublicense or the
License Agreement, specifically identified in writing as confidential and
proprietary, and transmitted by a party to the other party (or, with respect to
the License Agreement, by Grantor to Sublicensee) shall be maintained in
confidence by the receiving party and disclosed to employees or consultants of
the receiving party on a need-to-know basis under restrictions of
confidentiality, and the receiving party shall use such information only as
authorized by this Sublicense or the License Agreement and for no other purpose.
RTI and Sublicensee agree to take reasonable precautions to protect against
unauthorized disclosure of such information to third parties.
7.3 Exceptions to Confidentiality. No party shall be obligated to
maintain any information received from another party as confidential and refrain
from using it, if (a) the information was in the receiving party's possession or
was known to it prior to its receipt from the disclosing party; (b) the
information is independently developed or learned by the receiving party without
the utilization of such confidential or proprietary information provided by the
disclosing party; or (c) the information is or becomes public knowledge without
fault of the receiving party.
7.4 Proprietary Markings. Except as contemplated by this Sublicense,
Sublicensee shall not use any trademarks or trade names of Grantor or remove or
destroy any proprietary markings or proprietary legends of Grantor placed upon
the Products without Grantor's prior written consent.
ARTICLE VIII
TERM AND TERMINATION
8.1 Term. The term of this Sublicense shall commence on the date of its
execution and shall continue until this Sublicense is terminated in accordance
with the provisions hereof.
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8.2 Termination Upon Default or Certain Events. Either RTI or
Sublicensee may terminate this Sublicense as follows:
(a) upon 120 days' written notice to the other party if the other party
commits any material default or breach of any of its agreements,
obligations, representations or warranties contained in this
Sublicense; or
(b) upon 120 days' written notice to the other party if the other party
is declared bankrupt or becomes insolvent or voluntarily institutes a
bankruptcy proceeding under the Bankruptcy Code, or a receiver is
appointed for the assets of such other party, or such other party makes
a general assignment for the benefit of creditors or admits in writing
its inability to pay its debts as they become due;
PROVIDED, HOWEVER, that this Sublicense will not be terminated as
provided in paragraph (a) or (b) if, within such 120-day period, such
other party cures such breach, default, act or circumstance giving rise
to the right of termination to the reasonable satisfaction of the party
delivering the notice.
8.3 Termination Upon Change in Control. During the initial or any
successive term of the Services Agreement, RTI may terminate this Sublicense by
written notice to Sublicensee immediately upon, or at any time after, the
occurrence of any Change in Control. A "Change in Control" shall be deemed to
have taken place upon the occurrence of any of the following:
(a) Digital ceases to own all of the outstanding Voting
Shares of Sublicensee;
(b) Digital acquires actual knowledge that any Person other
than Digital, a subsidiary of Digital or any employee benefit plan(s)
sponsored by Digital has acquired the Beneficial Ownership, directly or
indirectly, of securities of Digital entitling such Person to 50% or
more of the Voting Power of Digital;
(c)(i) A Tender Offer is made to acquire securities of Digital
entitling the holders thereof to 50% or more of the Voting Power of
Digital; or (ii) Voting Shares are first purchased pursuant to any
other Tender Offer;
(d) At any time less than 30% of the members of the Board of
Directors of Digital shall be individuals who were either (i) directors
on the effective date of this Sublicensee or (ii) individuals whose
election, or nomination for election, was approved by a vote (including
a vote approving a merger or other agreement providing for the
membership of such individuals on the Board of Directors) of a least
two-thirds of the directors then still in office who were directors on
the effective date of this Sublicensee or who were so approved;
(e) The Board of Directors or stockholders of Digital or
Sublicensee shall approve an agreement or plan providing for Digital or
Sublicensee to be merged, consolidated or otherwise combined with, or
for all or substantially all its assets or stock to
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be acquired by, another entity, as a consequence of which the former
stockholders of Digital or Sublicensee will own, immediately after such
merger, consolidation, combination or acquisition, (i) in the case of
Digital, less than a majority of the Voting Power of such surviving or
acquiring entity or the parent thereof or (ii) in the case of
Sublicensee, less than all of the Voting Power of such surviving or
acquiring entity or the 100% parent thereof; or
(f) The Board of Directors or stockholders of Digital or
Sublicensee shall approve any liquidation of all or substantially all
of the assets of Digital or Sublicensee or any distribution to security
holders of assets of Digital or Sublicensee having a value equal to 30%
or more or the total value of all the assets of Digital or Sublicensee.
For purposes of this Section 8.3, the following terms shall have the
following meanings:
(1) The term "Person" shall be used as that term is used in Section
13(d) and 14(d) of the United States Securities Exchange Act of 1934 (the "1934
Act")(and shall include a "group," as used therein).
(2) "Beneficial Ownership" shall be determined as provided in Rule
13d-3 under the 1934 Act as in effect on the effective date of the Plan.
(3) "Voting Shares" shall mean all securities of a company entitling
the holders thereof to vote in an annual election of directors (without
consideration of the rights of any class of stock other than the Common Stock to
elect directors by a separate class vote); and a specified percentage of "Voting
Power" of a company shall mean such number of the Voting Shares as shall enable
the holders thereof to cast such percentage of all the votes which could be cast
in an annual election of directors (without consideration of the rights of any
class of stock other than the Common Stock to elect directors by a separate
class vote).
(4) "Tender Offer" shall mean a tender offer or exchange offer to
acquire securities of Digital (other than such an offer made by Digital or any
wholly-owned subsidiary of Digital), whether or not such offer is approved or
opposed by the Board.
8.4 Termination Upon Termination of License Agreement. This
Sublicense shall automatically terminate upon any termination of RTI's
license and rights under the License Agreement.
8.5 Survival of Certain Rights. The right of Sublicensee to continue to
use, copy, market, distribute, sell and otherwise transfer units of the Product
in its existing inventory or that are subject to outstanding purchase orders and
the Licensed Technology in existence as of the date of any termination of this
Sublicense shall survive any termination of this Sublicense, and Sublicensee
shall have an irrevocable, non-exclusive sublicense to continue to use, copy,
market, distribute, sell and otherwise transfer such Products and Licensed
Technology indefinitely, subject to the payment of Royalties as provided in
Article VI. Termination of this Sublicense shall not relieve Sublicensee of its
obligations under any outstanding purchase orders previously accepted by Grantor
that have not been fulfilled at the time of termination.
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ARTICLE IX
MISCELLANEOUS
9.1 Notices. Any notice required or permitted to be given by one party
to the other under the terms hereof shall be given in writing by certified mail,
return receipt requested, or by personal delivery or guaranteed overnight
courier, at the following address or to any other address hereafter specified by
either party by written notice to the other:
IF TO RTI:
Robinson Turney International, Inc.
800 East Campbell Road, Suite 199
Richardson, Texas 75081
Attention: Mr. David L. Turney, Principal
IF TO SUBLICENSEE:
TWINVISION Corp. Of North America, Inc.
c/o DIGITAL RECORDERS, Inc.
4900 Prospectus Drive, Suite 1000
Durham, North Carolina 27713
Attention: J. Phillips L. Johnston, Chairman
Each notice shall be deemed to have been given upon deposit in the
United States mail, postage pre-paid, in accordance with this Section, upon
personal delivery or upon delivery to a courier service that guarantees
overnight delivery to the recipient.
9.2 Entire Agreement. This Sublicense constitutes the entire agreement
between the parties with respect to the subject matter hereof and
supersedes all other agreements between the parties with respect thereto.
9.3 Severability. If any provision herein is held by a court of
competent jurisdiction to be invalid under the laws of any jurisdiction, such
provision shall be deemed modified to eliminate the invalid element and, as so
modified, shall be deemed a part of this Sublicense as though originally
included herein. The remaining provisions of this Sublicense shall not be
affected by the invalidity or modification of any other provision.
9.4 Independent Contractor. It is understood and agreed that no
partnership is created by this Sublicense. During the term of this Sublicense,
Sublicensee shall be an independent contractor and shall in no way be considered
a partner or employee of RTI. Sublicensee may refer to itself as RTI's or
Grantor's authorized dealer, distributor or reseller with respect to the
Product.
9.5 Assignment. Neither party may assign its rights or obligations
under this Sublicense
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unless the other party, in its sole discretion, gives its prior written consent
thereto.
9.6 Binding Effect. This Sublicense shall inure to the benefit of and
be enforceable by and against any permitted assignee, transferee or legal
successor-in-interest of the parties hereto. Unless the context clearly requires
otherwise, each reference to a party in this Sublicense shall be deemed to
include a reference to such party's permitted assignees, transferees and legal
successors-in-interest.
9.7 Governing Law. This agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
9.8 No Continuing Waiver. No waiver of any condition or covenant
contained in this Sublicense or failure to exercise any right or remedy shall be
deemed to constitute a continuing waiver of such condition, covenant, right or
remedy or a waiver of any other condition, covenant, right or remedy.
9.9 Expenses. Except as otherwise expressly provided in this
Sublicense, each party shall bear its own expenses incurred in connection with
or as a result of this Sublicense and the performance hereof.
9.10 Survival. The provisions of Sections 8.5, 9.1, 9.9, 9.11 and 9.12
and Articles VI and VII shall survive any termination of this Sublicense.
9.11 Arbitration. In the event of any dispute or difference arising out
of or relating to this Sublicense or the performance or failure of performance
hereunder, such dispute or difference shall, at the written request of either
party, be arbitrated in Dallas, Texas pursuant to the expedited procedures of
and in accordance with the rules of the American Arbitration Association.
The arbitrator shall be mutually selected by the parties or, if they
cannot agree on such selection, RTI and Sublicensee each shall designate one
arbitrator to represent it in the selection process and the two arbitrators
shall appoint a third arbitrator who shall arbitrate such dispute or difference.
Such selection process shall be completed within 30 days from the date on which
arbitration is requested by either party. The arbitrator selected shall, if
reasonably possible, be one who is familiar with the commercial and
manufacturing practices of the passenger information display industry.
The arbitrator's award shall be final and binding on the parties hereto
and enforceable by either party in any court of competent jurisdiction. As part
of its decision, the arbitrator shall apportion the costs and expenses of the
arbitration, including the fees and expenses of the arbitrator and the
reasonable fees and expenses of the parties (including reasonable attorneys'
fees and expenses), among the parties.
