FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ___________ to ______________
Commission file number 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer as specified in its charter)
North Carolina 56-1362926
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4900 Prospectus Drive, Suite 1000
Research Triangle Park, North Carolina 27709-4068
(Address of principal executive offices)
(919) 361-2155
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock: 2,674,075 shares outstanding
as of July 31, 1997
Transitional Small Business Disclosure Format (check one); Yes No X
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Item Page
Financial Statements:
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Consolidated Statements of Cash Flows............................ 5-6
Notes to Consolidated Financial Statements....................... 7-8
2
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1997 December 31,
Assets (Unaudited) 1996
---------------- ----------------
Current Assets:
Cash and cash equivalents $ 333,131 1,328,944
Investments 1,267,524 1,606,422
Trade accounts receivable 3,480,214 2,090,881
Other receivables 50,625 120,014
Inventories 2,215,785 1,889,906
Prepaids and other current assets 130,608 51,329
---------------- ----------------
Total current assets 7,477,887 7,087,496
---------------- ----------------
Property and equipment, net 406,065 458,011
Goodwill, net 1,592,044 1,668,807
Intangible assets, net 482,274 403,900
Other assets 7,099 7,099
================ ================
$ 9,965,369 9,625,313
================ ================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings 1,034,740 -
Accounts payable 666,575 830,883
Accrued expenses 162,992 172,892
Accrued commissions 196,428 199,485
Accrued warranty reserve 169,646 161,971
Dividends payable 3,525 -
---------------- ----------------
Total current liabilities 2,233,906 1,365,231
---------------- ----------------
Total liabilities 2,233,906 1,365,231
---------------- ----------------
Stockholders' Equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value, 20,000
shares authorized; 354 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding at June 30,
1997 and December 31, 1996, respectively 267,407 267,407
Additional paid-in capital 12,602,708 12,602,708
Translation adjustment (122,520) (9,791)
Accumulated deficit (5,016,167) (4,600,277)
---------------- ----------------
Total stockholders' equity 7,731,463 8,260,082
---------------- ----------------
$ 9,965,369 9,625,313
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
Net sales $ 2,905,773 2,173,448 5,303,983 3,924,016
Cost of sales 1,528,226 1,032,685 2,704,047 1,796,472
------------- ------------- ------------- -------------
Gross profit 1,377,547 1,140,763 2,599,936 2,127,544
Selling, general and administrative expenses 1,284,251 906,029 2,443,871 1,652,578
Research and development expenses 293,910 162,356 532,342 250,088
------------- ------------- ------------- -------------
Operating income (loss) (200,614) 72,378 (376,277) 224,878
Other income (expense):
Interest income 23,496 36,581 54,836 84,573
Interest expense (11,613) (1,113) (14,799) (3,743)
------------- ------------- ------------- -------------
Total other income (expense) 11,883 35,468 40,037 80,830
Income (loss) before income taxes (188,731) 107,846 (336,240) 305,708
Income tax expense - 10,000 - 20,000
------------- ------------- ------------- -------------
Net income (loss) (188,731) 97,846 (336,240) 285,708
Preferred dividend requirements (39,825) (39,825) (79,650) (79,650)
------------- ------------- ------------- -------------
Net income (loss) applicable to common stockholders $ (228,556) 58,021 (415,890) 206,058
============= ============= ============= =============
Net income (loss) per common and common equivalent share $ (0.09) 0.02 (0.16) 0.08
============= ============= ============= =============
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,674,075 2,674,075 2,674,075
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the six month periods ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net income (loss) $ (336,240) 285,708
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of
property and equipment 140,295 49,607
Amortization of goodwill and intangible assets 114,739 94,517
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable (1,389,333) 169,351
Decrease (increase) in other receivables 45,914 (88,797)
Increase in inventories (325,879) (202,910)
Decrease (increase) in prepaids and other current assets (79,279) 4,849
Increase in intangible assets (116,350) (148,660)
Increase in other assets - (198)
Decrease in accounts payable (164,308) (111,504)
Increase (decrease) in accrued expenses (5,282) 38,638
---------------- ---------------
Net cash provided (used) by operating activities (2,115,723) 90,601
---------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (88,349) (59,521)
Purchases of short-term investments (161,102) (64,126)
Sales and maturities of short-term investments 500,000 200,000
Payment for business acquired, net of cash received - (34,560)
---------------- ---------------
Net cash provided by investing activities 250,549 41,793
---------------- ---------------
Cash flows from financing activities:
Principal payments on long-term debt - (709,000)
Proceeds from short-term bank borrowings 2,770,740 -
Principal payments on short-term bank borrowings (1,736,000) (117,177)
Payment of dividends on preferred stock (52,650) (52,650)
---------------- ---------------
Net cash provided (used) by financing activities 982,090 (878,827)
---------------- ---------------
Effect of exchange rate changes (112,729) (366)
---------------- ---------------
Net decrease in cash and cash equivalents (995,813) (746,799)
Cash and cash equivalents at beginning of period 1,328,944 1,175,775
---------------- ---------------
Cash and cash equivalents at end of period $ 333,131 428,976
================ ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 14,799 3,743
================ ===============
Cash paid during the period for income taxes $ 51,800 -
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the six month periods ended June 30, 1997 and 1996
Supplemental disclosures of noncash financing activities:
The Company declared $79,650 in dividends on Series AAA Preferred Stock in each
of the six month periods ended June 30, 1997 and 1996. The Company paid $52,650
in cash dividends in each of the six month periods ended June 30, 1997 and 1996.
During the six month period ended June 30, 1997, $23,475 of the remaining
declared dividends were offset against an other receivable, and $3,525 of the
remaining declared dividends were unpaid.
During 1996, the Company acquired Transit-Media GmbH ("Transit-Media"). The
Company paid $35,000 for all of Transit-Media's stock at closing. The Company
recorded cash ($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).
6
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1997 and 1996
(1) Basis of Presentation and Disclosure
The unaudited interim condensed financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) considered
necessary to present fairly the results for the interim periods presented.
The accompanying condensed financial statements and related notes
should be read in conjunction with the Company's audited financial statements
included in its Annual Report on Form 10-KSB for the year ended December 31,
1996. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full
calendar year.
(2) Per Share Amounts
Net income (loss) per common and common equivalent share is based upon
the weighted average number of common and common equivalent shares
outstanding from convertible preferred stock and the exercise of stock
options and warrants. A treasury stock approach has been used in determining
the incremental shares outstanding. For 1997, the impact of the common stock
equivalent shares was anti-dilutive. For 1996, the common stock equivalent
shares had no impact on the per share amounts. Cash dividends declared on the
preferred stock during the period were deducted from net income or added to
net loss to determine the net income (loss) per share. Cash dividends
declared were $79,650 for each of the six months ended June 30, 1997 and
1996, respectively.
(3) 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 period.
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 period.
7
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued (Unaudited)
(4) Acquisition of Transit-Media GmbH
On April 30, 1996, the Company acquired Transit-Media GmbH
("Transit-Media") in a transaction accounted for using the purchase method of
accounting and, accordingly, the assets and liabilities of the acquired
entity were recorded at their fair market value at the date of acquisition.
Transit-Media assembles and markets proprietary on-board, electronic
destination signs for mass-transit systems in Europe 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 six months ended June
30, 1997 include the operations of Transit-Media.
The following unaudited pro forma results of operations assume the
transaction described above occurred as of January 1, 1996 after giving
effect to certain adjustments, including the amortization of the excess cost
over the fair value of the net assets acquired.
Six Months Ended
June 30, 1996
Net sales $ 3,924,016
Net income $ 212,898
Net income per common and common equivalent share $ 0.05
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 year presented and is not intended to be a projection of
future results or trends.
(5) Subsequent Event
On July 24, 1997, The Company's $2,000,000 unsecured credit facility
from a financial institution expired and was replaced by a $2,500,000 secured
line of credit facility and a $1,000,000 secured letter of credit facility
from this same financial institution. The new credit facility provides for
short-term borrowings and import letters of credit, is subject to certain
loan covenants, is secured by all of the Company's accounts receivable,
inventory, and equipment, and bears interest, payable quarterly, at the 90
day LIBOR or base rate plus 2.3% to 3.3% dependent upon the Company's rolling
four quarter earnings before interest, taxes, depreciation and amortization.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Highway Information Systems
("HIS"), Transit Communication Systems ("TCS"), and Digital Audio Company
("DAC"), and its two wholly-owned subsidiaries, Transit-Media GmbH
("Transit-Media") and TwinVision Corp. of North America, Inc. ("TwinVision").
From the Company's 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 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's products are currently marketed to the highway
information system-advisory radio ("HIS") market, the mass transit market and
the law enforcement market using proprietary software applications. Customers
include municipalities, regional transportation districts, federal, state, and
local departments of transportation, turnpikes, bus manufacturers, and law
enforcement agencies or organizations. Sales to these customers are
characterized by a lengthy sales cycle which generally extends for a period of
two to twenty-four months. In addition, purchases by these customers are
dependent on federal, state and local funding which may vary from year to year.
A significant portion of the Company's sales have historically been
attributable to a small number of customers. 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 net sales
during those years. During the three months ended June 30, 1997 and 1996, sales
to three customers accounted for approximately 34% and 55% of net sales,
respectively. During the six months ended June 30, 1997 and 1996, sales to three
customers accounted for approximately 28% and 44% of net sales, respectively.
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.
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.
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.
9
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Net sales ................................. 100% 100% 100% 100%
Cost of sales ............................. 53 48 51 46
Gross profit .............................. 47 52 49 54
Operating expenses:
Selling, general and administrative ... 44 42 46 42
Research and development .............. 10 7 10 6
Total operating expenses .................. 54 49 56 48
Operating income (loss) ................... (7) 3 (7) 6
Other income (expense), net ............... 1 2 1 2
Income (loss) before income taxes ......... (6) 5 (6) 8
Income tax expense ........................ 0 (1) 0 (1)
Net income (loss) ......................... (6) 4 (6) 7
</TABLE>
Comparison of Three and Six Months Ended June 30, 1997 and 1996.
Net sales for the three months ended June 30, 1997 were $2,905,773, an
increase of $732,325, or 34%, as compared to $2,173,448 for the comparable three
months in 1996. Net sales for the six months ended June 30, 1997 were
$5,303,983, an increase of $1,379,967, or 35%, as compared to $3,924,016 for the
comparable six months in 1996. These increases in sales were attributable to
increases in sales in the HIS business group, the DAC business group and the
Transit-Media subsidiary and the addition of sales from TwinVision, all of which
were offset by decreases in sales from the TCS business grooup.
During the three months ended June 30, 1997, HIS sales increased
$346,298, or 81%, from the corresponding three months in the prior year. During
the six months ended June 30, 1997, HIS sales increased $441,071, or 49%, from
the corresponding six months in the prior year. The increases in HIS sales are
due primarily to shipments on large orders from two customers, one of which
related to the new DR 2000 computer-controlled product. During the three months
ended June 30, 1997, DAC sales increased $4,134, or 1% from the corresponding
three months in the prior year. During the six months ended June 30, 1997, DAC
sales increased $230,760, or 31%, from the corresponding six months in the prior
year. The increases in DAC sales relate primarily to additional sales of the
MCAP product and to a shipment on a development project for one customer.
During the three months ended June 30, 1997, Transit-Media sales
increased $444,722, or 900%, from the corresponding three months in the prior
year. During the six months ended June 30, 1997, Transit-Media sales increased
$687,754, or 1,392%, from the corresponding six months in the prior year. These
increases are primarily due to Transit-Media having six months of sales in 1997
compared to two months of sales in 1996. The three months ended June 30, 1997
was the first period of sales for TwinVision which totaled $239,114.
During the three months ended June 30, 1997, TCS sales decreased
$301,943, or 23% from the corresponding three months in the prior year. During
the six months ended June 30, 1997, TCS sales decreased $218,732, or 10%, from
the corresponding six months in the prior year. The decreases in TCS sales
relate primarily to shipments of smaller dollar orders from several transit
customers during 1997, whereas, during the corresponding period in the prior
year, shipments were made primarily to fulfill a large order from one transit
customer. The TCS business group will continue to aggressively market its
products; however, the timing of large orders may continue to cause some
fluctuations in TCS revenues.
10
<PAGE>
Gross profit for the three months ended June 30, 1997 was $1,377,547, an
increase of $236,784, or 21%, over gross profit of $1,140,763 in the three
months ended June 30, 1996. As a percentage of sales, gross profit during the
three months ended June 30, 1997 was 47% of net sales, as compared to 52% during
the corresponding three months in 1996. Gross profit for the six months ended
June 30, 1997 was $2,599,936, an increase of $472,392, or 22%, over gross profit
of $2,127,544 in the six months ended June 30, 1996. As a percentage of sales,
gross profit during the six months ended June 30, 1997 was 49% of net sales, as
compared to 54% during the corresponding six months in 1996. The decreases in
gross profit percentages were caused primarily by increased international sales
which had lower margins.
Selling, general and administrative expenses during the three months
ended June 30, 1997 were $1,284,251, an increase of $378,222, or 42%, as
compared to expenses of $906,029 during the three months ended June 30, 1996.
Selling, general and administrative expenses during the six months ended
June 30, 1997 were $2,443,871, an increase of $791,293, or 48%, as compared to
expenses of $1,652,578 during the six months ended June 30, 1996. These
increases are primarily attributable to expenses related to increased
depreciation and amortization expenses resulting from continued purchases of
property and equipment and to expenses related to the Company's two wholly-owned
subsidiaries. These subsidiaries had minimal or no expenses during the
corresponding periods in the previous year since Transit-Media was acquired on
April 30, 1996 and TwinVision began operations subsequent to June 30, 1996.
Research and development expenses for the three months ended June 30,
1997 were $293,910, an increase of $131,554 or 81%, as compared to expenses of
$162,356 during the three months ended June 30, 1996. Research and development
expenses for the six months ended June 30, 1997 were $532,342, an increase of
$282,254 or 113%, as compared to expenses of $250,088 during the six months
ended June 30, 1996. These increases are primarily due to the hiring of
additional engineers across all business groups for the purpose of developing
new and enhancing existing products.
Operating income decreased by $272,992 from $72,378 for the three
months ended June 30, 1996 to an operating loss of $200,614 for the three months
ended June 30, 1997. Operating income decreased by $601,155 from $224,878 for
the six months ended June 30, 1996 to an operating loss of $376,277 for the six
months ended June 30, 1997. These decreases in operating income are due
primarily to the factors set forth above.
Total other income (expense) for the three months ended June 30, 1997
was $11,883, a decrease of $23,585, or 66%, as compared to total other income
(expense) for the three months ended June 30, 1996 of $35,468. This decrease was
due primarily to a decrease in interest income net of interest expense, as the
Company decreased its cash and cash equivalents and increased its bank
borrowings to finance operations during the three months ended June 30, 1997.
Total other income (expense) for the six months ended June 30, 1997 was
$40,037, a decrease of $40,793, or 50%, as compared to total other income
(expense) for the six months ended June 30, 1996 of $80,830. This decrease was
due primarily to the same factors noted for the three month period.
The Company's financial statements contain, when necessary, a provision
for income tax expense due to alternative minimum tax. For the three month
periods ended June 30, 1997 and 1996, the Company recorded income tax expense of
zero and $10,000, respectively. For the six month periods ended June 30, 1997
and 1996, the Company recorded income tax expense of zero and $20,000,
respectively. As a result of the accumulated losses incurred in past years, the
Company had a net operating loss carryforward for federal income tax purposes of
$2,751,134 as of December 31, 1996. 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 will 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.
11
<PAGE>
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.