9.12 Limitations and Disclaimers. No sublicense or right is granted
hereunder except as expressly set forth herein. The sublicense and rights
granted to Sublicensee hereunder are derived by RTI under the License Agreement
and, accordingly, no such sublicense or right shall in any
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event be broader than or exceed in any respect the license and rights granted to
RTI by Grantor under the License Agreement. Nothing herein shall be construed by
Sublicensee as a guarantee or warranty on the part of RTI with respect to the
quality or performance of the Product, the revenues to be obtained through the
sale and distribution of the Product, the validity of Grantor's patent or other
rights in the Product and the Licensed Technology, the freedom from Infringement
of the Product and the Licensed Technology or any other matter.
IN WITNESS WHEREOF, the parties hereto have executed this Sublicense as
of the date first written above.
ROBINSON TURNEY INTERNATIONAL, INC.
By:
David L. Turney, Principal
TWINVISION Corp. Of North America, Inc.
By:
J. Phillips L. Johnston, Chairman
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AMENDMENT AND SUPPLEMENT
THIS AMENDMENT AND SUPPLEMENT (this "Amendment") is made and entered
into as of this 1st day of June, 1996, by and between ROBINSON TURNEY
INTERNATIONAL, INC. ("RTI"), a Texas corporation with offices at 800 East
Campbell Road, Suite 199, Richardson, Texas 75081, and TWINVISION Corp. Of North
America, Inc. ("Sublicensee"), a North Carolina corporation and wholly-owned
subsidiary of Digital Recorders, Inc. ("Digital") with offices at 4900
Prospectus Drive, Suite 1000, Durham, North Carolina 27713.
WITNESSETH:
WHEREAS, RTI and Sublicensee are parties to that certain Exclusive
Distribution and Sublicense Agreement (the "Sublicense") dated as of June 1,
1996, and each of them desires to amend and supplement the Sublicense as set
forth below;
NOW, THEREFORE, in consideration of the premises, the mutual agreements
set forth herein and in the Sublicense, and other good and valuable good
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Notwithstanding the provisions of Section 2.4 of the Sublicense or any
other provision of the Sublicense to the contrary, RTI and its
affiliates shall not be prohibited from marketing, selling,
sublicensing, leasing or otherwise distributing, or authorizing or
permitting the marketing, sale, sublicense, lease or distribution of,
any technology, product, system or device that is or may be similar to
or competitive with the Product or the Technology, but which does not
embody the Technology (a "New Product"), to any person or entity, in
the Field of Use within the Territory or otherwise, during any period
in which RTI is not receiving any monetary compensation from
Sublicensee or Digital under the Sublicense or that certain Services
Agreement dated as of April 19, 1996 between Digital and RTI.
2. Except as specified in paragraph (1) above, RTI shall not be relieved
from its obligation not to engage in the specified activities with
respect to the Product, the Licensed Technology and any technology,
product, system or device that actually embodies the Licensed
Technology.
3. During the term of the Sublicense, Digital shall have a right of first
refusal with respect to any New Product, which right shall entitle
Digital (or if Digital so directs, Sublicensee) to obtain rights in the
New Product similar to Sublicensee's rights in the Product and the
Technology under the Sublicense, or such other rights as the parties
may agree, on terms no less favorable than any bona fide offer made by
RTI with respect thereto to a third party. Such right of first refusal
shall terminate with respect to each New Product if not exercised by
Digital within 90 days after RTI delivers notice to Digital of a
proposed grant of rights therein to a third party, which notice shall
summarize the terms of such proposed grant. If RTI does not receive
written notice from Digital exercising the right of first refusal
before the end of the 90-day period, RTI shall be free to consummate
the proposed grant of rights in the New Product to the third party and
Digital shall have no further rights with respect thereto.
<PAGE>
Except as specifically set forth herein, no term, condition or
provision of the Sublicense is amended or modified by this Amendment. The
Sublicense is hereby ratified and confirmed and shall remain in full force and
effect in accordance with its terms, as amended and supplemented by this
Amendment. Capitalized terms used but not defined herein have the meanings given
to them in the Sublicense.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
ROBINSON TURNEY INTERNATIONAL, Inc. TWINVISION Corp. Of North America, Inc.
By: By:
David L. Turney, Principal J. Phillips L. Johnston, Chairman
<PAGE>
AMENDMENT TO 01 JUNE 1996
EXCLUSIVE DISTRIBUTION AND SUBLICENSE AGREEMENT
BETWEEN
TWINVISION CORPORATION OF NORTH AMERICA, INC. AND RTI
Page #: 1
The following modifications to the above noted document were agreed and accepted
at time of execution of that document. These modifications are stated here for
record and clarity purposes; refer to the full agreement document where
indicated to see the exact context of the changes:
A.) PAGE 4; ARTICLE VI; PARAGRAPH 6.2: Added at the bottom of this page, as a
new closing to this Paragraph 6.2 is the following: "In the event DRI (DEFINED
HERE FOR THIS PURPOSE ONLY TO MEAN TWINVISION NA) has not terminated the
licensing agreements (DEFINED HERE FOR THIS PURPOSE ONLY TO MEAN THE ABOVE
STATED EXCLUSIVE DISTRIBUTION AND SUBLICENSE AGREEMENT) during a 6 year period
and has fulfilled its contracts including the Services Agreement (DEFINED HERE
FOR THIS PURPOSE ONLY TO MEAN THE SERVICES AGREEMENT DATED 19 APRIL 1996 AS
BETWEEN RTI AND DIGITAL RECORDERS) in all respects, it is agreed that no further
payments in any form will be due RTI.
B.) PAGE SEVEN (7); PARAGRAPH 8.3: Strike the words "or any successive term of
the" and replace with the words "3 year".
C.) RELATED TO THE EXCLUSIVE DISTRIBUTION AND LICENSE AGREEMENT to which the
above noted EXCLUSIVE DISTRIBUTION AND SUBLICENSE AGREEMENT RELATES, it is
understood throughout that the shipping and payment terms are:
i.) payment by letter of credit.
ii.) FOB point is sea or air port of departure in Taiwan.
- ---------------
The following modification to the above noted document is proposed at this date
by RTI following advise of legal counsel. This modification is stated here for
record and clarity purposes and for acceptance by the parties; refer to the full
agreement document where indicated to see the exact context of the changes:
D.) PAGE 4; ARTICLE VI; PARAGRAPH 6.2 AS AMENDED IN A.) ABOVE: Add, at the end
of the above noted modification, further words of "under this SUBLICENSE".
Agreed and Accepted:
TWINVISION CORPORATION OF NORTH AMERICA, INC.
By: ___________________________________ Date: ______________
J. Phillips L. Johnston; Chairman
RTI:
By: ___________________________________Date: _______________
David L. Turney; Principal
<PAGE>
MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement (this "Services Agreement") is made effective
as of April 19, 1996, by and among DIGITAL RECORDERS, INC. ("Digital
Recorders"), a North Carolina corporation with offices at 4900 Prospectus Drive,
Suite 1000, Durham, North Carolina 27713, USA, TRANSIT-MEDIA GmbH
("Transit-Media"), a German corporation and a wholly owned subsidiary of Digital
Recorders with offices at Nobelstrasse 22, D-76275 Ettlingen, Germany, and
ROBINSON TURNEY INTERNATIONAL, INC. ("RTI"), a Texas corporation with offices at
800 East Campbell Road, Suite 199, Richardson, Texas 75081, USA. Digital
Recorders and Transit-Media are referred to collectively herein as the "Client."
W I T N E S S E T H:
WHEREAS, RTI has knowledge and experience in and relating to the
worldwide public transportation and transit market and industry and is willing
to provide certain services to Transit-Media based on such knowledge and
experience, as hereinafter set forth; and
WHEREAS, the Client desires to receive such services from RTI on the
terms and conditions specified in this Services Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DESCRIPTION OF SERVICES: Beginning on March 15, 1996, RTI will provide
advisory, consulting and management services to Transit-Media, including
oversight and direction in areas such as business development, business and
manufacturing operations, marketing, acquisitions, mergers, strategic planning
and implementation, and technology, all as related to the public transportation
and transit related products and services of Transit-Media (collectively the
"Services").
2. PERFORMANCE OF SERVICES: The manner in which the Services are to be
performed, and the specific hours to be worked by RTI, shall be determined by
RTI. The Client will rely on RTI to work as many hours as may be reasonably
necessary to fulfill RTI's obligations under this Services Agreement.
3. COMPENSATION: As compensation for the Services, the Client will pay to RTI a
fee equal to a percentage of Transit-Media's Net Sales in the Territory (as
defined below) determined in accordance with the following schedule, based on
Net Sales volume achieved in each calendar year:
First $2,000,000 Net Sales----------------rate of 3%
Next $3,000,000 Net Sales----------------rate of 2%
Net Sales exceeding $5,000,000--------rate of 1%
Payment of this fee will be due by the 15th day of each month, without
further action by RTI to prompt or collect same, with respect to Net Sales
received by Transit-Media or any affiliate in the preceding month, and will
continue, following termination of this Services Agreement, until the fee has
been paid on all contracts and purchase orders, and contracts and purchase
orders resulting from proposals, dated prior to the date of termination of this
Services Agreement.
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For purposes of this Services Agreement, "Net Sales" means gross
revenues derived by Transit-Media and its affiliates from direct or indirect
sales, as contracted or invoiced, less returns, allowances and other adjustments
determined in accordance with generally accepted accounting principles,
consistently applied, which is the amount Transit-Media or an affiliate enters
in its records as the amount due and payable by a customer. For purposes of this
Services Agreement, "Territory" means Singapore, Hong Kong and Europe, which
includes but is not necessarily limited to the countries specified on Attachment
A attached hereto.
The Client shall maintain records in sufficient detail for purposes of
determining the fees payable to RTI. The Client shall provide to RTI with each
payment a written accounting that sets forth, in such detail as is reasonably
satisfactory to RTI, the manner in which the fee was calculated. RTI, or RTI's
agent, shall have the right to inspect the Client's records for the limited
purpose of verifying calculation of the amounts payable, subject to such
restrictions as the Client may reasonably impose to protect the confidentiality
of those records. Such inspections shall be made during reasonable business
hours as may be set by the Client.
4. EXPENSE REIMBURSEMENT: RTI shall be entitled to reimbursement from the Client
of all out-of-pocket expenses incurred in rendering the Services. RTI shall
obtain prior approval (which may be oral) from the Client of any expense that,
in a single instance, is expected to exceed Two Hundred Dollars ($200.00).
5. NEW PROJECT APPROVAL: RTI and the Client recognize that the Services may
include the development and implementation by RTI of various new projects for
Transit-Media. RTI shall obtain the approval of the Chairman and CEO of Digital
Recorders, after such officer has consulted with the managing director of
Transit-Media, prior to the commencement of any new project.