On May 24, 1996, the Company obtained a $2,000,000 unsecured credit
facility from a financial institution. The agreement provided for short-term
borrowings and import letters of credit, was subject to certain loan covenants,
and bore interest at a rate of LIBOR plus 2.3%, payable quarterly. At June 30,
1997 there were $1,034,740 of borrowings outstanding under this credit
agreement. In addition, at June 30, 1997, there was approximately $700,000
committed under import letters of credit for inventory purchases from an
overseas supplier. The unsecured credit facility expired July 24, 1997 and was
replaced by a $2,500,000 secured line of credit facility and a $1,000,000
secured letter of credit facility from this same financial institution. The
new credit facility provides for short-term borrowings and import letters of
credit, is subject to certain loan covenants, is secured by all of the Company's
accounts receivable, inventory and equipment, and bears interest, payable
quarterly at the 90 day LIBOR base rate plus 2.3% to 3.3% dependent upon the
Company's rolling four quarter earnings before interest, taxes, depreciation and
amortization.
As of June 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $333,131, investments of $1,267,524,
accounts receivable of $3,480,214 and bank borrowings of $1,034,740,
providing the Company with net working capital of $5,243,981.
The Company's operating activities used cash of $2,115,723 during the
six months ended June 30, 1997 and provided cash of $90,601 during the six
months ended June 30, 1996. For the six months ended June 30, 1997, increases in
accounts receivable of $1,389,333, increases in inventories of $325,879,
increases in intangible assets of $116,350, increases in prepaids
and other assets of $79,279 and decreases in accounts payable of $164,308
were the primary components of changes in working capital. For the six months
ended June 30, 1996, decreases in accounts receivable of $169,351,
increases in inventories of $202,910, increases in intangible assets of $148,660
and decreases in accounts payable of $111,504 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 $250,549 during the
six months ended June 30, 1997 and provided cash of $41,793 during the six
months ended June 30, 1996. Investing activities during the six months ended
June 30, 1997 related to capital expenditures of $88,349 and purchases of
short-term investments totaling $161,102 which were offset by sales of
investments totaling $500,000. Investing activities during the six months ended
June 30, 1996 related to capital expenditures of $59,521 and purchases of
short-term investments totaling $64,126 which were offset by sales of short-term
investments totaling $200,000 and the purchase of Transit-Media for $34,560, net
of cash received.
12
<PAGE>
The Company's financing activities provided cash of $982,090 during the
six months ended June 30, 1997 and used cash of $878,827 during the six months
ended June 30, 1996. Financing activities during the six months ended June 30,
1997 related primarily to net proceeds from short-term bank borrowings totaling
$1,034,740 and to the payment of dividends on preferred stock totaling $52,650.
Financing activities during the six months ended June 30, 1996 related to
principal payments on long-term debt of $709,000, principal payments on
short-term bank borrowings of $117,177 and to the payment of dividends on
preferred stock totaling $52,650.
The Company's cash requirements, other than for normal operating
expenses, will relate 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 $2,500,000 line of 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 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.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
13
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) The annual meeting of shareholders was held May 20, 1997.
(B) The following were elected directors to hold office for one-year
terms or until their successors are elected and qualified.
Votes For Votes Against
========= =============
John M. Cochran, Jr. 1,709,706 1,180
Curtis I. Kring 1,709,706 1,180
John K. Pirotte 1,709,706 1,180
Juliann Tenney 1,709,706 1,180
David L. Turney 1,709,706 1,180
J. Phillips L. Johnston 1,709,706 1,180
C. James Meese, Jr. 1,709,706 1,180
John M. Reeves, II. 1,707,143 3,743
John W. Thomas, Jr. 1,709,706 1,180
(C) To consider and act upon a proposal to approve an amendment to
the Company's 1993 Incentive Stock Option Plan to permit the
issuance of an additional 100,000 shares of Common Stock pursuant
to the Plan.
For 1,647,585
Against 55,105
Abstain 7,746
Not voted 450
(D) To ratify the appointment of KPMG Peat Marwick LLP as the
independent certified public accounts of the Company for the
fiscal year ending December 31, 1997.
For 1,695,919
Against 8,662
Abstain 6,305
(E) In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting or
any and all adjournment thereof.
For 1,620,385
Against 21,500
Abstain 69,001
ITEM 5 OTHER INFORMATION
None.
14
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
10.9.2 Commercial Lease Agreement, dated April 24, 1997, by and between Realmark Property
Investors Ltd. Partnership V and the Company.
10.21.1 Note, Commitment Letter and General Security Agreement, dated July 24, 1997, by and
between Wachovia Bank of North Carolina N.A. and the Company.
10.24.2 Amendment to April 19, 1996 Management Services Agreement dated May 15, 1997 by and
between the Company and Robinson Turney International, Inc.
10.24.3 Amendment to April 19, 1996 Management Services Agreement and to April 19, 1996
Services Agreement, dated June 30, 1997 by and between the Company,
Transit-Media GmbH, TwinVision Corp. of North America, Inc. and Robinson Turney
International, Inc.
27 Financial Data Schedule
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-QSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
<TABLE>
<CAPTION>
<C> <S>
Dated: August 14, 1997 By: /s/ J. PHILLIPS L. JOHNSTON
J. Phillips L. Johnston, Chairman of the Board,
President and Chief Executive Officer
Dated: August 14, 1997 By: /s/ JONATHAN E. KENNEDY
Jonathan E. Kennedy, Chief Financial Officer
</TABLE>
15
<PAGE>
Exhibit 10.9.2
COMMERCIAL LEASE
AGREEMENT
BETWEEN
REALMARK PROPERTY INVESTORS LTD. PARTNERSHIP V LESSOR
AND
DIGITAL RECORDERS, INC. LESSEE
TABLE OF CONTENTS
Paragraph Number Description Page
1. Premises 1
2. Term 1
3. Rent 1
4. Signs 2
5. Usage and Insurance 2
6. Services to the Premises 2
7. Utilities 2
8. Relocation 3
9. Repairs and Maintenance 3
10. Compliance with Laws, Rules and
Regulations 3
11. Hazardous Substances - General 3
12. Lessor Improvements 4
13. Alterations and Improvements 4
14. Condemnation 5
15. Fire and Casualty 5
16. Insurance by Lessee 5
17. Waiver of Subrogation 6
18. Insurance by Lessor 6
19. Indemnification 6
20. Quiet Enjoyment 6
21. Lessor's Right of Entry 6
22. Assignment or Sublease 6
23. Landlord's Lien 7
24. Uniform Commercial Code 7
25. Default by Lessee 7
26. Remedies for Lessee's Default 7
27. Waiver of Default or Remedy 7
28. Lessor's Liability 7
29. Election of Arbitration 7
30. Acts of God 8
31. Attorney's Fees 8
32. Holding Over 8
33. Rights of First Mortgagee 8
34. Estoppel Certificates 8
35. Financial Information 8
36. Cost of Living Increase 8
37. Successors 8
38. Rent Tax 9
39. Definitions 9
40. Miscellaneous 9
41. Notice 9
42. Entire Agreement and Limitation of
Warranties 9
43. Other Provisions 10
<PAGE>
COMMERCIAL
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into as of the
24th day of April 1997
by and between
REALMARK PROPERTY INVESTORS LTD. PARTNERSHIP V
hereinafter referred to as "Lessor"
AND
DIGITAL RECORDERS, INC.
hereinafter referred to as "Lessee".
WITNESSETH:
1. PREMISES: In consideration of the mutual covenants and agreements
herein stated, Lessor hereby leases to Lessee and Lessee hereby leases from
Lessor the following described premises (the "Premises"), together
with the appurtenances thereto:
6,665 Square Feet
of space situated at
2300 Englert Drive, Durham, Durham County, North Carolina
(sometimes referred to as the "building" or the "project").
The location of the Premises within the building shall be as shown on
EXHIBIT A attached hereto and made a part hereof by this reference.
For purposes of prorating various expenses, the Premises represent 13.330
percent of the building or project.
2. TERM: (a) Subject to and upon the conditions set forth below, the term of
the Lease shall commence on July 1, 1997 (the "commencement date") and shall
expire on September 1, 2002 (which date shall be on the last day of the
calendar month), unless sooner terminated as hereinafter provided. Lessor
shall use its reasonable efforts to establish the "completion date" as July
1, 1997.
(b) If the Premises are not available for occupancy on the "commencement
date" or "completion date," the Lease shall not be affected thereby and
Lessee shall have no claim against Lessor as a result of the postponement of
such date.
3. RENT: (a) Lessee agrees to pay monthly as base rental during the term of
this Lease the sum of See Rent Schedule - Exhibit C ($ ), which amount shall
be payable to Lessor at the address shown below on the first day of the
month. One monthly installment of rent shall be due and payable on the date
of execution of this Lease by Lessee for the first month's rent and a like
monthly installment shall be due and payable on or before the first day of
each calendar month succeeding the "commencement date" during the demised
term; provided, that if the "commencement date" should be a date other than
the first day of a calendar month, the monthly rental set forth above shall
be prorated to the end of that calendar month, and all succeeding
installments of rent shall be payable on or before the first day of each
succeeding calendar month during the demised term. Lessee shall pay, as
additional rental, all other sums due under this Lease. All rent and sums to
be paid under this Lease are to be paid without demand, set-off, abatement
or deduction, except as specifically provided in the Lease. If the Lease
terminates on a day other than the last day of a calendar month, the rent
for said month will be prorated.
1
(b) Deleted.
(c) If any increase in the fire or other insurance premiums paid by Lessor
for the building in which Lessee occupies space is caused by Lessee's use
and occupancy of the Premises, including without limitation Lessee's use,
storage, production or handling of any Hazardous Material (as hereinafter
defined in Paragraph 11), or if Lessee vacates the Premises and causes an
increase
<PAGE>
in such premiums, the Lessee shall pay as additional rent, upon
demand, the amount of such increase to Lessor.
(d) Other remedies for nonpayment of rent notwithstanding, if the monthly
rental payment is not received by Lessor on or before the tenth day of the
month for which rent is due, or if any other payment due Lessor by Lessee is
not received by Lessor on or before the tenth day following the date it was
due, a late charge of two percent (2%) of such past due amount shall become
due and payable in addition to such amounts owed under this Lease.
(e) Beginning with the Commencement Date, Lessee agrees to pay to Lessor, as
additional rental each year, Lessee's proportionate share of any direct
expenses (as defined below) incurred by or accrued as an expense of Lessor
or its agents on account of the operation or maintenance of the building
(and all appurtenances thereto) in which the Premises are situated and
including a portion of any charges attributable to the Common Areas.
("Common Areas" shall mean all areas, improvements, space, equipment, signs
and special services provided by Lessor for the common or joint use and
benefit of the occupants of the building, their employees, agents, servants,
customers, and other invitees, including, without limitation, parking areas,
entranceways, exits, walkways, service roads, driveways, retaining walls,
landscaped areas and truck serviceways.) Such additional rental shall be
paid on the first day of each calendar month throughout the term, without
deduction or set-off, in equal monthly installments of an amount based on
Lessor's projections of direct expenses for the applicable calendar year,
and all such monthly payments shall be credited to Lessee's rental account
for such calendar year. Lessor shall, within nine months following the close
of each calendar year during the term of the Lease, invoice Lessee for the
additional rental. The invoice shall include in reasonable detail all
computations of the additional rental. If this Lease shall terminate on a
day other than the last day of a year, the amount of any additional rental
payable by Lessee applicable to the year in which such termination shall
occur shall be prorated on the ratio that the number of days from the
commencement of such year to and including such termination date bears to
365. If such invoice shows an amount owing by Lessee that is less than the
sum of the monthly payments made by Lessee in the previous calendar year,
Lessor shall credit such excess to installments of rent (both base and
additional) next due from Lessee until such has been exhausted, or if this
Lease shall expire prior to the application of such excess, Lessor shall pay
to Lessee the balance not theretofore applied against rent. If such invoice
shows an amount owing by Lessee which is more than the sum of the monthly
payments made by Lessee in the previous calendar year, Lessee shall pay such
deficiency to Lessor within ten days after receipt of the invoice. Lessee
shall have the right, at its own expense and at a reasonable time, to audit
Lessor's books relevant to the additional rentals under this Paragraph 3.
The provisions herein shall survive the expiration or sooner termination of
the Lease.
(f) The term "direct expenses" as used above includes all direct costs of
operation and maintenance of the building and/or project of which the
Premises are a part, including, but not limited to, utility and service
charges attributable to Common Areas or paid by Lessor, the costs of
building supplies, repairs, maintenance and service contracts for the
building, Common Areas and all related mechanical equipment, property
management charges, the costs of grounds maintenance, landscaping, parking
maintenance and striping, all real property taxes and installments of
special assessments, including special assessments due to deed restrictions
and/or owner's associations which accrue against the building and/or project
of which the Premises are a part during the term of this Lease, as well as
all insurance premiums Lessor is required to pay or deems necessary to pay,
including all risk property, general liability and sign insurance. The term
"direct expenses" shall also include capital improvements (amortized on a
basis reasonably determined by Lessor) that are required by governmental
law, rule or regulation, which law, rule or regulation was not applicable to
the building at the time it was originally constructed, or that result in
cost savings in connection with the operation or maintenance of the
building. The term "direct expenses" does not include any capital
improvement to the building and/or project of which the Promises are a part,
other than as specifically provided hereinabove, nor shall it include income
and franchise taxes of Lessor, expenses incurred in leasing to or procuring
of tenants, leasing commissions, advertising expenses, expenses for the
renovating of space for new tenants, interest or principal payments on any
mortgage or other indebtedness of Lessor, compensation paid to any employee
of Lessor above the grade of building superintendent, nor any depreciation
allowance or expense.
<PAGE>
(g) Lessee shall pay all taxes or assessments of any nature imposed or
assessed upon its trade fixtures, equipment, machinery, inventory,
merchandise or other personal property located on the Premises and owned by
or in the custody of Lessee as promptly as all such taxes or assessments may
become due and payable without any delinquency.
4. SIGNS: Any signs or advertising to be used in connection with the
Premises shall be first submitted to Lessor for approval before installation
of same, and all signs, advertising or markings on the Premises
shall be permitted only in the area designated by Lessor.
5. USAGE AND INSURANCE: Lessee warrants and represents to Lessor that the
Premises shall be used and occupied only for the purpose of general office
use and the assembly, storage and distribution of digital recording devices
and related products including LED Flip-dot signs. Lessee shall occupy the
Premises, conduct its business and control its agents, employees, invitees
and visitors in such a manner as is lawful, reputable and will not create
any nuisance or , annoy or disturb any other lessee in its normal business
operations or Lessor in its management shall not commit, or suffer to be
committed, any waste on the Premises, nor shall Lessee permit the Premises
to be used in any way which would, in the opinion of Lessor, be extra
hazardous on account of fire or otherwise or which would in any way increase
or render void the fire or other insurance on the Premises or contents of
the building.
6. SERVICES TO THE PREMISES: Lessor shall, subject to interruptions which
are normal
2
and to the scheduling of repairs by providers of such services, cause to be
furnished to the Premises in common with other lessees, the following
connections: water and sewer connections, phone line connections providing
access to the local public telephone company, and normal electrical
connections and natural gas connections.
7. UTILITIES: Lessee agrees that it will pay all charges for gas,
electricity or other illumination used on the Premises, and will pay in
addition directly to Lessor all water and sewage charges described
hereafter. If the Premises are recognized as part of a building containing a
number of tenants, the Lessee agrees to pay its proportionate share of the
total water and sewage bill for the entire building based upon the ratio of
the number of square feet demised herein to the total square footage
contained in the entire building as set forth hereinabove under Paragraph 1.
It is expressly agreed that all water and sewage charges are considered as
rent as defined in this Lease. Should any of the above described charges
herein provided for at any time remain due and unpaid for a period of five
(5) days after the same shall have become due, Lessor may, at its option,
consider Lessee a tenant at sufferance, and immediately re-enter upon the
Premises, and the entire rental for the rental period shall at once be due
and payable and may forthwith be collected by distress or otherwise. If the
Premises consist of an entire building, Lessee shall pay the full cost of
water and sewage charges applicable to said building directly to the utility
providing the same. In the event Lessee's use of any utilities on a common
meter are irregular or disproportionate, either Lessor or Lessee shall have
the option as to future charges to have installed at its expense separate
meters for the utilities in question.
8. RELOCATION: In the event Lessor determines to utilize the Premises for
other purposes during the term of this Lease, Lessee agrees to relocate to
other space in the building and/or project designated by Lessor, provided
such other space is of equal or larger size than the Premises and has at
least the same number of windows. Lessor shall pay all out-of-pocket
expenses of any such relocation, including the expenses of moving and
reconstruction of all Lessee furnished and Lessor furnished improvements. In
the event of such relocation, this Lease shall continue in full force and
effect without any change in the terms or other conditions, but with the new
location substituted for the old location set forth in Paragraph 1 of this
Lease.
9. REPAIRS AND MAINTENANCE: (a) Unless otherwise expressly provided, Lessor
shall not be required to make any improvements, replacements or repairs of
any kind or character to the Premises during the term of this Lease. Lessor
shall not be liable to Lessee, except as expressly provided in this Lease,
for any damage or inconvenience, and Lessee shall not be entitled to any
abatement or deduction of rent by reason of any repairs, alterations or
additions made by Lessee under this Lease. Lessee will be required to
<PAGE>
maintain and repair all damage to each and every part of the Premises,
including without limitation, the water apparatus, HVAC, electric lights or
any other fixtures, appliances or appurtenances of the Premises such as
walls, doors, corridors, windows and other structures and equipment within
and serving the Premises, unless the same are necessitated by Lessor' s
negligence. Lessee shall enter into and keep in force throughout the term of
the Lease a maintenance/service contract with respect to the HVAC system
and, at Lessor's request, shall submit proof to Lessor of such contract.
Lessee agrees to keep the Premises trash-free and to pay the cost of trash
and debris removal as related to Lessee's operation. Lessee agrees to use a
trash removal service designated by Lessor and Lessee shall be billed
directly for such service. Lessee shall remove all liens of record that may
result from Lessee's performance of any repairs or maintenance required
under this Paragraph 9 and shall make all such repairs and perform all such
maintenance in a good and workmanlike manner. Lessee agrees that all such
repair and maintenance work shall be in compliance with federal, state and
local law, including, but not limited to, the Americans with Disabilities
Act.
(b) Lessee shall, at its own cost and expense, repair or replace any damage
or injury to all or any part of the Premises caused by Lessee or Lessee's
agents, employees, invitees, licensees or visitors; provided, however, if
Lessee fails to make the repairs or replacements promptly, Lessor may, at
its option, make the repairs or replacements and Lessee shall pay Lessor the
cost thereof plus an overhead charge equal to ten percent (1 0%) of the cost
of such repairs or replacements; and payment of such cost and overhead shall
be made on demand.
(c) Lessee shall not allow any damage to be committed on any portion of the
Premises, and at the termination of this Lease, by lapse of time or
otherwise, Lessee shall deliver the Premises to Lessor in as good condition
as existed at the commencement date or completion date of this Lease,
ordinary wear and tear excepted. The cost and expense of any repairs
necessary to restore the condition of the Premises shall be borne by Lessee,
and if Lessor undertakes to restore the Premises it shall have a right of
reimbursement against Lessee.
(d) All requests for repairs or maintenance that are the responsibility of
Lessor pursuant to any provision of this Lease must be made in writing to
Lessor at the address set forth below.
10. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Lessee, at Lessee's sole
expense, shall comply with all laws, rules, orders, ordinances, directions,
regulations and requirements of federal, state, county and municipal
authorities now in force or which may hereafter be in force, and with any
lawful direction of any public officer or officers, which shall impose any
duty upon the Lessor or Lessee with respect to the use, occupation or
alteration of the Premises, including without limitation, all applicable
federal, state and local laws, regulations or ordinances pertaining to air
and water quality, Hazardous Materials (as hereinafter defined), waste
disposal, air emissions and other environmental matters, all zoning and
other land-use matters, and utility availability. Lessee, at Lessee's sole
expense, shall also comply with any recorded covenants, conditions and
restrictions, regardless of when they become effective, which shall impose
such a duty upon Lessor or Lessee. Lessee shall use all reasonable efforts
to fully comply with the Americans With Disabilities Act. Lessee will comply
with the rules of the building adopted by Lessor which are set forth on a
schedule attached to this Lease and with all recommendations or requirements
of Lessor's insurance carrier relating to prevention of fires or other
hazardous conditions. Lessor shall have the right at all times to change the
rules and regulations of the building or to amend them in any reasonable
manner as may be deemed advisable for the safety, care and cleanliness, and
for the preservation of good order, of the Premises. All changes and
amendments in the rules and regulations of the building will be sent by
Lessor to Lessee in writing and shall thereafter be carried out and observed
by Lessee.
1. HAZARDOUS SUBSTANCES - GENERAL: The term "Hazardous Substances", as used
in this Lease, shall mean pollutants, contaminants, toxic or hazardous
wastes, or any other substances the use and/or the removal of which is
required or the use of which is restricted, prohibited or penalized by any
"Environmental Law," which term shall mean any
3
<PAGE>
federal, state or local law, ordinance or other statute of a governmental or
quasi-governmental authority relating to pollution or protection of the
environment. The term "Hazardous Substances" as used in this Lease shall
also mean any petroleum products or byproducts, including crude oil or any
fraction thereof and any other liquid hydrocarbon, which are not
specifically designated, defined, listed, or have no characteristics
identified in, under or pursuant to any Environmental Law. Lessee hereby
agrees that (i) no activity will be conducted on the Premises that will use
or produce any Hazardous Substance, except for such activities that are part
of the ordinary course of Lessee's business activities (the "Permitted
Activities") provided said Permitted Activities are conducted in accordance
with all Environmental Laws and have been approved in advance in writing by
Lessor; Lessee shall be responsible for obtaining any required permits and
paying any fees and providing any testing required by any governmental
agency; (ii) the Promises will not be used in any manner for the storage of
any Hazardous Substances, except for the temporary storage of such materials
that are used in the ordinary course of Lessee's business (the "Permitted
Materials") provided such Permitted Materials are properly stored ill a
manner and location meeting all Environmental Laws and approved in advance
in writing by Lessor; Lessee shall be responsible for obtaining any required
permits and paying any foes and providing any testing required by any
governmental agency; (iii) no portion of the Premises will be used as a
landfill or a dump; (iv) Lessee will not install any underground tanks of
any type; (v) Lessee will not allow any surface or subsurface conditions to
exist or come into existence that constitute, or with the passage of time
may constitute, a public or private nuisance; (vi) Lessee will not permit
any Hazardous Substances to be brought onto the Premises, except for
Permitted Materials provided such Permitted Materials arc properly handled
in a manner meeting all Environmental Laws and approved in advance in
writing by Lessor, and if so brought or found located thereon, the same
shall be immediately removed by Lessee, with proper disposal, at Lessee's
sole cost and expense, and all required cleanup procedures shall be
diligently undertaken pursuant to all Environmental Laws. Lessor or Lessor's
representative shall have the right but not the obligation to enter the
Premises for the purpose of inspecting the storage, use and disposal of
Permitted Materials to ensure compliance with all Environmental Laws. Should
it be determined, in Lessor's sole opinion, that said Permitted Materials
are at any time being improperly stored, used, or disposed of, then Lessee
shall immediately take such corrective action as requested by Lessor. Should
Lessee fail to take such corrective action within 24 hours, Lessor shall
have the right to perform such work and Lessee shall promptly reimburse
Lessor for any and all costs associated with said work. Lessor shall use its
best efforts to minimize interference with Lessee's business while
performing such work but shall not be liable for any interference caused
thereby. If at any time during or after the term of this Lease the Premises
are found to be so contaminated or subject to said conditions, Lessee shall
diligently institute proper and thorough cleanup procedures at Lessee's sole
cost.
Upon the expiration or termination of this Lease, Lessee shall render the
Promises in clean condition free and clear of any actual or threatened
presence of, or contamination, pollution, damage or injury by, any Hazardous
Substance. If any of the Permitted Activities involves storage, production
or use of a Hazardous Substance or if Lessor has evidence that Lessee has
stored, produced or used a Hazardous Substance on the Premises or has
brought onto the Premises such a substance, then at the request of Lessor,
Lessee shall provide to Lessor, at Lessee's sole cost and expense, a report
(an "Environmental Report") conducted and prepared by a competent licensed
environmental engineer or consultant acceptable to Lessor which affirms,
based on reasonable rigorous and detailed testing, that no adverse,
detrimental or harmful condition occurred or is present in, at, on, under,
about or surrounding the Premises or otherwise in connection with Lessee's
(or others at Lessee's sufferance or with Lessee's permission) operations
thereon or use or occupancy thereof and that the Premises are free and clear
of any actual or threatened contamination, pollution, damage, injury or harm
by any Hazardous Substance and any threat or risk to human health, safety
and welfare attributable to Lessee's (or others at Lessee's sufferance or
with Lessee's permission) operations thereon or use or occupancy thereof.
Such Environmental Report shall be provided to Lessor at least four (4)
weeks prior to the expiration or sooner termination of this Lease, with the
investigation upon which such Environmental Report is based occurring no
earlier than eight (8) weeks prior to the expiration or sooner termination
of this Lease.
For the purposes of applying the covenants provided under this Paragraph 11,
the Promises shall also mean, refer to and include the building, the
project, the land on which the building or project is situated including all
common areas (hereinafter, the
<PAGE>
"land"), and the soil, ground water, and surface water of the land. Lessee
agrees to indemnify and hold Lessor harmless from and against any and all
claims, demands, actions, liabilities or losses (including, without
limitation, those arising from any diminution in value of the Premises,
damages for the loss or restriction on use of rentable or usable space
or of any amenity of the Premises, damages arising from any adverse
impact on marketing or leasing of space, and sums paid in settlement of
claims), costs, expenses (including, without limitation, attorneys' fees
and environmental engineers' or consultants' fees), damages and obligations
of any nature arising from or as a result of the use of the Premises by
Lessee. The foregoing indemnification and the responsibilities of Lessee
under this Paragraph 11 shall survive the termination or expiration of this
Lease.
12. LESSOR IMPROVEMENTS: If construction to the Premises is to be performed
by Lessor prior to Lessee's occupancy, Lessor will, at its expense, commence
and/or complete the construction of the improvements constituting the
Premises in accordance with the floor plan (attached EXHIBIT A), attached
specifications, which plan, and specifications shall be approved and signed
by the parties prior to May 15, 1997 and are made a part hereof by this
reference. However, in no event shall Lessor be responsible for the cost of
Lessor Improvements in excess of $20,000. In the event the cost of Lessor
Improvements exceeds $20,000, Lessee shall pay to Lessor the overage prior
to occupancy of the Leased Premises by Lessee. Conversely, if the full
$20,000 allowance is not used prior to occupancy, the Lessee can use the
balance during the term of the lease subject to Lessor's approval. Any
changes or modifications to the approved plan and specifications shall be
made and accepted by written change order signed by Lessor and Lessee and
shall constitute an amendment to this Lease. Upon completion of the building
and other improvements in accordance with the plans and specifications,
Lessee agrees to execute and deliver to Lessor a letter accepting delivery
of the Premises. All Lessor's work contemplated under this paragraph shall
constitute improvements to the Premises which shall remain part of the
Premises upon expiration of the term of this Lease. If no improvements are
to be made or construction to be done to the Premises, Lessee hereby accepts
the Premises in the condition they are in at the beginning of this Lease.
Lessor hereby reserves the right at any time and from time to time to make
alterations or additions to, and build additions on the building in which
the Premises are contained and to build adjoining the same, and to install,
maintain, use and repair and replace pipes, ducts, conduits and wires
leading through the Premises in locations serving other parts of the
building which will not materially interfere with Lessee's use of the
Premises. Lessor also reserves the right to construct other buildings or
improvements from time to time and to make alterations thereof or additions
thereto and to build additional stories on the building or on other
buildings and to build adjoining same and to construct such parking
facilities as may be necessary or desirable.
4
13. ALTERATIONS AND IMPROVEMENTS: Lessee at its own cost and expense shall
fully equip the Premises with all lighting fixtures, furniture, operating
equipment, and any other equipment necessary for the proper operation of
Lessee's business. All fixtures installed by Lessee shall be new or
completely reconditioned. Lessee shall not do any alterations or
construction work or install any equipment without first obtaining Lessor's
written approval and consent, such consent not to be unreasonably withheld.
Lessee shall present to Lessor plans and specifications for such work at the
time approval is sought. Lessor reserves the right before approving such
work to require Lessee to furnish Lessor with evidence satisfactory to
Lessor of financial arrangements made by Lessee to promptly pay for any work
Lessee causes to be done in or on the Premises. Lessor's approval of any
plans, specifications or work drawings shall create no responsibility or
liability on the part of the Lessor for their completeness, design
sufficiency or compliance with all laws, rules and regulations of
governmental agencies or authorities. Lessee shall remove all liens of
record that may result from the performance of any alterations or additions.
Lessee agrees that all alterations, physical additions or improvements to
the Premises made by Lessee shall be completed in a good and workmanlike
manner and shall be in compliance with the Americans with Disabilities Act
(the "ADA") and, upon the request of Lessor, Lessee shall provide Lessor
with evidence reasonably satisfactory to Lessor that such work was performed
in compliance with the ADA.
<PAGE>
Any alterations, physical additions or improvements to the Premises made by
Lessee shall at once become the property of Lessor and shall be surrendered
to Lessor upon the termination of this Lease, except that the foregoing
shall not apply to moveable equipment or furniture owned by Lessee which may
be removed by Lessee at the end of the term of this Lease if Lessee is not
then in default and if such equipment and furniture is not then subject to
any other rights, liens and interests of Lessor. Lessor, at its option, may
require Lessee to remove any physical additions and/or repair any
alterations in order to restore the Premises to the condition existing at
the time the Lessee took possession, all costs of removal and/or alterations
to be borne by Lessee. If Lessee does not remove moveable equipment or
furniture or other personal property not owned by Lessor from the Premises
after Lessor's written request at the end of the term of the Lease, such
property will be deemed abandoned by Lessee and Lessor may dispose of such
property as Lessor sees fit and, if Lessor disposes of such property, Lessor
shall recover its costs incurred for the removal and disposal thereof. The
provisions of this Paragraph 1 3 shall survive the expiration or sooner
termination of this Lease.
14. CONDEMNATION: (a) If, during the term (or any extension or renewal) of
this Lease, all or a substantial part of the Premises or the building (other
than the Premises) is taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or
by purchase in lieu thereof, and the taking would prevent or materially
interfere with the use of the Premises for the purpose for which they are
then being used, this Lease shall terminate and the rent shall be abated
during the unexpired portion of this Lease effective on the date physical
possession is taken by the condemning authority. Lessee shall have no claim
to the condemnation award. In no event shall Lessor be liable to Lessee for
any business interruption or diminution in the use or the value of any
unexpired term of this Lease.
(b) If possession of a portion of the Premises is taken or condemned by
public authority for public use so as not to make the remaining portion of
the Premises unusable for the purposes leased, this Lease will not be
terminated but shall continue. In such case, the rent shall be equitably and
fairly reduced or abated for the remainder of the term in proportion to the
amount of the Premises taken. Lessee shall have no claim to the condemnation
award. In no event shall Lessor be liable to Lessee for any business
interruption or diminution in the use or the value of any unexpired term of
this Lease.