6. TERM & TERMINATION: This Services Agreement may be terminated as follows:
a. By either party for any reason upon 90 days' written notice to the
other party;
b. By either party upon 30 days' written notice to the other party if the
other party commits any material default or breach of any of its
agreements, obligations, representations or warranties contained in
this Services Agreement; or
c. By either party upon 30 days' written notice to the other party if the
other party (which, in the case of the Client, shall mean Digital
Recorders or Transit-Media) is declared bankrupt or becomes insolvent
or voluntarily institutes a bankruptcy proceeding under the Bankruptcy
Code, or a receiver is appointed for the assets of such other party, or
such other party makes a general assignment for the benefit of
creditors or admits in writing its inability to pay its debts as they
become due;
PROVIDED, HOWEVER, that this Services Agreement will not be terminated as
provided in paragraph (b) or (c) if, within such 30-day period, such other party
cures such breach, default, act or circumstance giving rise to the right of
termination to the reasonable satisfaction of the party delivering the notice.
The term of this Services Agreement shall be a period of three years
commencing on the date of its execution by RTI and the Client. This Services
Agreement shall automatically be renewed for an additional three-year term at
the end of the initial and each successive term,
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unless either party shall have given notice to the other party that it elects
not to renew this Services Agreement prior to end of the second year of the
initial or any subsequent three-year term.
7. RELATIONSHIP OF PARTIES: It is understood by the parties that RTI is an
independent contractor with respect to the Client, and not an employee, partner
or joint venturer of Digital Recorders or Transit-Media. Unless otherwise
specifically agreed with respect to any specific individual, the Client will not
provide a salary, fringe benefits, including health insurance benefits, paid
vacation, or any other employee benefit, for the benefit of RTI or RTI's
employees.
Each agreement, obligation, indemnity, representation and warranty of
the Client herein shall be a joint and several agreement, obligation, indemnity,
representation and warranty of Digital Recorders and Transit-Media, and Digital
Recorders and Transit-Media each shall have the authority to act on behalf of
and to bind the other in all matters relating to this Agreement and the
transactions contemplated hereby. RTI shall be entitled to rely on any notice,
instruction or other communication received from either of such corporations as
having been duly authorized by both. Any reference in this Agreement to the
Client, or to a "party" or any similar reference, shall, in the case of the
Client, be deemed to include Digital Recorders and Transit-Media, jointly and
severally, unless the context clearly requires otherwise. Any breach of this
Agreement by Digital Recorders or Transit-Media shall constitute a breach by
both. Without limiting the foregoing, Digital Recorders acknowledges that it
shall have the unconditional obligation in all cases to pay or cause to be paid
any and all amounts due RTI hereunder by the date on which such payments are
due.
8. DISCLOSURE: RTI is required to disclose any outside activities or interests
that, in the sole opinion of RTI, conflict or may conflict with the best
interests of Transit-Media. Notwithstanding RTI's opinion on such, prompt
disclosure is specifically required under this section if the activity is
directly or indirectly competitive with the public transportation and transit
business of Transit-Media. As of the date hereof, the only such item is the
beneficial holding, by David L. Turney, a principal of RTI, of less than 5,000
shares of Trans Industries common stock.
9. EMPLOYEES: RTI's and the Client's employees, if any, who perform services
under this Services Agreement shall also be bound by the provisions of this
Services Agreement.
10. INJURIES: RTI acknowledges RTI's obligation to obtain appropriate insurance
coverage for the benefit of RTI (and RTI's employees, if any). RTI waives any
rights to recovery from the Client for any injuries that RTI (and/or RTI's
employees) may sustain while performing Services under this Services Agreement
or that are a result of the negligence of RTI or RTI's employees, unless such
injuries result from the intentional or reckless behavior or gross negligence of
the Client or its employees.
11. ASSIGNMENT AND RELIANCE ON CERTAIN PARTIES: Neither party's rights or
obligations under this Services Agreement may be assigned or transferred to any
other person, firm or corporation without the prior written consent of the other
party. RTI acknowledges that the Client is primarily, but not exclusively,
relying on the availability of David L. Turney to perform Services under this
Services Agreement. RTI understands that the lack of such availability, at the
sole discretion of the Client, may be reason for termination of this Services
Agreement by the Client upon 90 days' written notice as provided in Section 6.
12. INTELLECTUAL PROPERTY: The following provisions shall apply with respect to
copyrightable works, trademarks, trade secrets, ideas, discoveries, inventions,
applications for
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patents, and patents of Transit-Media and RTI (collectively, "Intellectual
Property"):
a. RTI's Intellectual Property: As of the effective date of this Services
Agreement, RTI does not hold any interest in any Intellectual Property
which relates to the products and technology of Transit-Media to which
this Services Agreement applies other than RTI's exclusive license and
distribution rights granted to it by Lite Vision Corporation relating
to a device used in passenger information display systems in public
transit and transportation-related applications, in accordance with
that certain Exclusive Distribution and License Agreement among RTI,
Lite Vision Corporation and UTM, Inc. dated as of April 19, 1996. RTI
has granted to TwinVision Corp. of North America, Inc., a wholly owned
subsidiary of Digital Recorders, a sublicense with respect to its
rights under such agreement, pursuant to an Exclusive Distribution and
Sublicense Agreement dated as of June 1, 1996 by and between RTI and
such company.
b. Development of Intellectual Property: Any improvements to any existing
Intellectual Property of Transit-Media, any other and further
inventions or improvements, and any new items of Intellectual Property
relating to the products and technology of Transit-Media to which this
Services Agreement applies shall be the sole and exclusive property of
Transit-Media.
13. CONFIDENTIALITY: RTI and the Client each acknowledge that the other has and
will have trade secrets and other proprietary information (such as, but not
limited to, future plans, business affairs, process information, technical
information, customer lists, inventions, price lists and other pricing
information, and information relating to costs, apparatus, products and
machinery) (collectively, "Information") which are valuable, special and unique
assets of RTI or the Client, respectively. RTI and the Client each agree to not
at any time or in any manner, either directly or indirectly, divulge, disclose
or communicate in any manner any Information of the other party to any third
party without the prior written consent of the other. Each party will protect
the Information of the other and treat it as strictly confidential.
Notwithstanding the foregoing, neither party shall be obligated to maintain any
Information of the other party as confidential and refrain from using or
disclosing it, if (a) the Information was in the receiving party's possession or
was known to it prior to its receipt from the other party, (b) the Information
is independently developed or learned by the receiving party without the
utilization of any Information provided by the other party, (c) the Information
is or becomes public knowledge without fault of the receiving party or (d) the
receiving party is required by applicable law or court order to disclose the
Information.
14. UNAUTHORIZED DISCLOSURE OF INFORMATION: Each party acknowledges that a
violation by it of Section 13 would be a material violation of this Services
Agreement and would cause irreparable harm to the other party for which money
damages would be an inadequate remedy. Accordingly, except as provided otherwise
in Section 13, if it appears that RTI or the Client has disclosed (or has
threatened to disclose) Information in violation of this Services Agreement, the
other party shall be entitled to an injunction to restrain the disclosing party
from disclosing, in whole or in part, such Information, or from providing any
services to any party to whom such Information has been disclosed or may be
disclosed.
15. CONFIDENTIALITY AFTER TERMINATION: The confidentiality provisions of this
Services Agreement shall remain in full force and effect for a period of six
months after the termination of this Services Agreement.
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16. SERVICES TO OTHER PARTIES: The Client and RTI each acknowledge and agree
that RTI may provide consulting or other services to other parties during the
term of this Services Agreement. However, RTI is bound by the confidentiality
and disclosure provisions of this Services Agreement, and RTI may not use the
Information of the Client, directly or indirectly, for the benefit of third
parties in violation of this Services Agreement.
17. NON-COMPETE AGREEMENT: RTI agrees and covenants that for a period of six
months following the termination of this Services Agreement, in the event of
RTI's voluntary termination of this Services Agreement, RTI will not directly or
indirectly engage in any business competitive with Transit-Media's public
transportation and transit products and services business, as conducted on the
effective date of this Services Agreement. This covenant shall apply to the
geographical areas included in the Territory, as described on Attachment A.
Directly or indirectly engaging in any competitive business means (i) engaging
in a business as owner, partner, or agent; or (ii) becoming an employee of any
third party that is engaged in such business; or (iii) soliciting any customer
of Transit-Media for the benefit of a third party that is engaged in such
business. In the event of termination of this Services Agreement by the Client,
RTI shall not be subject to this section.
18. RETURN OF RECORDS: Upon termination of this Services Agreement, RTI shall,
upon request, deliver all records, notes, data, memorandum, models and equipment
of any nature that are in RTI's possession or under RTI's control and that are
Transit-Media's property or relate to Transit-Media's business.
19. NOTICES: All notices required or permitted under this Services Agreement
shall be in writing and shall be sent by telecopy or by a courier service that
guarantees overnight delivery, addressed as follows:
If to the Client:
Digital Recorders, Inc.
J. Phillips L. Johnston, Chairman and CEO
4900 Prospectus Drive, Suite 1000
Durham, North Carolina 27713
Fax no.: 919-361-9847
If to RTI:
Robinson Turney International, Inc.
David L. Turney, Principal
800 East Campbell Road
Suite 155, Box 10
Richardson, Texas 75081
Fax no.: 214-479-1506
Such address may be changed from time to time by either party by
providing written notice to the other in the manner set forth above. The date of
delivery to such a courier service or of telecopying shall be deemed to be the
effective date on which notice was given, provided that all telecopies shall
contain a provision requiring confirmation of receipt and shall not be effective
unless confirmation of receipt is received within 24 hours of transmission.
Except to the extent expressly stated otherwise in this Agreement,
notice to Digital
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<PAGE>
Recorders at such address shall be deemed to be notice to both
Digital Recorders and Transit Media and shall satisfy any obligation hereunder
of RTI to provide notice to the Client.
20. ENTIRE AGREEMENT: This Services Agreement contains the entire agreement of
the parties related to the Services. This Services Agreement supersedes any
prior written or oral agreements between the parties.
21. AMENDMENT: This Services Agreement may be modified or amended only by means
of a written instrument signed by the parties.
22. SEVERABILITY: If any provision of this Services Agreement shall be held to
be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Services Agreement is invalid or unenforceable, but that by limiting such
provision it would become valid and enforceable, then such provision shall be
deemed to be written, construed and enforced as so limited.
23. WAIVER OF CONTRACTUAL RIGHT: The failure of either party to enforce any
provision of this Services Agreement shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with such provision or any other provision of this Services
Agreement.
24. APPLICABLE LAW: This Services Agreement shall be governed by the laws of the
State of Texas. Exclusive venue and jurisdiction of any dispute or suit arising
hereunder shall lie with the courts of the State of Texas located in Dallas
County, Texas, or the federal courts located in the Northern District of Texas
and, without limiting the foregoing, such courts shall have authority to enforce
the injunctive relief provisions of Section 14 and the dispute resolution
provisions of Section 25.
25. DISPUTE RESOLUTION: Except for the provision for injunctive relief contained
in Section 14, the parties agree to engage in binding arbitration for resolution
of all disputes arising out of or relating to this Services Agreement or the
performance or failure of performance hereunder. Such arbitration shall be
conducted in Dallas County, Texas pursuant to the expedited procedures of and in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be mutually selected by the parties or, if they cannot agree on
such selection, the Client and RTI each shall designate one arbitrator to
represent it in the selection process and the two arbitrators shall appoint a
third arbitrator who shall arbitrate such dispute. Such selection process shall
be completed within 30 days from the date on which arbitration is requested by
either party. The arbitrator selected shall, if reasonably possible, be one who
is familiar with the commercial and manufacturing practices of the public
transportation and transit passenger information display industry. The
arbitrator's award shall be final and binding on the parties hereto and
enforceable by either party in any court of competent jurisdiction. The parties
agree that each party will bear its own costs of such arbitration (including
attorneys' fees and expenses), regardless of the decision rendered by the
arbitrator.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Services
Agreement as of the date first written above.
DIGITAL RECORDERS, INC.
By:
J. Phillips L. Johnston
Chairman and CEO
TRANSIT-MEDIA GmbH
By:
Robert Huber, Managing Director
ROBINSON TURNEY INTERNATIONAL, INC.
By:
David L. Turney, Principal
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Attachment A
The Territory
HONG KONG
SINGAPORE
EASTERN AND WESTERN EUROPE
Albania Greece Russia
Andorra Hungary Serbia
Armenia Iceland Slovakia
Austria Ireland Slovenia
Azerbaijan Italy Spain
Belarus, Republic of Latvia, Republic of Sweden
Belgium Liechtenstein Switzerland
Bosnia and Herzegovina Lithuania Turkey
Bulgaria Luxembourg Ukraine
Byelarus Macedonia United Kingdom - list of
Croatia Madeira political entities included
Cyprus Malta Channel Islands
Czech Republic Moldova England
Denmark Monaco Gibraltar
Greenmark (has Montenegro Isle of Man
home rule) Netherlands, The Northern Ireland
Estonia Norway Scotland
Finland Poland Wales
France Portugal Yugoslavia
Germany Romania
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<PAGE>
AMENDMENT TO
MANAGEMENT SERVICES AGREEMENT
DATED EFFECTIVE AS OF
19 APRIL 1996
The territory, as stated in paragraph 3, page 2, and Attachment A, is hereby
Amended to include Indonesia and Malaysia.
Agreed and accepted as effective 19 April 1996:
DIGITAL RECORDERS, Inc.
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J. Phillips L. Johnston; Chairman & CEO
TRANSIT MEDIA GmbH
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Robert Huber; Managing Director
ROBINSON TURNEY INTERNATIONAL, Inc.
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David L. Turney; Principal
<PAGE>
EXCLUSIVE INTERNATIONAL MARKETING AGREEMENT
THIS EXCLUSIVE INTERNATIONAL MARKETING AGREEMENT (this "Agreement"),
effective as of April 19, 1996, is made by and among the DIGITAL RECORDERS,
INC., a North Carolina corporation, TWINVISION CORP. OF NORTH AMERICA, INC., a
North Carolina corporation and a wholly-owned subsidiary of Digital Recorders,
Inc., each with offices at 4900 Prospectus Drive, Suite 1000, Durham, North
Carolina 27713, and ROBINSON TURNEY INTERNATIONAL, INC. ("RTI"), a Texas
corporation with offices at 800 East Campbell Road, Suite 199, Richardson, Texas
75081. Digital Recorders, Inc. and TwinVision Corp. of North America, Inc. are
referred to collectively herein as the "Company."
WHEREAS, the Company is or will be engaged in the production of
products such as automatic voice-announce systems and passenger information
display systems for bus, rail and other public transit and transportation
vehicles, and certain related and similar products; and
WHEREAS, the Company intends to distribute some or all of its products
outside of North America through Transit-Media GmbH, a wholly-owned German
subsidiary of Digital Recorders, Inc. ("Transit-Media"), to the extent possible,
and it is not currently expected that Transit-Media will be able feasibly to
accomplish the international distribution of such products to the full extent
desired by the Company; and
WHEREAS, RTI and one of its principals, David L. Turney, have extensive
experience and expertise in the public transportation automatic voice-announce
and information display technology markets; and
WHEREAS, RTI desires to receive from the Company, and the Company is
willing to grant to RTI, the exclusive right to market, sell and distribute the
existing and currently proposed products of the Company, and any additional
public transit or transportation rail or bus vehicle-related products developed
in the future by the Company with the assistance of RTI (collectively, the
"Products") in the Territory (as defined below) under the terms and conditions
set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, promises and
agreements set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
I. RIGHTS AND OBLIGATIONS
1.1 Grant of Rights. The Company hereby grants to RTI during the term
of this Agreement the exclusive and unlimited right and license, throughout the
Territory, to market, sell and distribute the Products, and to authorize others
to do so, in accordance with the terms of this Agreement. As used in this
Agreement, the term "Territory" means all of the nations and other political
subdivisions in Europe, Asia, Indonesia, South America and Australia and the
surrounding waters, now or hereafter in existence.
<PAGE>
Except as contemplated in the first paragraph of Section 1.2, the
Company shall not market, sell or distribute any Products (whether finished or
unfinished) to, or permit any Products (whether finished or unfinished) to be
sold by, any person or entity other than RTI in the Territory, directly or
indirectly, during the term of this Agreement.
1.2 Certain Limitations. The parties acknowledge that some or all of
the Products may be distributed in a portion of the Territory, specifically, in
Singapore, Hong Kong and Europe (the "Transit-Media Territory"), by
Transit-Media and that RTI has agreed to provide certain services to
Transit-Media in connection therewith pursuant to a Management Services
Agreement among RTI, Digital Recorders, Inc. and Transit-Media dated as of
_________________, 1996 (the "Transit-Media Agreement"). RTI agrees that it will
not market, sell or distribute Products hereunder in direct competition with
Transit-Media in the portions of the Transit-Media Territory in which
Transit-Media, from time to time, is actively attempting to market and
distribute Products.
The parties acknowledge that the Company's right to sell, and to
authorize RTI to sell, certain of the Products (the "Lite Vision Products") is
derived from the Exclusive Distribution and License Agreement dated as of April
19, 1996 by and between RTI, Lite Vision Corporation and UTM, Inc. and the
related Exclusive Distribution and Sublicense Agreement dated as of June 1, 1996
(the "Sublicense") by and between RTI and TwinVision Corp. of North America,
Inc., in each case as amended and supplemented. RTI's rights hereunder with
respect to the Lite Vision Products are subject to the terms and conditions of
such agreements and are limited to the territory specified therein (to the
extent included in the Territory) and such additional territories in which the
Company may hereafter obtain the right to distribute (on an exclusive or
nonexclusive basis) the Lite Vision Products.
1.3 RTI's Responsibilities. RTI will use its reasonable best efforts to
promote the sale and distribution of the Products in the Territory. RTI will
advise the Company periodically of its activities in connection with sales of
Products, the demand for and reaction to Products and other matters relating to
the marketing of the Products in the Territory.
1.4 The Company's Responsibilities. The Company will use its reasonable
best efforts to provide Products to RTI and its sublicensees and customers in
the quantities requested by RTI in accordance with Section 2.2. Such Products
will be in finished form, unless RTI requests delivery of unfinished Products.
The Company will provide RTI with all sales leads and mailing lists obtained by
the Company relating to potential sales of Products in the Territory.
II. MARKETING AND DISTRIBUTION
2.1 Control of Marketing. RTI shall have sole authority and control of
the marketing and distribution of the Products in the Territory, including
without limitation the
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determination of the content and quantity of promotional materials, the terms of
the marketing plan and the establishment and modification of the terms and
conditions of sale (including selling price, discounts, credit for returns and
similar matters); PROVIDED, HOWEVER, that such terms and conditions shall be
discussed with, approved by and reasonably acceptable to the Company, and
PROVIDED FURTHER, that RTI shall not have the authority to obligate the Company
to perform any action or incur any expense that it has not agreed, in this
Agreement or otherwise, to perform or incur.
The rights granted in Section 1.1 entitle RTI to sell, distribute and
market the Products directly itself and/or indirectly through distributors,
wholesalers and agents. RTI may, in its sole discretion, negotiate and enter
into sales, distribution and marketing agreements relating to the Products with
third parties, for such periods of time, with such terms and conditions and
covering such geographic areas within the Territory as RTI may deem appropriate.
RTI shall be responsible for its own costs and expenses incurred in connection
with the marketing and promotion of the Products in the Territory; PROVIDED,
HOWEVER, that the Company shall be responsible for and shall pay all reasonable
commissions payable to distributors, wholesalers or other agents engaged by RTI
as contemplated herein, and the amounts of such commissions shall be in addition
to, and shall not be deducted from or otherwise reduce the commissions payable
to RTI pursuant to Section 3.1(a). RTI shall not be subject to any requirements
with respect to minimum or maximum advertising expenditures or other marketing
efforts.
Notwithstanding the foregoing, (i) the Company shall supply to RTI, at
no cost to RTI, such product descriptions, brochures and other promotional
materials relating to the Products as RTI may reasonably request, (ii) RTI shall
promote and sell the Products under such trade names and trademarks as may be
designated by the Company from time to time and (iii) RTI shall not use the
Company's trade names or trademarks except as may be authorized or approved by
the Company. RTI shall have no right, title or interest in the trade names or
trademarks of the Company.
2.2 Methods of Sale. RTI may, at its election and in its sole
discretion, effect each sale of Products in the Territory pursuant to either of
the following methods:
(a) Direct Sales. The Company agrees to sell Products directly to
customers within the Territory upon the receipt from RTI of purchase orders,
completed by RTI or such customers (but in all cases approved and countersigned
by RTI), or pursuant to contracts entered into by RTI with a customer. If the
terms and conditions of sale are not set forth in a contract between RTI and the
customer, the purchase order submitted to the Company in accordance with this
paragraph (a) shall set forth the quantities ordered, purchase price, delivery
location, method of delivery, freight terms and such other information as is
commercially necessary in connection therewith. Such sales, whether by purchase
order or contract, shall be made upon such terms and conditions as may be agreed
by RTI and the customer, subject to the limitations set forth in Section 2.1,
and provided that RTI may not obligate the Company to sell any Products for less
than the minimum price, if any, previously communicated by the Company to RTI.