15. FIRE AND CASUALTY: (a) If the Premises or a portion of the building
other than the Premises should be totally destroyed by fire or other
casualty, or if the Premises or a portion of the building other than the
Premises should be so damaged so that rebuilding cannot reasonably be
completed within one hundred and twenty (1 20) working days after the date
of written notification by Lessee to Lessor of the destruction, this Lease
shall terminate and the rent shall be abated for the unexpired portion of
the Lease, effective as of the date of the written notification.
(b) If the Premises should be partially damaged by fire or other casualty,
and rebuilding or repairs can reasonably be completed within one hundred
twenty (120) working days from the date of written notification by Lessee to
Lessor of the destruction, this Lease shall not terminate, but Lessor may at
its sole risk and expense proceed with reasonable diligence to rebuild or
repair the building or other improvements (other than improvements which
Lessor is not obligated to insure pursuant to Paragraph 18) to substantially
the same condition in which they existed prior to the damage. If the
Premises are to be rebuilt or repaired and are untenantable in whole or in
part following the damage, and the damage or destruction was not caused or
contributed to by act or negligence of Lessee, its agents, employees,
invitees or those for whom Lessee is responsible, the rent payable under
this Lease during the period for which the Premises are untenantable shall
be adjusted to such an extent as may be fair and reasonable under the
circumstances. In the event that Lessor fails to complete the necessary
repairs or rebuilding within one hundred twenty (120) working days from the
date of written notification by Lessee to Lessor of the destruction plus the
number of days by which such repairs or rebuilding are delayed by reason of
acts of God or force majeure, Lessee may at its option terminate this Lease
by delivering written notice of termination to Lessor, whereupon all rights
and obligations under this Lease shall cease to exist.
<PAGE>
16. INSURANCE BY LESSEE: Lessee shall, during the term of the Lease,
procure at its expense and keep in force the following insurance:
(a) Commercial general liability insurance naming the Lessor as an
additional insured against any and all claims for bodily injury and
property damage, occurring in or about the Premises, arising out of
Lessee's use and occupancy of the Premises. Such insurance shall have a
combined single limit of not less than One Million Dollars ($1,000,000)
per occurrence with a Two Million Dollar ($2,000,000) aggregate limit
and excess umbrella liability insurance in the amount of Two Million
Dollars ($2,000,000). If the Lessee has other locations that it owns or
leases, the policy shall include an aggregate limit per location
endorsement. Such liability insurance shall be primary and not
contributing to any insurance available to Lessor and Lessor's
insurance shall be in excess thereto. In no event shall the limits of
such insurance be considered as limiting the liability of Lessee under
this Lease.
(b) Personal property insurance insuring all equipment, trade fixtures,
inventory, fixtures and personal property located on or in the Premises
for perils covered by the causes of loss - special form (all risk) and
in addition, coverage for
5
flood, earthquake and boiler and machinery (if applicable). Such
insurance shall be written on a replacement cost basis in an amount
equal to one hundred percent (100%) of the full replacement value of
the aggregate of the foregoing.
(c) Workers' compensation insurance in accordance with statutory law and
employers' liability insurance with a limit of not less than $1 00,000
per employee and $ 500,000 per occurrence.
(d) Such other insurance as Lessor deems necessary and prudent or required
by Lessor's beneficiaries or mortgagees of any deed of trust or
mortgage encumbering the Premises.
The policies required to be maintained by Lessee shall be with companies
rated AX or better in the most current issue of Best's Insurance Reports.
Insurers shall be licensed to do business in the state in which the Premises
are located and domiciled in the USA. Any deductible amounts under any
insurance policies required hereunder shall not exceed $1,000. Certificates
of insurance (certified copies of the policies may be required) shall be
delivered to Lessor prior to the commencement date and annually thereafter
at least thirty (30) days prior to the expiration date of the old policy.
Lessee shall have the right to provide insurance coverage which it is
obligated to carry pursuant to the terms hereof in a blanket policy,
provided such blanket policy expressly affords coverage to the Premises and
to Lessor as required by this Lease. Each policy of insurance shall provide
notification to Lessor at least thirty (30) days prior to any cancellation
or modification to reduce the insurance coverage.
17. WAIVER OF SUBROGATION: Lessor and Lessee hereby mutually waive their
respective rights of recovery against each other for any loss of, or damage
to, either party's property, to the extent that such loss or damage is
insured by an insurance policy issued by its insurer whereby the insurer
waives its rights of subrogation against the other party. The provisions of
this clause shall not apply in those instances in which waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible.
18. INSURANCE BY LESSEE: Lessor shall, during the term of this Lease,
procure and keep in force the following insurance, the cost of which shall
be deemed as Additional Rent payable by Lessee pursuant to Paragraph 3
hereinabove:
(a) Property insurance insuring the building and improvements and rental
value insurance for perils covered by the causes of loss - special
form (all risk) and in addition, coverage for flood, earthquake and
boiler and machinery (if applicable). Such coverage (except for flood
and earthquake) shall be written on a replacement cost basis equal to
ninety percent (90%) of the full insurable replacement value of the
foregoing and shall not cover Lessee's equipment, trade fixtures,
inventory, fixtures or personal property located on or in the
Premises.
<PAGE>
(b) Commercial general liability insurance against any and all claims for
bodily injury and property damage occurring in or about the building
or the land. Such insurance shall have a combined single limit of not
less than One Million Dollars ($1,000,000) per occurrence per
location with a Two Million Dollar ($2,000,000) aggregate limit.
(c) Such other insurance as Lessor deems necessary and prudent or
required by Lessor's beneficiaries or mortgagees of any deed of trust
or mortgage encumbering the Premises.
19. INDEMNIFICATION: The Lessee will indemnify and hold harmless the Lessor
from and against any and all claims arising from or caused by (i) Lessee's
occupancy of the Premises (including, but not limited to, statutory
liability and liability under workers' compensation laws), (ii) any breach
or default in the performance of any obligation on the Lessee's part to be
performed under the terms of this Lease, (iii) the buildings and
improvements located on the Premises becoming out of repair, or the leakage
of gas, oil, water or steam, or the occurrence of electricity emanating from
the Premises, or any cause whatsoever and (iv) any act or negligence of the
Lessee, or any officer, agent, employee, guest, or invitee of the Lessee.
The Lessee will indemnify and hold harmless the Lessor from and against any
and all costs, attorneys' fees, expenses and liabilities incurred with
respect to any such claim or any case, action or proceeding brought against
the Lessor by reason of any such claim. The Lessee upon notice from the
Lessor will defend the same at the Lessee's expense by counsel approved in
writing by the Lessor.
The Lessee, as a material part of the consideration to the Lessor, assumes
all risk of damage to property or injury to persons, in, upon or about the
Premises (except that the Lessee does not assume any risk of damage to the
Lessee resulting from the willful misconduct of the Lessor or its authorized
representatives) from any cause whatsoever except that which is caused by
the failure of the Lessor to observe any of the terms and conditions of the
Lease if such failure has persisted for an unreasonable period of time after
written notice of such failure.
The Lessor is not liable for any claims, costs or liabilities arising out of
or in connection with the acts or omissions of any other lessees in the
building. The Lessee waives all of its claims in respect thereof against the
Lessor.
20. QUIET ENJOYMENT: Lessor warrants that it has full right to execute and
to perform this Lease and to grant the estate demised and that Lessee, upon
payment of the required rents and performing the terms, conditions,
covenants and agreements contained in this Lease, shall peaceably and
quietly have, hold and enjoy the Premises during the full term of this Lease
as well as any extension or renewal thereof, subject to the provisions of
this Lease. Lessor shall not be responsible for the acts or omissions of any
other lessee or third party that may interfere with Lessee's use and
enjoyment of the Premises.
21. LESSOR'S RIGHT OF ENTRY: Lessor shall have the right, at all reasonable
hours, to enter the Premises for the following reasons: cleaning or making
repairs; making alterations or additions as Lessor may deem necessary or
desirable; determining Lessee's use of the Premises, determining if an act
of default under this Lease has occurred, or for the purpose of showing the
Premises to prospective purchasers, mortgagees and tenants. The right of
entry shall likewise exist for the purpose of removing placards, signs,
fixtures, alterations or additions which do not conform to this Lease or to
the rules and regulations of the building.
6
22. Lessee shall not assign this lease nor sublet all or any part of the
premise without the written consent of the Lessor, which approval shall not
be unreasonably withheld.
23. LANDLORD'S LIEN: As security for payment of rent, damages and all other
payments required to be made by this Lease, Lessee hereby grants to Lessor a
lien upon all
<PAGE>
property of Lessee now or subsequently located upon the Premises. If Lessee
abandons or vacates any substantial portion of the Premises or is in default
in the payment of any rentals, damages or other payments required to be made
by this Lease or is in default of any other provision of this Lease, Lessor
may enter upon the Premises, by picking or changing locks if necessary, and
take possession of all or any part of the personal property, and may, on
behalf of Lessee, sell all or any part of the personal property at a public
or private sale, in one or successive sales, with or without notice, to the
highest bidder for cash, delivering to the highest bidder all of Lessee's
title and interest in the personal property sold to him. The proceeds of the
sale of the personal property shall be applied by Lessor toward the
reasonable costs and expenses of the sale, including attorney's fees, and
then toward the payment of all sums then due by Lessee to Lessor under the
terms of this Lease; any excess remaining shall be paid to Lessee or any
other person entitled thereto by law.
24. UNIFORM COMMERCIAL CODE: This Lease is intended as and constitutes a
security agreement within the meaning of the Uniform Commercial Code of the
state in which the Premises are situated and, Lessor, in addition to the
rights prescribed in this Lease, shall have all of the rights, titles, liens
and interests in and to Lessee's property now or hereafter located upon the
Premises which are granted a secured party, as that term is defined under
the Uniform Commercial Code, to secure the payment to Lessor of the various
amounts provided in this Lease. Lessee will on request execute and deliver
to Lessor a financing statement for the purpose of perfecting Lessor's
security interest under this Lease or Lessor may file this Lease or a copy
thereof as a financing statement.
25. DEFAULT BY LESSEE: The following shall be deemed to be events of
default by Lessee under this Lease:
(a) Lessee shall fail to pay when due any installment of rent or any other
payment required pursuant to this Lease;
(b) Lessee shall abandon any substantial portion of the Premises;
(c) Lessee shall fail to comply with any term, provision or covenant of
this Lease, other than the payment of rent, and the failure is not
cured within five (5) days after written notice to Lessee;
(d) Lessee shall file a petition or be adjudged bankrupt or insolvent under
federal bankruptcy law or any similar law or statute of the United
States or any state; or a receiver or trustee shall be appointed for
all or substantially all of the assets of Lessee; or Lessee shall make
a transfer in fraud of creditors or shall make an assignment for the
benefit of creditors; or
(e) Lessee shall do or permit to be done any act which results in a lien
being filed against the Premises or the building and/or project of
which the Premises are a part.
26. REMEDIES FOR LESSEE'S DEFAULT: Upon the occurrence of any event of
default set forth in this Lease, Lessor shall have the option to pursue any
one or more of the following remedies without any notice or demand:
(a) Terminate this Lease, in which event Lessee shall immediately surrender
the Premises to Lessor, and if Lessee fails to surrender the Premises,
Lessor may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the
Premises, by picking or changing locks if necessary, and lock out, expel, or
remove Lessee and any other person who may be occupying all or any part of
the Premises without being liable for prosecution of any claim for damages.
Lessee agrees to pay on demand the amount of all loss and damage which
Lessor may suffer by reason of the termination of the Lease under this
subparagraph, whether through inability to relet the Premises on
satisfactory terms or otherwise.
(b) Enter upon and take possession of the Premises, by picking or changing
locks if necessary, and lock out, expel or remove Lessee and any other
person who may be occupying all or any part of the Premises without being
liable for any claim for damages, and relet the Premises on behalf of Lessee
and receive directly the rent by reason of the reletting. Lessee agrees to
pay Lessor on demand any deficiency that may arise by reason of any
reletting of the Premises; further, Lessee agrees to reimburse Lessor for
any expenditures made by it for remodeling or repairing in order to relet
the Premises.
<PAGE>
(c) Enter upon the Premises, by picking or changing locks if necessary,
without being liable for prosecution of any claim
7
for damages, and do whatever Lessee is obligated to do under the terms of
this Lease. Lessee agrees to reimburse Lessor on demand for any expenses
which Lessor may incur in effecting compliance with Lessee's obligations
under this Lease; further, Lessee agrees that Lessor shall not be liable for
any damages caused by the negligence of Lessor or otherwise resulting to
Lessee from effecting compliance with Lessee's obligations under this
subparagraph.
27. WAIVER OF DEFAULT OR REMEDY: Failure of Lessor to declare an event of
default immediately upon its occurrence, or delay in taking any action in
connection with an event of default, shall not constitute a waiver of the
default, but Lessor shall have the right to declare the default at any time
and take such action as is lawful or authorized under this Lease. Pursuit of
any one or more of the remedies set forth in Paragraph 26 above shall not
preclude pursuit of any one or more of the other remedies provided elsewhere
in this Lease or provided by law, nor shall pursuit of any remedy provided
constitute forfeiture or waiver of any rent or damages accruing to Lessor by
reason of the violation of any of the terms, provisions or covenants of this
Lease. Failure by Lessor to enforce one or more of the remedies provided
upon an event of default shall not be deemed or construed to constitute a
waiver of the default or of any other violation or breach of any of the
terms, provisions and covenants contained in this Lease.
28. LESSOR'S LIABILITY: In the event of any liability of Lessor, Lessee
agrees to look solely to Lessor's interest in the building or the project,
the lease of the building or of the project, and the Premises for the
satisfaction of any right or remedy of Lessee including the collection of a
judgment (or other judicial process) requiring the payment of money by
Lessor, and no other property or assets of Lessor shall be subject to levy,
execution, attachment, or other enforcement procedure for the satisfaction
of Lessee's remedies under or with respect to the Lease, the relationship of
Lessor and Lessee hereunder, or Lessee's use and occupancy of the demised
premises, or any other liability of Lessor to Lessee.
29. ELECTION OF ARBITRATION: Lessor and Lessee shall have the right to elect
that any controversy or claim arising out of or relating to this Lease, or
the breach thereof, be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered in such an arbitration may be entered in
any court having jurisdiction thereof.
30. ACTS OF GOD: Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation
is delayed, caused by or prevented by an act of God or force majeure.
31. ATTORNEY'S FEES: In the event Lessee defaults in the performance of any
of the terms, covenants, agreements or conditions contained in this Lease
and Lessor places in the hands of an attorney the enforcement of all or any
part of this Lease or the collection of any rent due or to become due or
recovery of the possession of the Premises, then in any of such events,
Lessee agrees to pay Lessor reasonable attorney's fees for the services of
the attorney, whether suit is actually filed or not. In no event shall the
attorney's fees be less than fifteen percent of the outstanding balance owed
by Lessee to Lessor. Attorney fees will be paid the Lessor only if the
Lessee is deemed to be at fault in arbitration or by a court of law.
32. HOLDING OVER: In the event of holding over by Less after the expiration
or termination of this Lease, the hold over shall be as a tenant at will and
all of the terms and provisions of this Lease shall be applicable during
that period, except that Lessee shall pay Lessor as rental for the period of
such hold over an amount equal to one and one-half the rent which would have
been payable by Lessee had the hold over period been a part of the original
term of this Lease. Lessee agrees to vacate and deliver the Premises to
Lessor upon Lessee's receipt of notice from Lessor to vacate.