Upon its receipt
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of a purchase order, the Company shall deliver the Products ordered to the
customer at the location and by the date specified therein, and shall invoice
the customer directly for the full amount of the specified purchase price.
(b) Purchase and Resale. RTI may purchase Products from the Company at
such prices and upon such terms and conditions as the parties may agree from
time to time. The Company agrees to sell Products to RTI in accordance with such
terms and conditions, upon receipt from RTI of purchase orders containing such
information as may be commercially necessary in connection therewith. The prices
and other terms and conditions upon which such Products may be resold by RTI in
the Territory shall be within RTI's sole and absolute discretion.
2.3 No Purchase Requirements. RTI shall not be obligated to purchase,
or obtain orders for the purchase of, any minimum number of Products pursuant to
Section 2.2. Notwithstanding the foregoing or the provisions of Section 1.1, if
RTI fails to make any sales in any individual nation or other political
subdivision within the Territory (each, a "Subterritory") within 24 months after
the date of this Agreement, the Company shall thereafter have the right to
terminate the exclusivity of RTI's rights and license with respect to such
Subterritory by giving 90 days' written notice to RTI; PROVIDED, HOWEVER, that
such termination of exclusivity shall not occur if RTI makes any sales of
Products in such Subterritory prior to the expiration of such 90-day notice
period; and PROVIDED FURTHER, that the Company shall negotiate in good faith
with RTI regarding the terms and conditions of an alternative exclusive
arrangement with respect to such Subterritory to take effect after the end of
such 90-day period if RTI does not make any sales in such Subterritory during
such period. Any termination of exclusivity with respect to any Subterritory
shall not diminish or affect in any way RTI's exclusive rights and license with
respect to the remainder of the Territory or any other Subterritory.
2.4 Planning. RTI will use its best efforts periodically to provide the
Company with estimates of the quantities of each Product that RTI reasonably
expects to order pursuant to Section 2.2(a) and (b), provided that RTI shall not
be required to achieve, or be subject to any liability for any failure to
achieve, such estimates. The Company shall promptly inform RTI whether it
reasonably expects to be able to meet its obligation to provide the Products in
such quantities.
III. COMPENSATION AND EXPENSES
3.1 Compensation.
(a) Direct Sales. The Company will pay to RTI a commission equal to a
percentage of the Company' Net Sales of the Products in the Territory pursuant
to Section 2.2(a) of this Agreement, determined in accordance with the following
schedule, based on Net Sales volume achieved in each calendar year:
First $2,000,000 Net Sales----------------rate of 3%
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Next $3,000,000 Net Sales----------------rate of 2%
Net Sales exceeding $5,000,000----------rate of 1%
Payment of this commission will be due by the 15th day of each month,
without further action by RTI to prompt or collect same, with respect to Net
Sales received by the Company or any affiliate in the preceding month, and will
continue, following termination of this Agreement, until commission has been
paid on all contracts and purchase orders, and contracts and purchase orders
resulting from proposals, dated prior to the date of termination of this
Agreement.
For purposes of this Agreement, "Net Sales" means gross revenues
derived by the Company and its affiliates from direct or indirect sales
(excluding sales to RTI pursuant to Section 2.2(b)), as contracted or invoiced,
less returns, allowances and other adjustments determined in accordance with
generally accepted accounting principles, consistently applied, which is the
amount the Company or an affiliate enters in its records as the amount due and
payable by a customer. Notwithstanding the foregoing, sales commissions paid or
payable to RTI or any other person or entity shall not be deducted from gross
revenues for purposes of calculating Net Sales.
The Company shall maintain records in sufficient detail for purposes of
determining the amounts payable to RTI. The Company shall provide to RTI with
each payment a written accounting that sets forth, in such detail as is
reasonably satisfactory to RTI, the manner in which the payment was calculated.
RTI, or RTI's agent, shall have the right to inspect the Company's records for
the limited purpose of verifying calculation of the amounts payable, subject to
such restrictions as the Company may reasonably impose to protect the
confidentiality of those records. Such inspections shall be made during
reasonable business hours as may be set by the Company.
Notwithstanding the foregoing, the parties acknowledge and agree that
RTI shall not be entitled to any commissions under this Agreement with respect
to sales of Products by Transit-Media in the Transit-Media Territory, and the
revenues from such sales shall not be included in Net Sales, as defined above,
or considered for purposes of determining whether the sales levels specified in
the table above have been reached. Nothing in this Agreement, however, shall
diminish or affect RTI's right to receive payments from the Company or
Transit-Media under the Transit-Media Agreement with respect to such sales.
(b) Purchase and Resale. RTI shall retain any and all amounts it
receives in connection with the marketing, sale and distribution of Products it
purchases from the Company and resells as contemplated by Section 2.2(b), and
the Company shall not be entitled to any payment in connection therewith other
than the purchase price paid by RTI pursuant to Section 2.2(b).
3.2 Expenses. Except as otherwise expressly provided in this Agreement
or any Attachment hereto, each party shall be responsible for its own expenses
incurred in
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connection with the performance of its obligations and the exercise
of its rights under this Agreement.
IV. DOCUMENTATION AND SUPPORT
4.1 Documentation. The Company shall provide to RTI, its sublicensees
and each customer who purchases any Product pursuant to this Agreement copies of
all Documentation and Specifications relating to the applicable Product.
"Documentation" means user guides, operating manuals, specifications, test data,
bills of materials, engineering drawings, sketches, education materials and
other information relating to the Product, whether in print, magnetic,
electronic or video format, in existence at the time any Product is delivered to
RTI or its sublicensees or customers. "Specifications" means the functional,
performance, operational, compatibility and other specifications or
characteristics of the Product, included in the Documentation or otherwise
provided by the Company to RTI, its sublicensees or any other purchaser of the
Product. The Company has provided to RTI copies of all Documentation and
Specifications for the Products in existence as of the date of this Agreement.
The Company shall provide all updates, revisions and supplements to the
Documentation and Specifications, when produced, to RTI, its sublicensees and
each customer who purchases any Product pursuant to this Agreement.
4.2 Maintenance and Support. The Company shall provide or make
available to each customer who purchases any Product pursuant to this Agreement
the same maintenance and support services that the Company provides or makes
available generally to other purchasers of the Products, including correction of
errors, updates, non-custom enhancements and telephone support. RTI and its
agents and representatives shall have no obligation to provide any customer or
other party any maintenance or support services with respect to any Product
except as RTI may determine in its sole discretion.
4.3 Corrections and Enhancements. The Company shall promptly correct,
without charge, all errors in the design of any Product. The Company
acknowledges that all enhancements of any Product are subject to the rights and
license granted to RTI, and the Company shall deliver all enhancements without
any charge other than the purchase price paid in accordance with Section 2.2. An
"enhancement" is any modification, improvement, change, addition or upgrade made
to, or any new or alternative version of, a Product after the original versions
are supplied to RTI or its sublicensees or customers, and shall include any new
device, equipment, component, system or technology that is or may be a
replacement or substitute for, a derivative of or a complement to the Product.
4.4 Discontinuance of Products. The Company shall provide RTI at least
12 months' advance written notice of its intent to discontinue any Product. The
Company shall provide to RTI such information and training as may be necessary
to permit RTI to maintain and support such Product, or to authorize others to do
so. Notwithstanding the preceding sentence, RTI shall have no obligation to
provide to any customer or other
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party any demonstration, maintenance or support services with respect to any
Product, including any discontinued Product.
V. REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Company. Digital Recorders,
Inc. and TwinVision Corp. of North America, Inc. jointly and severally
represent and warrant to RTI that:
(a) Digital Recorders, Inc. and TwinVision Corp. of North America, Inc.
are each duly incorporated pursuant to the laws of the State of North Carolina
and each is validly existing and in good standing under such laws and has full
power and authority to enter into and perform its obligations under this
Agreement. The officer whose name appears on the signature page of this
Agreement has full power and authority to execute and deliver this Agreement on
behalf of each of such corporations and to cause each of them to perform its
obligations under this Agreement.
(b) The Company has, and upon execution and delivery of the Agreement
RTI will have, all rights or licenses necessary to permit it to market, sell and
distribute the Products as contemplated by this Agreement, and to authorize
others to do so, without liability to any third party. Neither the Products nor
the sale thereof as contemplated herein will violate any law or infringe upon or
violate the rights of any person or entity (including but not limited to
copyright, patent or other intellectual property rights).
(c) All Products sold to RTI and its customers and sublicensees
pursuant to this Agreement will be delivered in good and marketable condition
and will conform to all Specifications for such Products previously delivered to
and accepted by RTI, which Specifications are subject to change from time to
time by agreement of the parties. RTI and its customers and sublicensees shall
have the right to return, at the Company's expense, any and all Products that
are not in such condition or that do not conform to such Specifications at the
time of delivery.
(d) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT THE COMPANY MAKES
NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.2 Representations and Warranties of RTI. RTI represents and warrants
to the Company that RTI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas and has full power and
authority to enter into and perform its obligations under this Agreement. The
officer whose name appears on the signature page of this Agreement has full
power and authority to execute and deliver this Agreement on behalf of RTI and
to cause RTI to perform its obligations under this Agreement.
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VI. INDEMNITY
6.1 Indemnification by the Company. Digital Recorders, Inc. and
TwinVision Corp. of North America, Inc., jointly and severally, shall indemnify,
defend and hold harmless RTI from and against any and all damages, liabilities,
costs and expenses, including reasonable attorneys fees (collectively,
"Liabilities"), that arise from any claim, lawsuit or other action (a) arising
out of or resulting from the breach by the Company of any of its
representations, warranties, agreements or covenants contained in this
Agreement, or (b) relating to the infringement of any patent, copyright or other
intellectual property right arising out of or resulting from the production,
marketing or commercial exploitation of the Products. RTI shall notify the
Company immediately of any such claims and Liabilities, shall permit the Company
to have exclusive control of the defense and/or settlement of such claims,
including without limitation the selection of defense counsel, and shall
cooperate with the Company in the defense and/or settlement of such claim.
6.2 Indemnification by RTI. RTI shall indemnify, defend and hold
harmless the Company from and against any and all Liabilities that arise from
any claim, lawsuit or other action arising out of or resulting from the breach
by RTI of any of its representations, warranties, agreements or covenants
contained in this Agreement. The Company shall notify RTI immediately of any
such claims and Liabilities, shall permit RTI to have exclusive control of the
defense and/or settlement of such claims, including without limitation the
selection of defense counsel, and shall cooperate with RTI in the defense and/or
settlement of such claim.
VII. TERM AND TERMINATION
7.1 Term and Termination. This Agreement may be terminated as
follows:
(a) By mutual agreement of all parties at any time;
(b) By either party upon 30 days' written notice to the other party if
the other party commits any material default or breach of any of its agreements,
obligations, representations or warranties contained in this Agreement; or
(c) By either party upon 30 days' written notice to the other party if
the other party (which, in the case of the Company, shall mean Digital
Recorders, Inc. or TwinVision Corp. of North America, Inc.) is declared bankrupt
or becomes insolvent or voluntarily institutes a bankruptcy proceeding under the
Bankruptcy Code, or a receiver is appointed for the assets of such other party,
or such other party makes a general assignment for the benefit of creditors or
admits in writing its inability to pay its debts as they become due;
PROVIDED, HOWEVER, that this Agreement will not be terminated as provided in
paragraph (b) or (c) of this Section 7.1 if, within such 30-day period, such
other party
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cures such breach, default, act or circumstance giving rise to the
right of termination to the reasonable satisfaction of the party delivering the
notice.
The term of this Agreement shall be a period of three years commencing
on the date of its execution by RTI and the Company. This Agreement shall
automatically be renewed for an additional three-year term at the end of the
initial and each successive term, unless either party shall have given notice to
the other party that it elects not to renew this Agreement prior to the end of
the second year of the initial or any subsequent three-year term.
7.2 Effect of Termination. The termination of this Agreement shall not
affect either party's obligation to pay any amount due and owing the other party
under the provisions of this Agreement as of the date of termination. The
Company shall deliver all Products that are subject to, and otherwise fully
perform, all contracts and purchase orders, and contracts and purchase orders
resulting from all proposals, dated prior to the date of termination of this
Agreement, and RTI shall be entitled to receive the commissions specified in
Section 3.1(a) with respect to such Products. The termination of this Agreement
shall not affect any rights or obligations of any party under any provision of
this Agreement that is intended to survive such termination.
7.3 Sell-Off Rights. Without limiting Section 7.2, upon termination of
this Agreement, RTI and its sublicensees and distributors shall have the right
to sell off their respective remaining inventories of Products, and RTI shall be
entitled to receive payment with respect to such sales in accordance with
Section 3.1(a); PROVIDED, HOWEVER, that RTI shall offer the Company the
opportunity to purchase such Products, and the Company shall have the right of
first refusal to purchase any such Product, at a price equal to the price
offered to RTI by a third party, within a period of 10 business days after RTI
has given notice to the Company of its intent to sell the Product.
VIII. MISCELLANEOUS
8.1 Relationship of Parties. It is understood by the parties that RTI
is an independent contractor with respect to the Company, and not an employee,
partner or joint venturer of Digital Recorders, Inc. or TwinVision Corp. of
North America, Inc. RTI may refer to itself as the exclusive, authorized dealer,
distributor or sales agent of the Company in the Territory.
Each agreement, obligation, indemnity, representation and warranty of
the Company herein shall be a joint and several agreement, obligation,
indemnity, representation and warranty of Digital Recorders, Inc. and TwinVision
Corp. of North America, Inc., and Digital Recorders, Inc. and TwinVision Corp.
of North America, Inc. each shall have the authority to act on behalf of and to
bind the other in all matters relating to this Agreement and the transactions
contemplated hereby. RTI shall be entitled to rely on any notice, instruction or
other communication received from either of such corporations as having been
duly authorized by both. Any reference in this
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<PAGE>
Agreement to the Company, or to a "party" or any similar reference, shall, in
the case of the Company, be deemed to include Digital Recorders, Inc. and
TwinVision Corp. of North America, Inc., jointly and severally, unless the
context clearly requires otherwise. Any breach of this Agreement by Digital
Recorders, Inc. or TwinVision Corp. of North America, Inc. shall constitute a
breach by both.
8.2 Notices. All notices required or permitted under this Agreement
shall be in writing and shall be sent by telecopy or by a courier service that
guarantees overnight delivery, addressed as follows:
If to the Company:
Digital Recorders, Inc.
J. Phillips L. Johnston, Chairman and CEO
4900 Prospectus Drive, Suite 1000
Durham, North Carolina 27713
Fax no.: 919-361-9847
If to RTI:
Robinson Turney International, Inc.
David L. Turney, Principal
800 East Campbell Road, Suite 155, Box 10
Richardson, Texas 75081
Fax no.: 214-479-1506
Such address may be changed from time to time by either party by
providing written notice to the other in the manner set forth above. The date of
delivery to such a courier service or of telecopying shall be deemed to be the
effective date on which notice was given, provided that all telecopies shall
contain a provision requiring confirmation of receipt and shall not be effective
unless confirmation of receipt is received within 24 hours of transmission.
Except to the extent expressly stated otherwise in this Agreement,
notice to Digital Recorders, Inc. at such address shall be deemed to be notice
to both Digital Recorders, Inc. and TwinVision Corp. of North America, Inc. and
shall satisfy any obligation hereunder of RTI to provide notice to the Company.
8.3 Entire Agreement. This Agreement contains the entire agreement of
the parties related to the subject matter hereof. This Agreement supersedes any
prior written or oral agreements between the parties with respect to such
subject matter.
8.4 Amendment. This Agreement may be modified or amended only by means
of a written instrument signed by both parties.
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<PAGE>
8.5 Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Agreement is invalid or unenforceable, but that by limiting such provision
it would become valid and enforceable, then such provision shall be deemed to be
written, construed and enforced as so limited.
8.6 No Waiver. The failure of either party to enforce any provision of
this Agreement shall not be construed as a waiver or limitation of that party's
right to subsequently enforce and compel strict compliance with such provision
or any other provision of this Agreement.
8.7 Applicable Law. This Agreement shall be governed by the laws of the
State of Texas. Exclusive venue and jurisdiction of any dispute or suit arising
hereunder shall lie with the courts of the State of Texas located in Dallas
County, Texas, or the federal courts located in the Northern District of Texas
and, without limiting the foregoing, such courts shall have authority to enforce
the equitable relief provisions of Section 8.8 and the dispute resolution
provisions of Section 8.9.
8.8 Equitable Relief. The Company acknowledges that a breach by the
Company of this Agreement or a failure by the Company to perform any of its
obligations hereunder may cause irreparable harm and injury to RTI for which
damages in an action at law would be inadequate and therefore agrees that RTI
will be entitled to an injunction or other equitable relief to prevent or remedy
any such breach or failure of performance by the Company. Such relief shall be
in addition to any other rights or remedies that RTI may have.
8.9 Dispute Resolution. The parties agree to engage in binding
arbitration for resolution of all disputes arising out of or relating to this
Agreement or the performance or failure of performance hereunder. Such
arbitration shall be conducted in Dallas County, Texas pursuant to the expedited
procedures of and in accordance with the rules of the American Arbitration
Association. The arbitrator shall be mutually selected by the parties or, if
they cannot agree on such selection, the Company and RTI each shall designate
one arbitrator to represent it in the selection process and the two arbitrators
shall appoint a third arbitrator who shall arbitrate such dispute. Such
selection process shall be completed within 30 days from the date on which
arbitration is requested by either party. The arbitrator selected shall, if
reasonably possible, be one who is familiar with the commercial and
manufacturing practices of the public transportation and transit passenger
information display industry. The arbitrator's award shall be final and binding
on the parties hereto and enforceable by either party in any court of competent
jurisdiction. The parties agree that each party will bear its own costs of such
arbitration (including attorneys' fees and expenses), regardless of the decision
rendered by the arbitrator.
8.10 Binding Effect and Assignment. This Agreement shall be binding
upon each party and its respective successors and permitted assigns. This
Agreement may not be
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<PAGE>
assigned or transferred by either party without the prior written consent of the
other, subject to the right of RTI to sublicense or enter into other contracts
or agreements relating to the marketing, sale or distribution of the Products as
contemplated herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date set forth in
the first paragraph of this Agreement.
DIGITAL RECORDERS, INC.
By:
J. Phillips L. Johnston
Chairman and CEO
TWINVISION CORP. OF
NORTH AMERICA, INC.
By:
J. Phillips L. Johnston
Chairman
ROBINSON TURNEY
INTERNATIONAL, INC.
By:
David L. Turney
Principal
-12-
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES ("BLUE
SKY") LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, OR HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND UNDER THE APPLICABLE STATE SECURITIES
("BLUE SKY") LAWS OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT AND LAWS IS ESTABLISHED TO THE SATISFACTION
OF THE CORPORATION, WHICH MAY NECESSITATE A WRITTEN OPINION OF SELLER'S
COUNSEL SATISFACTORY TO CORPORATION COUNSEL.
WARRANT
FOR THE PURCHASE OF 30,000 SHARES OF COMMON STOCK
OF
DIGITAL RECORDERS, INC.
(A NORTH CAROLINA CORPORATION)
THIS CERTIFIES THAT, for value received, Robinson Turney International,
Inc., as registered owner (the "Owner") of this Warrant, is entitled, subject to
the terms and conditions and at the times set forth or incorporated herein, to
subscribe for, purchase and receive 30,000 fully paid and nonassessable shares
of common stock, $.10 par value (the "Shares") of Digital Recorders, Inc., a
North Carolina corporation (the "Corporation"), at the price of $6.50 per Share
(the "Exercise Price"), upon presentation and surrender of this Warrant and upon
payment of the Exercise Price for the Shares to be purchased to the Corporation
at the principal office of the Corporation as more fully set forth below and as
described in the Statement of Rights of Warrantholder, a copy of which is
attached as Annex I hereto and by this reference made a part hereof; provided,
however, that upon the occurrence of any of the events specified in said
Statement of Rights of Warrantholder, the rights granted by this Warrant shall
be adjusted as specified in the Statement of Rights of Warrantholder. If the
subscription rights represented hereby shall not be exercised at or before the
times specified in the Statement of Rights of Warrantholder, this Warrant shall
become and be void without further force or effect, and all rights represented
hereby shall cease and expire.
Subject to the terms and conditions set forth or incorporated herein,
this Warrant may be exercised in whole or in part by the delivery to and receipt
by the Corporation of (i) a written notice of election to exercise, in the form
hereinafter provided, specifying the number of Shares to be purchased; (ii)
accompanied by payment of the full purchase price thereof in cash or cashier's
check payable to the
<PAGE>
order of the Corporation; and (iii) by return of this Warrant for endorsement of
exercise by the Corporation on Schedule I hereof.
In no event shall this Warrant (or the Shares issuable upon full or
partial exercise hereof) be offered or sold except in conformity with the
Securities Act of 1933, as amended.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
signed by its duly authorized officers and to be sealed with the seal of the
Corporation.