<PAGE>
The rental payable during the hold over period shall be payable to Lessor on
demand. No holding over by Lessee, whether with or without consent of
Lessor, shall operate to extend this Lease except as otherwise expressly
provided.
33. RIGHTS OF FIRST MORTGAGEE: This Lease is and shall be subject and
subordinate to all ground or underlying leases which may now or hereafter
affect the building and to all mortgages and deeds of trust which may now or
hereafter affect such leases or the building, and to all renewals,
refinancings, modifications, replacements and extensions thereof (each, a
'superior instrument'), and to any lien created thereby. Lessee shall
promptly execute and deliver any certificate that the holder of a superior
instrument (the 'Holder') may reasonably request to confirm the
subordination and Lessor is hereby irrevocably designated as
attorney-in-fact for Lessee to deliver any such certificate to the Holder in
the name, place and stead of Lessee. In the event the Holder succeeds to the
interest of Lessor under this Lease, it shall not (i) have any liability for
refusal or failure to perform or complete any work required to be done by
Lessor under this Lease or any work letter attached hereto, to prepare the
Premises for Lessee's occupancy, or otherwise to prepare the Premises for
occupancy in accordance with the provisions of this Lease, or have any
liability under any guaranty of indemnification with respect to such work,
(ii) be liable for any act, omission or default of any prior Lessor under
this Lease, (iii) be subject to any offsets, claims or defenses which shall
have theretofore accrued to Lessee against any prior Lessor, (iv) be bound
by any rent or additional rent which the Lessee might have paid to any prior
Lessor for more than one month in advance, (v) be bound by any modification,
amendment, abridgment, cancellation or surrender of this Lease to which the
Holder shall not have consented in writing. In the case of any foreclosure
or conveyance by deed in lieu of foreclosure under any superior instrument,
the rights and remedies of Lessee in respect of any obligations of any
successor Lessor under this Lease shall be nonrecourse as to any assets of
such successor Lessor other than its equity in the building. In the event
the Holder shall succeed to the interest of Lessor under this Lease, whether
through possessory or foreclosure action or deed in lieu of foreclosure,
this Lease shall, at the option of the Holder, not be terminated or affected
by such foreclosure or any of such proceedings and Lessee shall attorn to
and recognize the Holder as its Lessor upon the terms, covenants, conditions
and agreements contained in this Lease to the same extent and in the same
manner as if this Lease was a direct lease between the Holder and Lessee,
except as otherwise provided above.
34. ESTOPPEL CERTIFICATES: Lessee agrees to furnish promptly, from time to
time, upon request of Lessor or any mortgagee, an estoppel certificate to
Lessor, any person designated by Lessor or any mortgagee, in the form
attached hereto as Exhibit B.
35. FINANCIAL INFORMATION: Lessee agrees to submit to Lessor, within 90 days
from Lessee's fiscal year end, audited annual financial statements for the
previous fiscal year. If Lessee does not have annual financial statements
which are audited, Lessee agrees to submit to Lessor unaudited annual
financial statements within the same time frame.
8
36. Deleted.
37. SUCCESSORS: This Lease shall be binding upon and inure to the benefit of
Lessor and Lessee and their respective heirs ' personal representatives,
successors and assigns. It is hereby covenanted and agreed that should
Lessor's interest in the Premises cease to exist for any reason during the
term of this Lease, then notwithstanding the happening of such event this
Lease nevertheless shall remain unimpaired and in full force and effect and
Lessee hereunder agrees to attorn to the then owner of the Premises.
38. RENT TAX: If applicable in the jurisdiction where the Premises are
situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county
or other governmental body having authority, such payments to be in addition
to all other payments required to be paid to Lessor by Lessee under the
terms of this Lease. Any such payment shall be paid concurrently with the
payment of the rent upon which the tax is based as set forth above.
<PAGE>
39. DEFINITIONS: The following definitions apply to the terms set forth
below as used in this Lease:
(a) "Abandon" means the vacating of all or a substantial portion of the
Premises by Lessee, whether or not Lessee is in default of the rental
payments due under this Lease.
(b) An "act of God" or "force majeure" is defined for purposes of this Lease
as strikes, lockouts, sit-downs, material or labor restrictions by any
governmental authority, unusual transportation delays, riots, floods,
washouts, explosions, earthquakes, fire, storms, weather (including wet
grounds or inclement weather which prevents construction), acts of the
public enemy, wars, insurrections and any other cause not reasonably within
the control of Lessor and which by the exercise of due diligence Lessor is
unable, wholly or in part, to prevent or overcome.
(c) The "commencement date" shall be the date set forth in Paragraph 2. The
"commencement date" shall constitute the commencement of this Lease for all
purposes, whether or not Lessee has taken possession.
(d) The "completion date" shall be the date on which the improvements
erected and to be erected upon the Premises shall have been substantially
completed in accordance with the plans and specifications described in
Paragraph 12. Lessor shall use its reasonable efforts to establish the
"completion date" as the date set forth in Paragraph 2. In the event that
the improvements have not in fact been completed as of that date, Lessee
shall notify Lessor in writing of its objections. Lessor shall have a
reasonable time after delivery of the notice in which to take such
corrective action as may be necessary, and shall notify Lessee in writing as
soon as it deems such corrective action has been completed so that the
improvements are completed and ready for occupancy. Taking of possession by
Lessee shall be doomed to establish conclusively that the improvements have
been completed and that the Premises are in good and satisfactory condition,
as of the date possession was so taken by Lessee, except for latent defects,
if any.
(e) "Real Property tax" means all school, city, state and county taxes and
assessments including special district taxes or assessments.
(f) "Square feet" or "square foot" as used in this Lease includes the area
contained within the space occupied by Lessee.
(g) "Lessor" as used in this Lease means only the owner, or the mortgagee in
possession, for the time being of the building or the land on which the
building is situated (the "land") (or the owner of a lease of the building
or of the land and the building), so that in the event of any transfer of
title to said land and building or said lease, or in the event of a lease of
the building, or of the land and building, upon notification to Lessee of
such transfer or lease the said transferee Lessor shall be and hereby is
entirely freed and relieved of all existing or future covenants, obligations
and liabilities of Lessor hereunder.
9
40. MISCELLANEOUS: The captions appearing in this lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of such paragraph. If any provision of this Lease shall ever
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision of this Lease, and such other provisions
shall continue in full force and effect.
41. NOTICE: (a) All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address setforth below.
(b) All payments required to be made by Lessor to Lessee shall be payable to
Lessee at the address set forth below, or
at any other address within the United States as Lessee may specify from time
to time by written notice.
(c) Any notice or document required or permitted to be delivered by this Lease
shall be deemed to be delivered (whether or not actually received) when
deposited in the United
<PAGE>
States Mail, or hand delivered, postage prepaid, certified mail, return receipt
requested, addressed to the parties at the respective addresses set out below:
LESSOR: LESSEE:
Realmark Property Investors Ltd. V Digital Recorders, Inc.
c/o Property Resources P.O. Box 14068
P.O. Box 19206 Research Triangle Park, NC 27709-4068
Raleigh, NC 27619
42. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: IT IS EXPRESSLY AGREED BY
LESSEE, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS
LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE
ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE AND WERE NO VERBAL
REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR
PROMISES PERTAINING TO THIS LEASE OR THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC
DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. LESSOR AND LESSEE
EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF
MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY
OTHER KIND ARISING OUT OF THIS LEASE AND THERE ARE NO WARRANTIES WHICH EXTEND
BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. IT IS LIKEWISE AGREED THAT
THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN
INSTRUMENT IN WRITING SIGNED BY BOTH LESSOR AND LESSEE. THE FOLLOWING
DOCUMENTS ARE ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCES:
43. OTHER PROVISIONS:
Signed at Suite 1000, 4900 Prospectus Dr, RTP, this day of April 24, 1997
10
LESSOR: LESSEE:
REALMARK PROPERTY INVESTORS LTD.
PARTNERSHIP V DIGITAL RECORDERS, INC.
By: /s/ David M. Shipston By: /s/ J. Phillips L. Johnston
David M. Shipston, Vice-President J. Phillips L. Johnston, President
& Chief Executive Officer
(Corporate Seal) (Corporate Seal)
Attest: Attest:
By: ____________________________ By: /s/ Jonathan E. Kennedy
_________________________ Secretary Jonathan E. Kennedy, Secretary
<PAGE>
Exhibit B
Form of Estoppel Certificate
The undersigned ________________________________________________________________
("Lessee"), in consideration of One Dollar (S 1.00) and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
hereby certifies to ____________________________________________________________
("Lessor"), (the holder or prospective holder of any mortgage or deed of trust
covering the property] (the "Mortgagee") and (the vendee under any contract of
sale with respect to the Property] (the "Purchaser") as follows:
1. Lessee executed and exchanged with Lessor a certain lease (the
"Lease"), dated _____________, 19__, covering the floor shown attached on the
plan annexed hereto as Exhibit A (the "leased premises") in the building located
in the _______________________ known as and by the street number
_____________________________(the "Property"), for a term to commence (or which
commenced) on _______________________ 19__, and to expire on
__________________________.
2. The Lease is in full force and effect and has not been
modified, changed, altered or amended in any respect.
3. Lessee has accepted and is now in possession of the leased
premises and is paying the full rental under the Lease.
4. The base rental payable under the Lease is $_______________ per
month. The base rental and all additional rent and other charges required to be
paid under the Lease have been paid for the period up to and including
_______________.
5. No rent under the Lease has been paid for more than thirty
(30) days in advance of its due date.
6. All work required under the Lease to be performed by Lessor
has been completed to the full satisfaction of Lessee.
7. There are no defaults existing under the Lease on the part of
either Lessor or Lessee.
8. There is no existing basis for Lessee to cancel or terminate the
Lease.
9. As of the date hereof, there exists no valid defense, offsets,
credits, deductions in rent or claims against the enforcement of any of the
agreements, terms, covenants or conditions of the Lease.
10. Lessee affirms that any disputes with Lessor giving rise to a claim
against Lessor is a claim under the Lease only and is subordinate to the rights
of the holder of all mortgages or deeds of trust of the fee or leasehold of the
building and shall be subject to all the terms, conditions and provisions
thereof. Any such claims are not offsets to or defense against enforcement of
the Lease.
<PAGE>
11. Lessee affirms that any dispute with Lessor giving rise to a claim
against Lessor is a claim under the Lease only and is subordinate to the rights
of the Purchaser pursuant to any contract of sale. Any such claims are not
offsets to or defense against enforcement of the Lease.
12. Lessee affirms that any claims pertaining to matters in existence at
the time Lessee took possession and which are known to or which were then
readily ascertainable by Lessee shall be enforced solely by money judgment
and/or specific performance against Lessor named in the Lease and may not be
enforced as an offset to or defense against enforcement of the Lease.
13. There are no actions, whether voluntary or otherwise,
pending against Lessee under the bankruptcy laws of the United States or any
state thereof.
14. There has been no material adverse change in Lessee's
financial condition between the date hereof and the date of the execution and
delivery of the Lease.
15. Lessee acknowledges that Lessor has informed Lessee that an
assignment of Lessor's interest in the Lease has been or will be made to the
Mortgagee and that no modification, revision, or cancellation of the Lease or
amendments thereto shall be effective unless a written consent thereto of the
Mortgagee is first obtained, and that until further notice payments under the @e
may continue as heretofore.
16. Lessee acknowledges that Lessor has informed Lessee that Lessor has
entered into a contract to sell the Property to Purchaser and that no
modification, revision or cancellation of the Lease or amendments thereto shall
be effective unless a written consent thereto of the Purchaser has been
obtained.
17. This certification is made to induce Purchaser to consummate a
purchase of the Property and to induce Mortgagee to make and maintain a mortgage
loan secured by the Property and/or to disburse additional funds to Lessor under
the terms of its agreement with Lessor, knowing that said Purchaser and
Mortgagee rely upon the truth of this certification in making and/or maintaining
such purchase or mortgage or disbursing such funds, as applicable.
-1-
18. Except as modified herein, all other provisions of the
Lease are hereby ratified and confirmed.
By:____________________________________
LESSEE
____________________________________
DATE
-2-
<PAGE>
EXHIBIT C
RENT SCHEDULE
Base monthly rental shall be paid in accordance with paragraph 3 of this Lease
and upon the following schedule:
Base
Period Rate/SF/Year Monthly Rental
Months 1 and 2: Rent Abated
Months 3 through 26: $8.90 $4,943.21
Months 27 through 38: $9.17 $5,093.17
Months 39 through 50: $9.44 $5,243.13
Months 51 through 62: $9.73 $5,404.20
<PAGE>
RULES AND REGULATIONS
1. Lessor agrees to furnish Lessee two keys without charge. Additional keys
will be furnished at a nominal charge.
2. Lessee will refer all contractors, contractor's representatives and
installation technicians rendering any service on or to the leased
premises for Lessee, to Lessor for Lessor's approval and supervision
before performance of any contractual service. 'This provision shall apply
to all work performed on or about the leased premises or project,
including installation of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature-affecting floors,
walls, woodwork, trim, windows, ceilings and equipment or any other
physical portion of (he premises or project. Lessor may charge a
supervisory fee equal to ten percent (10%) of the cost of all such
services.
3. Lessee shall not at any time occupy any part of the leased premises or
project as sleeping or lodging quarters.
4. Lessee shall not place, install or operate on the leased premises or in
any part of the building, any engine, stove or machinery, or conduct
mechanical operations or cook thereon or therein, or place or use in or
about the leased premises or project any explosives, gasoline, kerosene,
oil, acids, caustics, or any flammable, explosive, or hazardous material
without written consent of Lessor.
5. Lessor will not be responsible for lost or stolen personal property,
equipment, money or jewelry from the leased premises or the project
regardless of whether such loss occurs when the area is locked against
entry or not.
6. No dogs, cats, fowl, or other animals shall be brought into or kept in or
about the leased premises or project.
7. Employees of Lessor shall not receive or carry messages for or to any
Lessee or other person, not contract with or render free or paid services
to any Lessee or Lessee's agents, employees or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries, passages,
doors, elevators, hallways or stairways shall be blocked or obstructed, or
any rubbish, litter, trash, or material of any nature will be placed,
emptied or thrown into these areas or such area be used by Lessee's
agents, employees or invitees at any time for purposes inconsistent with
their designation by Lessor.
9. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting to them from misuse, or by the defacing or injury of any part of
the building shall be home by the person who shall occasion it. No person
shall waste water by interfering with the faucets or otherwise.
10. No person shall disturb occupants of the building by the use of any
radios, record players, tape recorders, musical instruments, the making of
unseemly noises, or any unreasonable use.
11. Nothing shall be thrown out of the windows of the building or down the
stairways or other passages.
12. Lessee shall notify the Building Manager when safes or other heavy
equipment are to he taken into or out of the Building. Moving of such
items shall be done under the supervision of the Building Manager, after
receiving written permission from him.
<PAGE>
Lessor agrees that there will be no charge for such supervision if such
moving occurs during normal working hours.
13. Lessor shall have the power to prescribe the weight and position of safes
or other heavy equipment, which may overstress the floor. All damage done
to the Building by the improper placing of heavy items which overstress
the floor will be repaired at the sole expense of Lessee.
14. No additional locks shall be placed upon any doors without the prior
written consent of Lessor. All necessary keys shall be furnished by
Lessor, and the same shall be surrendered upon termination of this Lease,
and Lessee shall then give Lessor or his agent an explanation of the
combination of all locks on the doors or vaults.
15. Corridor doors, when not in use, shall be kept closed.
16. Lessee shall comply with parking rules and regulations as may be posted
and distributed from time to time.
17. Vending machines or dispensing machines of any kind will not be placed in
the leased premises by Lessee unless prior written approval has been
obtained from Lessor.