DIGITAL RECORDERS, INC.
By:
J. Phillips L. Johnston, President
and authorized signatory by action of
the Board of Directors
(S E A L)
By:
Secretary
<PAGE>
Form to be used to exercise Warrant:
EXERCISE FORM
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase _________ shares of Common Stock of Digital Recorders,
Inc., called for hereby, and encloses a cashier's check payable to the order of
"Digital Recorders, Inc." in the amount of $_____________ in payment of the
purchase price of $______________ (at the rate of $6.50 per share) for the
Shares which I have elected to purchase pursuant hereto. Please issue the shares
as to which this Warrant is exercised in accordance with the instructions given
below.
Dated: ,
Signature:
Signature Guaranteed:
INSTRUCTIONS FOR REGISTRATION OF SHARES
Name
(Print in Block Letters)
Address
NOTICE: The signature to the form to exercise must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
<PAGE>
SCHEDULE I
TO WARRANT ISSUED TO ROBINSON TURNEY INTERNATIONAL, INC.
ON APRIL 19, 1996
FOR THE PURCHASE OF 30,000 SHARES OF COMMON STOCK
OF DIGITAL RECORDERS, INC.
Unexercised Unvested Issuing
Shares Payment Vested Shares Shares Officer
Date Purchased Received Remaining Remaining Initials
<PAGE>
ANNEX I TO WARRANT
DIGITAL RECORDERS, INC.
STATEMENT OF RIGHTS OF WARRANTHOLDER
1. Vesting and Exercise of Warrant. Subject to the vesting requirements
set forth in paragraph 1(a) below, the Owner may exercise this Warrant to
purchase the Shares, in whole or in part, at any time and from time to time on
or prior to April 19, 2006. For the purposes of any computation under this Annex
I, the "market price" at any date shall be the closing sale price of the
Corporation's Common Stock on such date. If the principal trading market for
such securities is an exchange, the closing sale price shall be the reported
last sale price on such exchange. If trading of such Common Stock is listed on
any consolidated tape, the closing sale price shall be the reported last sale
price set forth on such consolidated tape. If the principal trading market for
such securities is the over-the-counter market, the closing sale price shall be
the closing bid price on such date as set forth by The Nasdaq Stock Market,
Inc., or, if the security is not quoted on such market, the closing bid price as
set forth in the National Quotation Bureau sheet or the Electronic Bulletin
Board System for such day. Notwithstanding the foregoing, if there is no
reported last sale price or closing bid price, as the case may be, on a date
prior to the event requiring a calculation hereunder, then the market price
shall be determined as of the latest date prior to such day for which such last
sale price or closing bid price is available.
(a) The Owner's right to purchase the Shares shall be
contingent upon the market price of the Shares exceeding, for any
period of ninety (90) consecutive calendar days, the following prices,
for each block of shares:
First 10,000 Share Block $ 6.50
Next 6,000 Share Block $ 9.50
Next 6,000 Share Block $ 11.00
Final 8,000 Share Block $ 14.00
<PAGE>
(b) It shall not be necessary that the market price of the
Shares exceed the specified amount at the time of exercise of this
Warrant, provided the requirement of paragraph (a) has been satisfied
at any time prior to such exercise.
(c) The period within which the right to purchase Shares may
be exercised shall commence on the date upon which the right to
purchase such Shares became vested and shall end on April 19, 2006 (an
"Exercise Period"). If the rights represented hereby shall not be
exercised at or before the expiration of the Exercise Period, this
Warrant shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire with respect to
Shares not purchased at or before such expiration.
(a) Notwithstanding the foregoing provisions of this Section
1, if the Services Agreement, dated April 19, 1996, by and between the
Corporation and the Owner, as amended (the "Agreement"), is terminated
by the Corporation pursuant to Section 7(a) of the Agreement, or by the
Owner pursuant to Section 7(b) or (c) of the Agreement, at any time
during the period beginning three months after the effective date of
the Agreement and ending three years after such effective date, the
vesting of all remaining unvested portions of this Warrant shall be
accelerated, and this Warrant shall be and become exercisable in full
from and after the date of such termination, at any time and from time
to time, during the remainder of the Exercise Period. Further, if the
Agreement is terminated at any time by the Owner pursuant to Section
7(a) of the Agreement, or by the Corporation pursuant to Section 7(b)
or (c) of the Agreement, this Warrant shall be exercisable by the
Owner, to the extent vested on the date of such termination, at any
time and from time to time, during the remainder of the Exercise
Period, and all unvested portions of this Warrant on such date of
termination shall terminate.
2. Exercise Procedures.
(b) In case the Owner shall desire to exercise the purchase
rights evidenced by this Warrant, the Owner shall present to the
Corporation at the principal office of the Corporation at 4900
Prospectus Drive, Suite 1000, Durham, North Carolina 27713, attention
of the President (i) a written notice of election to exercise, in the
form hereinbefore provided, duly
<PAGE>
executed by the Owner hereof specifying the number of Shares to be
purchased; (ii) payment of the full purchase price for the Shares to be
purchased by certified funds, cashier's check or other form of payment
acceptable to the Corporation; and (iii) this Warrant for endorsement
of exer cise by the Corporation. This Warrant may be exercised in whole
or in part at any time and from time to time during the Exercise
Period. In case of the exercise hereof in part only, the Corporation
will endorse Schedule I hereto and redeliver, within five business
days, this Warrant to the Owner evidencing the rights to purchase,
subject to the terms and conditions hereof, the number of Shares as to
which this Warrant has not been exercised.
The Shares purchased upon exercise of this Warrant
shall be deemed issued to the Owner hereof or its designee as the
record owner of such Shares as of the close of business on the date on
which the requirements set forth in the first sentence of this
paragraph (a) shall have been satisfied. Certificates for the Shares
purchased shall be delivered to the Owner hereof within a reasonable
time, not exceeding five business days, after this Warrant has been
exercised. The certificates so delivered shall be in such denominations
as may be requested by the Owner hereof and shall be registered in the
name of the Owner or such other name as shall be designated by the
Owner. The Corporation shall pay all transfer taxes and other expenses
payable in connection with the preparation, execution and delivery of
stock certificates, except that, in case such stock certificates shall
be registered in a name other than the Owner, funds sufficient to pay
stock transfer taxes, if any, payable in connection with the execution
and delivery of such certificates shall be paid by the Owner.
Unless the Corporation receives an opinion from
counsel satisfactory to it that such a legend is not required in order
to assure compliance with the Securities Act of 1933, as amended (the
"1933 Act"), or any applicable state securities laws, each certificate
for Shares issued hereunder shall bear a legend reading substantially
as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, NOR HAVE THEY BEEN
REGISTERED UNDER THE SECURITIES ("BLUE SKY") LAWS OF ANY
STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
OR HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND
<PAGE>
UNDER THE APPLICABLE STATE SECURITIES ("BLUE SKY") LAWS OR
UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT AND LAWS IS ESTABLISHED TO THE SATISFACTION OF
THE CORPORATION, WHICH MAY NECESSITATE A WRITTEN OPINION OF
SELLER'S COUNSEL SATISFACTORY TO CORPORATION COUNSEL.
(b) The exercise price (the "Exercise Price") per Share
issuable upon the exercise of this Warrant shall be $6.50, subject to
adjustment as provided in Section 4.
3. Disposition of Shares.
No disposition of the Shares shall be made unless and until:
(a) The Corporation has received an opinion from counsel for
the Owner of said securities stating that no registration under the
1933 Act or any state securities law is required with respect to such
disposition; or
(b) A registration statement or post-effective amendment to a
registration statement under the 1933 Act has been filed by the
Corporation and made effective by the Securities and Exchange
Commission covering such proposed disposition and the securities have
been registered under the appropriate state securities laws or an
exemption from registration is available.
4. Share Dividends, Reclassification, Reorganization Provisions.
(a) If, prior to the expiration of this Warrant by exercise or
by its terms, the Corporation shall issue any of its shares of Common
Stock as a share dividend or subdivide the number of outstanding shares
of Common Stock into a greater number of shares, then, in either of
such cases, the Exercise Price per Share purchasable pursuant to this
Warrant in effect at the time of such action shall be proportionately
reduced and the number of Shares at the time purchasable pursuant to
this Warrant shall be proportionately increased; and conversely, if the
<PAGE>
Corporation shall reduce the number of outstanding shares of Common
Stock by combining such shares into a smaller number of shares, then,
in such case, the Exercise Price per Share purchasable pursuant to this
Warrant in effect at the time of such action shall be proportionately
increased and the number of Shares at that time purchasable pursuant to
this Warrant shall be proportionately decreased. If the Corporation
shall, at any time during the life of this Warrant, declare a dividend
payable in cash on its Common Stock and shall at substantially the same
time offer to its shareholders a right to purchase new shares of Common
Stock from the proceeds of such dividend or for an amount substantially
equal to the dividend, all shares of Common Stock so issued shall, for
the purpose of this Warrant, be deemed to have been issued as a share
dividend. Any dividend paid or distributed upon the Common Stock in
shares of any other class of securities convertible into Common Stock
shall be treated as a dividend paid in Common Stock to the extent that
shares of Common Stock are issuable upon the conversion thereof.
(b) If, prior to the expiration of this Warrant by exercise or
by its terms, the Corporation shall be recapitalized by reclassifying
its outstanding shares of Common Stock into shares with a different par
value, or the Corporation or a successor corporation shall consolidate
or merge with or convey all or substantially all of its or of any
successor corporation's property and assets to any other corporation or
corporations (any such corporation being included within the meaning of
the term "successor corporation" used above in the event of any
consolidation or merger of any such corporation with, or the sale of
all or substantially all of the property of any such corporation to
another corporation or corporations), the Owner of this Warrant shall
thereafter have the right to purchase, upon the basis and on the terms
and conditions and during the time specified in this Warrant, in lieu
of the Shares purchasable upon the exercise of this Warrant (whether or
not vested at the time of such recapitalization, consolidation, merger
or sale) such shares, securities, or assets as may be issued or payable
with respect to, or in exchange for, the number of Shares purchasable
upon the exercise of this Warrant had such recapitalization,
consolidation, merger or conveyance not taken place, and, in any such
event, the rights of the Owner of this Warrant to an adjustment in the
number of Shares purchasable upon the exercise of this Warrant as
herein provided shall continue and be preserved in respect
<PAGE>
of any shares, securities, or assets which the Owner of this Warrant
becomes entitled to purchase. Upon the occurrence of any of the events
specified in this paragraph (b), this Warrant (regardless of whether it
has vested pursuant to the provisions of Section 1 hereof) shall be and
become fully vested and may be exercised at any time and from time to
time during the Exercise Period.
(c) If: (i) the Corporation shall take a record of the holders
of its shares of Common Stock for the purpose of entitling them to
receive a dividend payable otherwise than in cash, or any other
distribution in respect of the Common Stock (including cash), pursuant
to, without limitation, any spin-off, split-off, or distribution of the
Corporation's assets; or (ii) the Corporation shall take a record of
the holders of its shares of Common Stock for the purpose of entitling
them to subscribe for or purchase any shares of any class or to receive
any other rights; or (iii) in the event of any classification,
reclassification, or other reorganization of the shares which the
Corporation is authorized to issue, consolidation or merger of the
Corporation with or into another corporation, or conveyance of all or
substantially all of the assets of the Corporation; or (iv) in the
event of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation; then, and in any such case, the
Corporation shall mail to the Owner of this Warrant, at least thirty
(30) days prior thereto, a notice stating the date or expected date on
which a record is to be taken for the purpose of such dividend,
distribution or rights (the "Record Date"), and the date on which such
classification, reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation, or winding up, as the
case may be, will be effected. Such notice shall also specify the date
or expected date, if any is to be fixed, as of which holders of shares
of Common Stock of record shall be entitled to participate in such
dividend, distribution, or rights, or shall be entitled to exchange
their shares of Common Stock for securities or other property
deliverable upon such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation, or winding
up, as the case may be. As of the date that is three business days
prior to the Record Date, this Warrant (regardless of whether it has
vested pursuant to the provisions of Section 1
<PAGE>
hereof) shall be and become fully vested and may be exercised at any
time and from time to time during the Exercise Period.
(d) If the Corporation, at any time while this Warrant shall
remain unexpired and unexercised, shall sell all or substantially all
of its property, dissolve, liquidate, or wind up its affairs, the Owner
of this Warrant may thereafter receive upon exercise hereof, in lieu of
each Share which he would have been entitled to receive, the same kind
and amount of any securities or assets as may be issuable,
distributable, or payable upon any such sale, dissolution, liquidation,
or winding up with respect to each share of Common Stock of the
Corporation.
(e) The Corporation will not, by amendment of its charter or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed by it hereunder, but will at all
times in good faith assist in the carrying out of all the provisions of
this Warrant and in the taking of all such actions as may reasonably be
requested by the Owner in order to protect the exercise privilege of
the Owner against dilution or other impairment, consistent with the
tenor and purpose of this Warrant.
5. Registration Rights.
(a) As promptly as practicable after the date of this Warrant
(and in no event later than the date preceding the date on which any
portion of this Warrant first becomes exercisable by the Owner), the
Corporation shall prepare and file with the Commission a Registration
Statement on Form S-8 or Form S-3 covering the issuance of the Shares
by the Corporation to the Owner pursuant to exercise of the Warrant.
The Corporation shall keep such registration statement, and the related
registrations and qualifications contemplated by this Section 5,
effective until the earlier of (i) the date on which the Owner shall
have exercised this Warrant in full or (ii) the expiration of the
Exercise Period.
<PAGE>
(b) Notwithstanding the provisions of paragraph (a) of this
Section 5, in the event that neither Form S-8 nor Form S-3 is available
for such purpose, as promptly as practicable after this Warrant first
becomes exercisable by the Owner, the Corporation shall prepare and
file with the Commission a sufficient shelf registration statement, on
the applicable form, to permit the public offering and sale of the
Shares by the Owner through the facilities of all appropriate
securities exchanges and the over-the-counter market in accordance with
the 1933 Act, and will use its best efforts through its officers,
directors, auditors and counsel to cause such registration statement to
become effective as promptly as practicable; provided, however, that
the Corporation shall only be obligated to file and obtain
effectiveness of one such registration statement for the benefit of the
Owner for which all expenses incurred in connection with such
registration (other than the fees and disbursements of counsel for the
Owner and underwriting discounts, if any, payable in respect of the
Shares sold by the Owner) shall be borne by the Corporation. The method
of distribution of the Shares pursuant to such registration shall be
determined by the Owner in his discretion, and the description of the
plan of distribution set forth in the registration statement shall
contemplate such methods of distribution as the Owner may request,
including both underwritten and non-underwritten offerings or sales.
(c) If, at any time, the Corporation shall file a registration
statement (other than on Form S-4, Form S-8, or any successor form)
with the Securities and Exchange Commission (the "Commission") while
Shares are available for purchase upon exercise of this Warrant or
while any Shares (which have not been registered) are outstanding and
held by the Owner, the Corporation shall give the Owner at least 30
days prior written notice of the filing of such registration statement.
If requested by the Owner in writing within 20 days after receipt of
any such notice, the Corporation shall, at the Corporation's sole
expense (other than the fees and disbursements of counsel for the Owner
and the underwriting discounts, if any, payable in respect of the
Shares sold by the Owner), register or qualify the Shares concurrently
with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Shares through
the facilities of all appropriate securities exchanges and the
over-the-
<PAGE>
counter market, and will use its best efforts through its
officers, directors, auditors and counsel to cause such registration
statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such
offering shall advise the Corporation in writing that, in its opinion,
the distribution of all or a portion of the Shares requested to be
included in the registration concurrently with the securities being
registered by the Corporation would materially adversely affect the
distribution of such securities by the Corporation for its own account,
then the Owner shall delay the offering and sale of such Shares (or the
portions thereof so designated by such managing underwriter) for such
period, not to exceed 90 days, as the managing underwriter shall
request, provided that no such delay shall be required as to any Shares
if any securities of the Corporation are included in such registration
statement for the account of any person other than the Corporation and
the Owner, unless the securities included in such registration
statement for such other person shall have been reduced pro rata to the
reduction of the Shares which were requested to be included in such
registration.
(d) In connection with the registration of the Shares pursuant
to paragraph (b) of this Section 5, the Corporation shall (1) deliver
to the Owner and to the managing underwriter, if any, without charge,
at least one signed copy of the registration statement and any
post-effective amendment thereto, and as many copies of the prospectus
or prospectuses (including preliminary prospectuses) and any amendment
or supplement thereto as the Owner or the managing underwriter amy
reasonably request (and the Corporation consents to the use of such
prospectuses and any amendments or supplements in connection with the
offer and sale of the Shares covered thereby); (2) enter into such
agreements and take all actions as shall be reasonably necessary in
order to expedite or facilitate the disposition of the Shares,
including without limitation the execution and delivery of a reasonable
and customary underwriting agreement on such terms and conditions as
are approved by the Corporation, which approval will not be
unreasonably withheld; and (3) take such actions and make such
disclosures and filings as may be necessary to cause the registration
statement and related prospectuses not to contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
<PAGE>
(e) In connection with the registration of the Shares pursuant
to paragraph (b) of this Section 5, the Corporation shall indemnify and
hold harmless the Owner to the extent that issuers typically indemnify
and hold harmless underwriters in connection with public offerings
under the 1933 Act; and the Owner shall indemnify and hold harmless the
Corporation to the extent that selling shareholders typically indemnify
and hold harmless issuers of securities in connection with pubic
offerings under the 1933 Act with respect to the written information
provided by the Owner for use by the Corporation in the preparation of
the registration statement.
(f) In connection with a registration pursuant to the
provisions of this paragraph 5, the Corporation shall use its best
efforts to cause the Shares so registered to be registered or qualified
for sale under the securities or blue sky laws of such jurisdictions as
the Owner may reasonably request; provided, however, that the
Corporation shall not be required to qualify to do business in any
state by reason of this paragraph 5(f) in which it is not otherwise
required to qualify to do business.
(g) Prior to the period this Warrant becomes exercisable by
the Owner, the Corporation shall, as promptly as practicable, prepare
and file a listing of additional shares application with The Nasdaq
Stock Market, Inc. which covers the Shares.
(h) The Corporation shall keep effective any registration or
qualification contemplated by paragraph (b) of this Section 5 and shall
from time to time amend or supplement each applicable registration
statement, preliminary prospectus, final prospectus, application,
document and communication for such period of time as shall be required
to permit the Owner to complete the offer and sale of the Shares
covered thereby; provided, however, the Corporation shall in no event
be required to keep any such registration or qualification in effect
beyond the date, if any, on which all Shares covered thereby have
become freely tradeable by the Owner pursuant to Rule 144 under the
1933 Act (or otherwise) without registration, unless
<PAGE>
the Corporation is required to keep any such registration or
qualification in effect with respect to securities other than the
Shares beyond such period, in which event the Corporation shall keep
such registration or qualification in effect as it relates to the
Shares for so long as such registration or qualification remains or is
required to remain in effect in respect of such other securities.
6. Reservation of Shares Issuable on Exercise of Warrant. The
Corporation will, at all times, reserve and keep available out of its authorized
shares, solely for issuance upon the exercise of this Warrant, such number of
shares of Common Stock as from time to time shall be issuable upon the exercise
of this Warrant. All Shares will, upon issuance, be validly issued, fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof.
7. Assignment. This Warrant may not be sold, assigned, hypothecated or
transferred, other than by will or pursuant to the laws of descent and
distribution or by operation of law.
8. Loss, Theft, Destruction or Mutilation. Upon receipt by the
Corporation of evidence satisfactory to it (in the exercise of its reasonable
discretion) of the loss, theft, destruction, or mutilation of this Warrant, the
Corporation will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
9. Warrantholder Not a Shareholder. The Owner of this Warrant, as such,
shall not by reason of this Warrant be entitled to any rights or subject to any
liabilities whatsoever of a shareholder of the Corporation.
10. Taxes. The Corporation will pay all taxes in respect of the issue
of this Warrant or the Shares issuable upon exercise hereof.
11. Construction. This Warrant shall be construed in accordance with
the laws of the State of North Carolina, without giving effect to conflict of
laws.
<PAGE>
12. Mailing of Notice. All notices and other communications from the
Corporation to the Owner of this Warrant or from the Owner to the Corporation
shall be mailed by first class, certified mail, postage prepaid, or by confirmed
telecopy, to the address or telecopy number theretofore furnished in writing by
the recipient of such notice to the party giving such notice.
DIGITAL RECORDERS, INC.
By:
J. Phillips L. Johnston, President
and authorized signatory by action of
the Board of Directors
(S E A L)
EXHIBIT 21: LISTING OF SUBSIDIARIES OF THE COMPANY
T.I.S., Inc. Inactive North Carolina
Digital Audio Corporation Inactive North Carolina
Transit-Media GmbH Transit-Media Ettlingen, Germany
TwinVision Corp. of North America, Inc. TwinVision, n.a. North Carolina
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