18. Prior written approval, which shall be at Lessor's sole discretion, must
be obtained for installation of any solar screen material, window shades,
blinds, drapes, awnings, window ventilators, or other similar equipment
and any window treatment of any kind whatsoever. Lessor will control all
internal lighting that may be visible from the exterior of the Building
and shall have the right to change any unapproved lighting, without notice
to Lessee, at Lessee's expense.
19. Lessee shall be required to furnish and install a chair mat for each desk
chair in the leased premises.
20. The building shall be closed for the following legal holidays: New Year's
Day, the Fourth of July,Labor Day, Thanksgiving Day and Christmas Day.
-1-
TOWER SECTION (IF APPLICABLE)
21. Movement in or out of the building of furniture or office supplies and
equipment, or dispatch or receipt by Lessee of any merchandise or
materials, which require use of elevators or stairways, or movement
through the building entrances or lobby, shall be restricted to hours
designated by Lessor. All such movement shall be under supervision of
Lessor and carried out in the manner agreed between Lessee and r by
prearrangement before performance. Such prearrangement will include
determination by Lessor of time, method, and routing of movement and
limitations imposed by safety or other concerns which may prohibit any
article, equipment or any other item from being brought into the
building. @e assumes, and shall indemnify Lessor against, all risks and
claims of damage to persons and properties arising in connection with any
said movement.
22. Lessor will provide and maintain an alphabetical directory board in the
ground floor lobby of the building and allot one name strip for Lessee.
23. Lessor shall not be liable for any damages from the stoppage of elevators
for necessary or desirable repairs or improvements or delays of any sort
of duration in connection with the elevator service.
It is Lessor's desire to maintain in the building or project the highest
standard of dignity and good taste consistent with comfort and convenience for
Lessees. Any action or condition not meeting this high standard should be
reported directly to Lessor. Your cooperation will be mutually beneficial and
sincerely appreciated. r reserves the right to make such other and further
reasonable rules and regulations as in Its judgment may from time to time be
necessary, for the safety, care and cleanliness of the leased premises, and
for the preservation of good order therein.
-2-
<PAGE>
Exhibit 10.21.1
_________________________________________WACHOVIA________
Note and Security Agreement
Date July 24, 1997 $2,500,000.00
FOR VALUE RECEIVED, the undersigned (hereinafter called the "Borrower") hereby
promises to pay to the order of WACHOVIA BANK, N.A., f/k/a WACHOVIA BANK OF
NORTH CAROLINA, N.A. (hereinafter called the "Lender") at its office where
borrowed, in immediately available funds, the sum of Two Million Five Hundred
Thousand and No/One Hundred Dollars, together with any unpaid interest hereon
from date of advance, in accordance with the terms contained in this Note and
Security Agreement (hereinafter referred to as the "Note"). The optional
provisions applicable to this Note are checked below.
Repayment:
__ One payment in full of principal and unpaid interest due
__ On Demand ____________________________________
__ Payments of $ ______________beginning____________________and
thereafter_________________
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________until______________
when the entire principal amount then outstanding and all accrued but unpaid
interest shall be paid in full.
X On Demand the principal amount set forth above or the unpaid principal amount
of all advances which the Lender actually makes hereunder to the Borrower,
whichever amount is less. Each advance and each payment made on account of the
principal thereof, shall be evidenced on an attachment hereto; provided,
however, any such notation or the failure of the Lender or other holder to make
any such notation shall not limit or otherwise affect the obligation of the
Borrower with respect to repayment of all advances actually made hereunder. This
Note and any attachment hereto shall be used to record the outstanding principal
balance advanced hereunder until it is surrendered to the Borrower by the
Lender, and it shall continue to be used even though there may be periods prior
to such surrender when no amount of principal or interest is owing hereunder. If
advances of the principal amount hereof are to be made by Lender to the Borrower
after the date of this Note, Lender, at its sole discretion, is hereby
authorized to make such advances under this Note upon telephonic or written
communication of a borrowing request from any person representing himself or
herself to be the Borrower or, in the event the Borrower is a partnership or
corporation, a duly authorized officer or representative of Borrower.
Interest:
Payable: X in arrears; __ in advance.
X in addition to the payments described above; __ included in the
payments described above.
Payable at the rate per annum of: __ Prime Rate ____ %;
__ ____% of Prime Rate; __ ___% Fixed;
__ Those rates which may be offered from time to time by the Lender and
agreed to by the Borrower and so noted by the Lender on an attachment
hereto. In the event of a good faith dispute among the parties to
this Note as to rate under this rate option, the rate shall be the
Prime Rate, adjusted for any changes in the Prime Rate as of the day
such Prime Rate changes;
X The rate(s) set forth in Schedule 1 attached to this Note and
incorporated herein by reference;
__ Those rates which have been offered by the Lender to the Borrower in
the Loan Agreement or Commitment Letter checked below, the provisions
of which shall determine such rates, the procedure for the selection
of such rates and the time periods for which such rates shall apply.
In no case shall interest exceed the maximum rate permitted by applicable law.
To the extent not prohibited by law, a late charge not to exceed 4% of the
payment amount shall be assessed on any payment remaining unpaid on the
fifteenth day after the payment due date or 30 days in the case interest is
payable in advance.
If the interest is based upon the Prime Rate, such interest rate will be
adjusted on: __ The day the Prime Rate changes; __ Other ____________________
Due: __ On principal payment dates; X Other quarterly beginning October 27,
1997
Interest will be calculated on the basis of X A year of 360 days and paid for
the actual number of days elapsed;
__ Other _______________________
After demand or maturity (whether by acceleration or otherwise), as
applicable, interest on any unpaid balance hereof shall be payable on demand
at a rate per annum equal to 150% of the Prime Rate, or if greater, 2% above
the rate applicable prior to demand or maturity, adjusted for any changes in
the Prime Rate as of the day such Prime Rate changes, not to exceed the
maximum rate permitted by applicable law.
As used herein, "Prime Rate' refers to that interest rate so denominated and
set by the Lender from time to time as an interest rate basis for borrowings.
The Prime Rate is one of several interest rate bases used by the Lender. The
Lender lends at interest rates above and below the Prime Rate.
All payments on this Note shall be applied first to accrued interest, then to
principal, and then to late charges.
__ The terms and conditions in a Loan Agreement dated ______________________
between the parties hereto, as the same may be amended from time to time,
shall be considered a part hereof to the same extent as if written
herein.
X The terms and conditions in a Commitment Letter dated July 23, 1997 from
the Lender to the Borrower, as the same may be amended, extended or
replaced from time to time, shall be considered a part hereof to the same
extent as if written herein.
To secure the indebtedness evidenced by this Note, Together with any extensions,
modifications, or renewals thereof, in whole or in part, as well as all other
indebtedness, obligations and liabilities of the Borrower to the Lender or to
any of Lender's Affiliates (as hereinafter deemed), now existing or hereafter
incurred or arising (hereinafter sometimes referred to collectively as the
'Obligations'), except for other indebtedness, obligations and liabilities owing
to Lender or Lender's Affiliates that constitute open-end credit under, or are
subject to, the disclosure requirements of the Truth-in-Lending Act and Federal
Reserve Board Regulation Z or any applicable state consumer protection laws
(hereinafter collectively referred to as "Consumer Debt"), the Borrower does
hereby grant to the Lender and to such Lender's Affiliate (as the case may be) a
security interest in and security title to, and does hereby assign, pledge,
transfer and convey to Lender and such Lender's Affiliate (as the case may be),
the following described property:
Collateral as described in General Security Agreement dated July 24, 1997
between Borrower and Lender
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
whether now owned or hereafter acquired, together with any and all additions and
accessions thereto or replacements thereof, returned or unearned premiums from
any insurance written in connection with this Note and any products arid/or
proceeds of any of the foregoing. As used herein, "Lender's Affiliates" means
any entity or entities now or hereafter directly or indirectly controlled by
Wachovia Corporation or any successor thereto. In no event, however, shall the
Lender or the Lender's Affiliates (as the case may be) have a security interest
in any goods acquired by the Borrower for personal, family or household purposes
more than 10 days after the date of this Note, unless such goods are added to or
attached to the Collateral (as hereinafter defined). In addition, to the extent
not prohibited by law, the Borrower hereby grants to the Lender and to such
Lender's Affiliate (as the case may be) a security interest in and security
title to, and does hereby assign, pledge, transfer and convey to Lender and such
Lender's Affiliate (as the case may be), (i) all other property of the Borrower
of every kind or description now or hereafter in the possession or control of
the Lender or of any of Lender's Affiliates, exclusive of any such property in
the possession or control of the Lender or any of Lender's Affiliates as a
fiduciary other than as agent, for any reason including, without limitation, all
cash, stock or other dividends and all proceeds thereof, and all rights to
subscribe for securities incident thereto and any substitutions or replacements
for, or other rights in connection with, any of the Collateral and (ii) any
balance or deposit accounts of the Borrower, whether such accounts be general or
special, or individual or multiple party, and upon all drafts, notes, or other
items deposited for collection or presented for payment by the Borrower with the
Lender or the Lender's Affiliates (as the case may be), and the Lender and the
Lender's Affiliates (as the case may be) may at any time, without demand or
notice, appropriate and apply any of such to the payment of any of the
Obligations, whether or not due, with the exception of Consumer Debt. All
property described in this paragraph, in which the Borrower has granted to the
Lender and the Lender's Affiliates a security interest or security title
hereunder, is herein collectively referred to as the 'Collateral.' If, with
respect to any Collateral in the form of investment securities, a stock dividend
is declared or any stock split-up made or right to subscribe issued, all the
certificates for the shares representing such stock dividend or split-up or
right to subscribe will be immediately delivered, duly endorsed, to the Lender
as additional Collateral. The Lender and the Lender's Affiliates (as the case
may be) shall be deemed to have possession, control and custody of any
Collateral actually in transit to it or to any of its officers or agents.
<PAGE>
If at any time the Collateral pledged as security for any of the Obligations
shall be or become unsatisfactory to the Lender or should the Lender deem itself
insecure, the Borrower will immediately furnish such further property to be held
by the Lender as if originally pledged as Collateral hereunder or make such
payment on account as will he satisfactory to the Lender.
The Lender shall have, but shall not be limited to, the following rights, each
of which may be exercised at any time: (i) to transfer this Note and the
Collateral, and any transferee shall have all the rights of the Lender hereunder
and the Lender shall be thereafter relieved from any liability with respect to
any Collateral so transferred: (ii) to transfer the whole or any part of the
Collateral in the name of itself or its nominees; (iii) to vote any investment
securities forming a part of the Collateral; (iv) to notify the obligors on any
Collateral to make payment to the Lender of any amounts due thereon; (v) to
execute at any time in the name of any party hereto and to file financing
statements covering any of the Collateral; (vi) to receive or take control of
any income or other proceeds of any of the Collateral; and (vii) to request and
receive current financial information from any party liable for all or any part
of the Obligations.
Furthermore, the Lender shall have the right to require Borrower to maintain
insurance on such of the Collateral, with such companies, in such amounts and
against such risks as Lender may request. All policies of insurance will specify
that Lender is an additional insured as its interest may appear and shall
provide that such insurance shall not be cancelable by the Borrower or the
insurer without at least 10 days advance written notice to Lender. In the event
any or all insurance hereinbefore provided is canceled, any returned premium
thereon shall be payable to Lender and may be applied by Lender to any part of
the Obligations, whether matured or unmatured. Lender is authorized to receive
the proceeds of any insurance loss and at the option of Lender shall apply such
proceeds toward either the repair or replacement of the Collateral or the
payment of the Obligations secured hereby. If the Borrower fails to maintain
such insurance, Lender may, at its option, but without obligation, purchase such
insurance or pay any premium owing and any such paid by Lender shall be payable
by Borrower on demand by Lender or at Lender's option may be added to any of the
Obligations.
Upon (i) any failure of any Obligor (which term shall include the Borrower and
each endorser, surety or guarantor of this Note) to pay any of the Obligations
when due or to observe or perform any agreement, covenant or promise hereunder
or in any other agreement, note, instrument or certificate of any Obligor to the
Lender, or to any of Lender's Affiliates, now existing or hereafter executed in
connection with any of the Obligations; including, but not limited to, a loan
agreement, if applicable, and any agreement guaranteeing payment of any of the
Obligations; (ii) any default of any Obligor in the payment or performance
of any other liabilities, indebtedness or obligations to any
other creditor or to allow or permit any other liabilities, indebtedness or
obligations to any other creditor to be accelerated; (iii) any failure of any
Obligor to furnish Lender current financial information upon request; (iv) any
failure of any Obligor or any pledgor of any security interest in the Collateral
(the 'Pledgor') to observe or perform any agreement, covenant or promise
contained in any agreement, instrument or certificate executed in connection
with the granting of a security interest in property to secure the Obligations;
(v) any warranty, representation or statement made or furnished to the Lender by
or on behalf of any Obligor or Pledgor in connection with the extension of
credit evidenced by this Note proving to have been false in any material respect
when made or furnished; (vi) any loss, theft, substantial damage, destruction,
sale, foreclosure of or encumbrance to any of the Collateral, or the making of
any levy, seizure or attachment thereof or thereon or the rendering of any
judgment or lien or garnishment or attachment against any Obligor or his
property, whether actual or threatened; (vii) the death, dissolution, change in
control, termination of existence, insolvency, business failure, or appointment
of a receiver of any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding under any bankruptcy or
insolvency laws, state or federal, by or against, the Borrower or any other
Obligor; (viii) any discontinuance or termination of any guaranty of any of the
Obligations by a guarantor; or (ix) the Lender deeming itself insecure;
thereupon, or at any time thereafter, the Lender at its option may terminate any
obligation to extend any additional credit or make any other financial
accommodation to the Borrower and/or may declare all of the Obligations to be
immediately due and payable, all without notice or demand, and shall have in
addition to and independent of the right to declare the Obligations to be due
and payable mid any other rights of the Lender under this Note or any other
agreement with any Obligor or any Pledgor, the remedies of a secured party under
the Uniform Commercial Code of North Carolina, as amended from time to time (the
'Code'), including, without limitation thereto, the right to take possession of
the Collateral, or the proceeds thereof and to sell or otherwise dispose
thereof, and for this purpose, to sign in the name of any Obligor or Pledgor any
transfer, conveyance or instrument necessary or appropriate in order for the
Lender to sell or dispose of any of the Collateral, and the Lender may, so far
as the Borrower can give authority therefor, enter upon the premises on which
the Collateral or any part thereof may be situated and remove the same
therefrom, without being liable in any way to any Obligor on account of entering
any premises. The Lender may require the Borrower to assemble the Collateral and
make the Collateral available to the Lender at a place to be designated by the
Lender which is reasonably convenient to both parties. Unless the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, the Lender shall give the Borrower written notice
of the time and place of any public sale thereof or of the time after which any
private sale or other intended disposition thereof is to be made. The
requirement of sending reasonable notice shall be met if such notice is mailed,
postage prepaid, or otherwise given, to the Borrower or Pledgor at the last
address shown on the Lender's records at least five days before such
disposition. If any Obligation (including but not limited to the Note) is a
demand instrument, the statement of a maturity date, the requirement for the
payment of periodic interest or the recitation of defaults arid the right of
Lender to declare any Obligation due and payable shall not constitute an
election by Lender to waive its right to demand payment under a demand at any
time and in any event as Lender in its sole discretion may deem appropriate.
The rights of the Lender specified herein shall be in addition to, and not in
limitation of the Lender's rights under the Code, or any other statute or rules
of law conferring rights similar to those conferred by the Code, and under the
provisions of any other instrument or agreement executed by the Borrower, any
other Obligor or any Pledgor to the Lender. Any rights or remedies of the Lender
may be exercised or taken in any order or sequence whatsoever, at the sole
option of the Lender.
The security agreement set forth herein and the security interest in the
Collateral created hereby shall terminate only when all of the Obligations have
been indefeasibly paid in full and such payments are no longer subject to
rescission, recovery or repayment upon the bankruptcy, insolvency,
reorganization, moratorium, receivership or similar proceeding affectingthe
Borrower or any other person. No waiver by the Lender of any default shall be
effective unless in writing nor operate as a waiver of any other default or of
the same default on a future occasion. All rights of the Lender hereunder shall
inure to the benefit of its successors and assigns, and ail obligations of the
Borrower shall bind the heirs, legal representatives, successors and
assigns of the Borrower. The Borrower and each endorser, surety or guarantor
of this Note, whether bound by this or by separate instrument or agreement,
shall be jointly and severally liable for the indebtedness evidence by this
Note and hereby severally (1) waive presentment for payment, demand, protest,
notice of nonpayment or dishonor and of protest arid any and all other
notices and demands whatsoever; (2) consent that at any time,
or from time to time, payment of any sum payable under this Note may
be extended without notice whether for a definite or
indefinite time; and (3) agree to remain liable until all of the
Obligations are paid in full notwithstanding any impairment, substitution,
release or transfer of Collateral or any one or
more Borrower or Obligor by the Lender or any of Lender's Affiliates, with or
without consideration, or of any extension, modification or renewal. No conduct
of the holder shall be deemed a waiver or release of such liability, unless the
holder expressly releases such party in writing. In the event the indebtedness
evidenced hereby is collected by or through an attorney, the holder shall be
entitled to recover reasonable attorneys' fees (15% of the then outstanding
principal and interest of the indebtedness, to the extent not prohibited by law)
and all other costs and expenses of collection. Time is of the essence.
This Note, and the rights and obligations of the parties hereunder, shall be
governed and construed in accordance with the laws of the State of North
Carolina.
IN WITNESS WHEREOF, the Borrower has executed this Note under seal the day and
year set forth above.
<TABLE>
<CAPTION>
<S> <C>
Witness: _____________________________(SEAL)
(Individual Borrower)
_______________________________ _____________________________(SEAL)
(Individual Borrower)
_______________________________ Borrower:
Attest: Digital Recorders, Inc.
(Name of Corporation or Partnership)
/s/ Jonathan E. Kennedy By: /s/ J. Phillips L. Johnston
Jonathan E. Kennedy J. Phillips L. Johnston
Title Secretary Title President
(Corporate Seal)
</TABLE>
<PAGE>
SCHEDULE 1
Note dated July 24, 1997
Borrower: Digital Recorders, Inc.
Amount: $2,500,000.00
INTEREST RATE:
The rate of interest for the term of the loan shall be the 90 day "LIBOR Base
Rate" plus an amount to be determined by the chart below:
Rolling 4 Quarter EBITDA (X): X >= $700M $700M > X > $300M X <= $300M
Number of basis points over 90 230 300 330
day LIBOR Base Rate
DEFINITION
"LIBOR" means, for any Interest Period, the rate per annum determined
on the basis of the offered rate for deposits in United States Dollars offered
for a term comparable to such Interest Period, that appears on the display
designated as page "3750" of the Telerate Service (or such other page as may
replace page 3750 of that service or such other service or services as may be
nominated by the British Bankers' Association for the purpose of displaying
London interbank offered rates for United States Dollar deposits), determined as
of 11:00 a.m., London time (rounded upward to the next higher of 1/10,000 of
1%), two Euro-Dollar Business Days prior to the first day of such Interest
Period.
If no such offered rate appears on such page, "LIBOR" for such Interest
Period will be the arithmetic average (rounded upward, if necessary, to the next
higher 1/100th of 1%) of rates quoted by not less than two major banks in New
York City at approximately 10:00 a.m., New York City time, two (2) Euro-Dollar
Business Days prior to the first day of such Interest Period, for deposits in
Dollars offered to leading European banks for a period comparable to such
Interest Period in an amount comparable to the principal amount of such
Euro-Dollar Loan.
Initials: /s/ JEK
/s/ JPLJ
<PAGE>
____________________________________________________WACHOVIA________
Wachovia Bank, N.A.
Post Office Box 27886
Raleigh, North Carolina 27611-7886
July 23, 1997
Mr. J. Phillips L. Johnston
President and Chief Executive Officer
Digital Recorders, Inc.
P.O. Box 14068
Research Triangle Park, NC 27709-4068
Dear Phil:
Wachovia Bank is pleased to make available to your company a
$2,500,000.00 Line of Credit facility and a $ 1,000,000.00 Letter of
Credit facility. This credit facility will become effective upon your
acceptance of this commitment letter, your return of the executed copy
of same to the Bank, and, subject to the conditions set forth herein, a
closing of the transaction in a manner satisfactory to the Bank.
"Closing," "close," or "closed," as used herein, shall mean the
execution, recordation where necessary, and delivery to the Bank of all
documentation required by this commitment letter. After closing, this
credit facility will expire on February 27, 1998. This credit facility
is subject to the maintenance by your company of a condition
satisfactory to the Bank and the following terms and conditions.
As used herein, the term "loan" shall include loan, line of credit,
advance, drawing, debit, liability, and any other obligation of your
company arising out of this commitment.
I. Interest Rate: The rate of interest for the term of the loan shall
be the 90 day "LIBOR Base Rate" plus an amount to be determined by the
chart below:
Rolling 4 Quarter EBITDA (X) X >= S700M S700M > X > S300M X <= S300M
Number of basis points over 90 230 300 330
day LIBOR Base Rate
Rate of interest shall be calculated on a basis of a 360 day year for
the actual number of days in each interest period. As used herein, the
"LIBOR Base Rate" shall mean a rate for deposits in US dollars, with
maturities comparable to the selected LIBOR interest period that
appears on page "3750" of the Telerate Service (or as such page as may
replace page 3750 of that service or services as may be nominated by
the British Bankers Association for the purpose of displaying the
London Interbank offered rates for US dollar deposit) determined as of
1:00 P.M. New York Time two business days prior to commencement of such
interest period.
<PAGE>
2. Interest Payments and Principal Payments: At the end of each
applicable Interest Period or quarterly, if earlier, calculated on an
actual/360 day basis. Adjusted LIBOR Loans may not be prepaid before
the end of the Interest Period applicable to such Loans. Base Rate
Loans may be paid at any time on one Business Day's notice in a minimum
amount of $1,000,000.00 and any incremental multiple of $500,000.00.
3. Fees: The Bank shall receive a commitment and documentation
fee in the amount of $500.00 to be paid to the Bank simultaneously with
the acceptance of this commitment by your Company, which commitment and
documentation fee shall be fully earned when paid and non-refundable.
In addition, there will be an unused fee of .20% annually on the unused
portion of the commitment amount, calculated and payable quarterly in
arrears.
4. Use of Proceeds: The loan will be used by your company for
general working capital purposes and Import Letters of Credit.
5. Collateral: General Security Agreement, defined as a first
priority lien position on all accounts receivable, inventory, and
equipment now owned or here after acquired.
6. Loan Covenants: Unless the Bank shall otherwise agree in
writing, for so long as this agreement shall remain in effect and until
all of the Obligations are paid in full, the Borrower agrees as
follows:
A) All of the assets of the company are to remain
unencumbered, with the exception of Wachovia's first lien on
accounts receivable and inventory.
B) Company borrowing shall not exceed either the stated
$2,500,000.00 borrowing line plus the $1,000,000.00 LOC
facility or an amount defined each month as a borrowing base.
C) The company will submit to the Bank a monthly Borrowing
Base report as well as monthly financials and monthly agings
of accounts receivable. The Borrowing Base will be equal to
80% domestic accounts receivable.
D) Rolling four quarter EBITDA, as defined above, shall at all
times be greater than $250,000 in 3Q97 and $300,000 in 4Q97;
to be tested on a quarterly basis.
E) All changes in executive management require the prior
approval of the Bank, whose approval will not be unreasonably
withheld, and the President will maintain key man life
insurance in the amount of $1,000,000.00.
F) The company will inform the Bank of any acquisitions
insofar as this information is in compliance with all SEC
regulations.
<PAGE>
7. Applicable Law: This commitment shall be interpreted, construed,
enforced, and governed by the laws of the State of North Carolina. Upon
return by your company the Bank of a fully-executed copy of this
commitment by its expiration of August 1, 1997, this commitment will be
considered accepted and will constitute an agreement obligating the
Bank to make and your company to accept the loan in accordance with the
terms and conditions set forth above. If the executed copy is not
received by the Bank by the expiration date noted above, this
commitment shall be considered null and void.
Should you have any questions of the terms hereof, please do not
hesitate to call me at (919) 755-7687.
Very Truly Yours,
/s/ Martin Zorn
Martin Zorn
Senior Vice President
ACCEPTED THE 25th DAY OF July, 1997:
DIGITAL RECORDERS, INC.
By: /s/ J. Phillips L. Johnston
Title: President & Chief Executive Officer
Accepted Copy Received by Bank
Date:_______________________
By: ________________________
<PAGE>
___________________________________________________________WACHOVIA____________
General Security Agreement
Wachovia Bank, N.A.
Raleigh ,North Carolina
Gentlemen:
1 . From time to time the undersigned expects to become or has become
indebted or otherwise obligated or liable to Wachovia Bank, N.A., herein called
"Bank", or to any of "Bank's Affiliates" hereinafter defined (the Bank and
Bank's Affiliates being hereafter collectively and/or individually, as the
context shall require, referred to as "Lender"), directly or indirectly,
absolutely or contingently, in connection with letter of credit or acceptance
transactions, trust receipt transactions, or other loan or financial
accommodations (such indebtedness, obligations and liabilities to Lender being
hereinafter referred to as the "Obligation(s)"). As used herein, "Bank's
Affiliates" means any entity or entities now or hereafter directly or indirectly
controlled by Wachovia Corporation or any successor thereto. In consideration of
the Obligation(s), the undersigned agrees that in order to provide Lender with
security for payment and performance of all the Obligations, except for
Obligations extended in North Carolina by Wachovia Bank, N.A. that constitute
openend credit under, or are subject to, the disclosure requirements of the
Truth-in-Lending Act and Federal Reserve Board Regulation Z (hereinafter
collectively referred to as "NC Consumer Debt"), Lender shall have a lien upon,
security interest in and security title to all of the personal property of the
undersigned, now owned or hereafter existing or acquired, of any type or
description, including but not limited to all of the inventory of the
undersigned, now owned or hereafter acquired and wherever located, whether raw,
in process or finished; all materials or equipment usable in processing the
same; all documents of title covering any inventory; all equipment and fixtures
employed or useful in the operation of the undersigned's business; all of the
undersigned's contract rights, accounts, general intangibles, instruments,
investment property, investment securities, dividends and distributions thereof,
chattel paper, notes, drafts, acceptances, and all monies, deposit accounts and
Bank balances of the undersigned with Lender, whether such accounts be general
or special, individual or multiple party, or other claims of the undersigned
against Lender, but exclusive of property in the possession or control of Lender
as a fiduciary other than as agent, and all books and records, computer tapes
and programs and ledger books arising out of or related to any of the foregoing
and the proceeds and products of each of the foregoing in any form whatsoever
including without limitation insurance proceeds (all of the foregoing being
hereinafter referred to collectively as the "Collateral"). In no event, however,
shall the Lender have a security interest in any goods acquired by the
undersigned for personal, family or household purposes more than 10 days after
the date of this Agreement unless such goods are added to or attached to the
Collateral. The undersigned agrees that should the aggregate market value of the
Collateral at any time suffer any decline in value or should any property be
deemed by the Lender to be unsatisfactory or inadequate, or should such property
fail to conform to legal requirements, the undersigned will upon request,
deliver to Lender additional Collateral or will make one or more payments on
account of the Obligations to the satisfaction of Lender. To the extent that the
aforesaid Collateral may consist of investment securities, it is further agreed
that, in the event of any new or additional certificate(s) of stock being issued
(as stock dividends or otherwise) relative to any such investment securities,
held at the time as Collateral hereunder, such certificate(s) shall be deemed an
increment to the stock so held and under pledge to Lender and that, therefore,
such certificate(s) will (to the extent received by or placed under the control
of the undersigned) be held or controlled in trust for Lender and will be
promptly delivered to Lender (in form for transfer) to be held hereunder if
Lender so requests.
2. Lender shall have no duty of care with respect to the Collateral,
except that Lender shall exercise reasonable care with respect to Collateral in
Lender's custody, but shall be deemed to have exercised reasonable care if such
property is accorded treatment substantially equal to that which Lender accords
its own property, or if Lender takes such action with respect to the Collateral
as the undersigned shall request in writing, but no failure to comply with any
such request nor any omission to do any such act requested by the undersigned
shall be deemed a failure to exercise reasonable care, nor shall Lender's
failure to take steps to preserve rights against any parties or property be
deemed a failure to have exercised reasonable care with respect to Collateral in
Lender's custody.
3. In addition to the rights and security interest elsewhere herein set
forth, Lender may, at its option at any time(s) and with or without notice to
the undersigned, appropriate and apply to the payment or reduction, either in
whole or in part of the amount owing on any one or more of the Obligations,
whether or not then due, any and all monies now or hereafter with Lender, on
deposit or otherwise, to the credit of or belonging to the undersigned, whether
individual or in a multiple party capacity, and upon all drafts, notes or other
items deposited for collection or presented for payment, it being understood and
agreed that Lender shall not be obligated to assert or enforce any rights or
security interest hereunder or to take any action in reference thereto, and that
Lender may in its discretion at any time(s) relinquish its rights as to
particular Collateral hereunder without thereby affecting or invalidating its
rights hereunder as to all or any other Collateral hereinbefore referred to.
4. The undersigned further agrees and covenants (a) that, if Lender so
demands in writing at any time, all proceeds shall be delivered to Lender
promptly upon the undersigned's receipt in a form satisfactory to Lender; (b)
that, if Lender so demands in writing at any time, all chattel paper,
instruments, and documents shall be delivered to Lender at the time and place
and in the manner in which specified by Lender's demand; (c) to execute and
deliver, upon request, any notice, statement, instrument, document, agreement or
other papers and to perform any act requested by Lender which may be necessary
to create, perfect, preserve, validate or otherwise protect any security
interest granted pursuant hereto or to enable Lender to exercise and enforce its
rights hereunder or with respect to such security interest; (d) that during the
period that any Obligation is outstanding, the undersigned will not, without
obtaining Lender's prior written approval, create, incur, assume, or suffer to
exist any lien, security agreement in or security title with respect to the
Collateral pursuant to a security agreement subject to the Uniform Commercial
Code or any similar law of any jurisdiction, except as herein provided, and the
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<PAGE>
undersigned will not sign or file or authorize the signing or filing of a
financing statement under the said Uniform Commercial Code of any jurisdiction
with respect to the Collateral or any portion thereof, except as herein
provided. The undersigned further agrees to provide Lender with such information
as Lender may from time to time request with respect to the location of any of
the undersigned's business. In addition, Lender will be notified promptly in
writing of any change in location of any office where records concerning any of
the accounts that constitute a portion of the Collateral are maintained or of a
change in location of the undersigned's principal place of business or of a
change in location of any Collateral, or of a change in the undersigned's name,
identity or structure.
5. The undersigned will maintain insurance on such of the Collateral,
with such companies, in such amounts and against such risks as Lender may
request. All policies of insurance will specify that Lender is an additional
insured as its interest may appear and shall provide that such insurance shall
not be cancelable by the undersigned or the insurer without at least ten days
advance written notice to Lender. In the event any or all insurance hereinbefore
provided for is canceled, any returned premium thereon shall be collected by
Lender and may be applied by Lender to any part of the Obligations, whether
matured or unmatured. Lender is authorized to receive the proceeds of any
insurance loss and at its option shall apply such proceeds toward either the
repair or replacement of the Collateral or the payment of the Obligations
secured hereby. If the undersigned fails to maintain such insurance, Lender may,
at its option, but without obligation, purchase such insurance or pay any
premium owing and any such sum paid by Lender shall be payable by the
undersigned on demand by Lender or at its option may be added to any of the
Obligations and secured hereby. The undersigned will pay all taxes and other
impositions on the Collateral as well as the cost of repairs and maintenance.
Lender may, at its option, but without obligation, pay any and all amounts for
taxes, repairs and other costs, expenses and liabilities and any such sum shall
be payable on demand or added to the Obligations and secured hereby.
6. The undersigned represents and warrants to Lender (which
representations and warranties shall be deemed to be renewed as of the date of
each renewal or extension of credit under any of the Obligations) that:
(a) The undersigned is the sole owner of the Collateral free and
clear of all security interests, liens and encumbrances
whatsoever, other than those evidenced by this Agreement.
(b) The Collateral is located at the address(es) indicated below,
wherever located to include but not limited to:
2300 Englert Drive, Suite B, Research Triangle Park, NC 27709
(c) Lender and any persons designated by it shall have the right to
call at the place where the Collateral is located at any
reasonable time and without hindrance or delay to inspect the
Collateral, and to inspect, audit, check and make extracts from
the undersigned's books, records, journals, orders, receipts and
any correspondence and other data relating to the undersigned's
business or the Collateral. (d) The undersigned's legal name is
the name listed below and the following is a list of any and all
names used by the undersigned during all or any part of the seven
year period preceding the date of this Agreement:
Digital Recorders, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(e) The undersigned will promptly advise the Lender in writing of any
change in name, identity or structure of the undersigned or any change
of the Collateral locations listed above or the opening of any new
places of business or the closing of the undersigned's existing places
of business.
(f) The undersigned has the power to make, deliver and perform this
Agreement and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement. This Agreement
is the valid Obligation of the undersigned, legally binding upon the
undersigned and enforceable in accordance with its terms. No consent or
approval of any other person or entity and no consent, license,
approval or authorization of any governmental authority, bureau or
agency is required in connection with the execution, delivery,
performance, validity and enforceability of this Agreement.
7. In the event of happening of any one or more of the following events
of default, to wit:
(a) Any failure to make any payments of principal or of interest on any
of the Obligations to Lender when due or to observe or perform any agreement,
covenant or promise hereunder or in any other agreement, note, instrument or
certificate of the undersigned or any endorser, surety or guarantor of the
obligations (collectively the "Obligor") to the Lender, now existing or
hereafter executed in connection with any of the Obligations or the granting of
a security interest in property to secure the Obligations, including but not
limited to, a loan agreement, if applicable, a security agreement and any
agreement guaranteeing payment of any of the Obligations.
(b) Any default of the undersigned or any Obligor in the payment or
perform any of any other liabilities, indebtedness or obligations to any other
creditor or to allow or permit any other liabilities, indebtedness or
obligations to any other creditor to be accelerated.
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<PAGE>
(c) Any failure of the undersigned or any Obligor to furnish Lender
current financial information upon request or as required under any other
agreement with Lender.
(d) Any representation or warranty made in this Agreement or in
connection with the extension of credit evidenced by any Obligation or in any
certificate, financial or other statement furnished at any time hereunder or in
connection with this Agreement or the extension of credit evidenced by any
Obligation proving to have been untrue in any material respect when made or
furnished.
(e) Any discontinuance or termination of any guaranty of any of
the Obligations by a guarantor.
(f) The death, dissolution, termination of existence, insolvency,
business failure, appointment of a receiver of any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding under any bankruptcy or insolvency laws, state or federal, by or
against the undersigned or any Obligor.
(g) Any loss, theft, substantial damage, destruction, sale, foreclosure
of or encumbrance to any of the Collateral or any part of any of the property
securing the Obligations, or the making of any levy, seizure or attachment
thereof or thereon or the rendering of any judgment or lien or garnishment or
attachment against the undersigned or any Obligor, or his property, whether
actual or threatened.
(h) Lender, at any time and in good faith, deeming itself insecure.
Then or any time after the happening of such event of default or at any
time thereafter, Lender may declare any or all of the Obligations immediately
due and payable, without presentment, demand, protest, or notice of any kind,
demand or notice to the undersigned. Furthermore, upon the occurrence of any
such event of default, or at any time thereafter, Lender, at its option, may
terminate any obligation to make further loans or extensions of credit or other
financial accommodations to the undersigned and, in addition to and independent
of any of the foregoing rights or other rights, Lender shall also have all of
the rights and remedies provided to a secured party by the Uniform Commercial
Code in effect in Georgia at that time. In addition thereto, the undersigned
further agrees that (i) in the event that notice is necessary under applicable
law, written notice mailed to the undersigned at the address given below five
(5) business days prior to the date of public sale of any of the Collateral
subject to the security interest created herein or prior to the day after which
private sale or any other disposition of said Collateral will be made shall
constitute reasonable notice, but notice given in any other reasonable manner or
at any other time shall be sufficient; (ii) in the event of sale or other
disposition of any such Collateral, Lender may apply the proceeds of any such
sale or disposition to the satisfaction of its reasonable attorneys' fees, legal
expenses, and other costs and expenses incurred in connection with its taking,
retaking, holding, preparing for sale, and selling of the Collateral and to any
of the Obligations in such order as Lender, in its discretion, may elect; (iii)
without precluding any other methods of sale, the sale of Collateral shall have
been made in a commercially reasonable manner if conducted in conformity with
reasonable commercial practices of banks disposing of similar property but in
any event Lender may sell on such terms as Lender may choose, without assuming
any credit risk and without any obligation to advertise or give notice of any
kind; and (iv) Lender may require the undersigned to assemble the Collateral,
taking all necessary or appropriate action to preserve and keep it in good
condition, and make such available to Lender at a place and time convenient to
both parties, all at the expense of the undersigned. Furthermore, in any such
event, to the extent permitted under applicable law, the undersigned waives all
rights which the undersigned has or may have as to notice and to a judicial
hearing prior to any seizure of the Collateral by Lender and full power
and authority are hereby given Lender to sell, assign, and deliver the
whole of the Collateral or any part(s) thereof, at any time(s) at any broker's
board, or at public or private sale, at its option, and no delay on its part in
exercising any power of sale or any rights or options hereunder, and no notice
of demand, which may be given to or made upon the undersigned by Lender with
respect to any power of sale or other right or option hereunder, shall
constitute a waiver thereof, or limit or impair Lender's right to take any
action or to exercise any power of sale or any other rights hereunder, without
notice or demand, or prejudice Lender's rights as against the undersigned in any
respect.
8. Any and all of Lender's rights with respect to the security interest
hereunder shall continue unimpaired, and the undersigned shall be and remain
obligated in accordance with the terms hereof, notwithstanding the release or
substitution of any Collateral at any time or of any rights or of interest
therein, or any delay, extension of time, renewal, compromise or other
indulgence granted by Lender in reference to any of the Obligations, or any
promissory note, draft, bill of exchange or other instrument given in connection
therewith, the undersigned hereby waiving all notice of any such delay,
extension, release, substitution, renewal, compromise or other indulgence, and
hereby consenting to be bound thereby as fully and effectually as if the
undersigned had expressly agreed thereto in advance.
9. No delay on Lender's part in exercising any power of sale, option or
other right hereunder, and no notice or demand which may be given to or made
upon the undersigned by Lender, shall constitute a waiver thereof, or limit or
impair Lender's right to take any action or to exercise any other power of sale,
option or any other right hereunder, without notice or demand, or prejudice
Lender's rights as against the undersigned in any respect.
10. Lender is authorized at its option and without any obligation to do
so, to transfer or register in the name of its nominee(s) all or any part of the
securities that constitute a portion of the Collateral, and to do so before or
after the maturity of any of the Obligations, and with or without notice to the
undersigned.
11. The undersigned shall execute and file such financing statements as
Lender may request and Lender is authorized, at its option, to file financing
statement(s) or amendments thereto without the signature of the undersigned with
respect to any of the Collateral; the undersigned agrees to reimburse Lender for
the expense of any such filing.
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<PAGE>
12. Lender may assign or otherwise transfer this Agreement, or any
instrument(s) evidencing all or any of the Obligations, and any agreement
relating thereto and may deliver all or any of the Collateral to the
transferee(s), who shall thereupon become vested with all the powers and rights
in respect thereto given to Lender herein or in the instrument(s) transferred,
and Lender shall thereafter be forever relieved and fully discharged from any
liability or responsibility with respect thereto, all without prejudice to the
retention by Lender of all rights and powers hereby given with respect to any
and all instruments, rights or property not so transferred.
13. This is a continuing Agreement and shall remain in full force and
effect until revoked by Lender in writing or written notice shall have been
received by Lender that it has been revoked, but any such notice by the
undersigned shall not release the notifying party (or parties) from liability,
responsibility, lien or security interest created hereunder with respect to such
of the Obligation(s) as may have been theretofore incurred and any renewals,
extensions or modifications of such Obligations and any expenses paid or
incurred by Lender in endeavoring to collect the Obligations, including
reasonable attorneys' fees, or realize upon the Collateral or in enforcing this
Agreement. Furthermore, if this Agreement is terminated, or revoked by operation
of law as against the undersigned, the undersigned will indemnify and save
Lender. its successors or assigns, harmless from any loss which may be suffered
or incurred by Lender in making, giving, granting or extending any loans or
other credit or otherwise acting, hereunder prior to receipt by Lender of notice
in writing of such termination or revocation.
14. The undersigned agrees that the lien, security interest and
security title granted hereby shall remain in full force and effect and shall
not be released by Lender until all Obligations have been indefensibly paid in
full and such payments are no longer subject to rescission, recovery or
repayment upon the bankruptcy, insolvency, reorganization, moratorium,
receivership or similar proceeding affecting the undersigned.
15. If this Agreement is executed by two or more parties, they shall be
severally bound and committed hereunder and the word "undersigned" whenever used
herein shall be construed to refer to such parties separately and collectively
to all such parties and this Agreement shall not be revoked or impaired as to
one or more of the parties hereto by the revocation or release of any
Obligation(s) hereunder of any other(s) of the parties hereto.
16. This Agreement shall be governed by the laws of the State of North
Carolina in all respects, including matters of construction, validity and
performance; none of its terms or provisions may be waived, altered, modified,
limited or amended except by an agreement expressly referring hereto and to
which Lender consents in writing duly signed for Lender and on its behalf, the
rights granted to Lender herein shall be supplementary and in addition to those
granted in any other agreements with respect to the Obligation(s).
Executed under seal this 24th day of July, 1997
Very truly yours,
Digital Recorders, Inc.
By: /s/ J. Phillips L. Johnston
J. Phillips L. Johnston
Title: President
2300 Englert Drive, Suite B
(Mailing Address)
Research Triangle Park, NC 27709
(Mailing Address)
<PAGE>
Exhibit 10.24.2
AMENDMENT TO MANAGEMENT SERVICES AGREEMENT ("MSA")
Between DIGITAL RECORDERS, Inc. ("DRI") &
Robinson Turney International, Inc. ("RTI")
In consideration of investment by RTI of time and expenses outside of the scope
of the Management Services Agreement of 19 April 1996 ("MSA"), the following is
agreed and adopted, effective 15 May 1997, as an amendment to that Agreement:
Item #1: SALES REPRESENTATION: It is agreed to be in the best interest of
TwinVision na, Inc. for RTI to not appoint and contract with a specific
Independent Sales Representative for the territory west of the Mississippi river
until sometime in mid to late 1997. This "delay" will provide time for the
preferred Independent Sales Representative to arrange business affairs and to be
convinced to join the TwinVision business team of DRI to cover that territory.
Therefore, until such time that an official Independent Sales Representative is
appointed (in any event such to be accomplished prior to December 1997), RTI
agrees to perform that role on a commission basis according to the commission
rates in effect by contract for the Independent Sales Representative serving the
Eastern part of the USA (6% of sales value - payable upon collection of the
effected invoice). RTI will utilize task-specific assistance from third parties
to accomplish this as well as invest its own time and financial resources.
Therefore, the commission on selected orders, as to be agreed for time to time,
will be assigned to RTI for RTI distribution between itself and those assisting
third parties. All such commission distribution plans will be documented by RTI
to DRI, be subject to the prior approval of TwinVision na, Inc. and will be made
directly to the intended and agreed recipients by TwinVision na, Inc. This will
be in effect for any or all of the following orders, if, and only if, officially
accepted and entered by TwinVision na, Inc. on or prior to 01 May 1998.
Commission on orders so effected will be paid, however, according to the then in
effect commission payment policy of DRI, following shipment, no matter what the
date of such shipment, until all shipments under those orders are complete. As
of the date of this Agreement, the following potential orders are subject to
this agreement: Houston - NFI; Houston - NEOPLAN; VIA San Antonio (no Bus
Builder order award at this time - in RFQ stage), SF Muni, three potential
orders - Trolley Bus; 40' Transit Bus, and Articulated Transit Bus (no Bus
Builder order award at this time - in RFQ stage).
Item #2: DIRECT MANAGEMENT OVERSIGHT - TwinVision na, Inc. & BudgetVision: It is
agreed that RTI will assume a larger role in the BudgetVision product launch
than would be anticipated under the MSA. This larger role will be assumed for
the time period of 01 June 1997 through 31 May 1998, as a means of facilitating
TwinVision na, Inc. not adding selected budgeted personnel and this reducing
necessary fixed expenses at TwinVision na, Inc. In exchange for this larger role
being assumed, and the additional time and expense of RTI associated with same,
it is agreed that a supplemental payment $3,375 per month for the 11 months of
01 June 1997 through 31 May 1998 will be made. This supplemental Payment is
under the terms of, and in accordance with, the MSA - Exhibit A, Clause #1.
DIGITAL RECORDERS, Inc. ROBINSON TURNEY INTERNATIONAL,
& TwinVision na, Inc. Inc.
/s/ J. Phillips L. Johnston /s/ David L. Turney
J. Phillips L. Johnston; Chairman & CEO David L. Turney; Principal
<PAGE>
Exhibit 10.24.3
AMENDMENT TO
MANAGEMENT SERVICES AGREEMENT
and
SERVICES AGREEMENT
Regarding Paragraph 3 of the Management Service Agreement (effective April 19,
1996) and Paragraph 4 of the Services Agreement (effective April 19, 1996), all
being as related to commissions due and payable to RTI, the following is agreed:
o The agreements as drafted are not clear on treatment of intercompany sales
o It is agreed and understood that intercompany shipments and sales will be
excluded from commission compensation calculation
o It is agreed that the effective date of this agreed treatment of
intercompany shipments and sales will be June 30, 1997, for purposes of new
calculations.
o It is agreed that a retroactive adjustment will be calculated to refund
any payments made to date of June 30, 1997, which are consistent with the
specific intent of this amendment.
Agreed and accepted as effective 30 June, 1997
DIGITAL RECORDERS, Inc. TRANSIT MEDIA GmbH
/s/ J. Phillips L. Johnston /s/ Robert Huber
-------------------------------- ---------------------------
J. Phillips L. Johnston; Chairman & CEO Robert Huber; Managing Director
TWINVISION CORP. OF NORTH ROBINSON TURNEY
AMERICA, Inc. INTERNATIONAL, Inc.
/s/ J. Phillips L. Johnston /s/ David L. Turney
------------------------------- --------------------------
J. Phillips L. Johnston; Chairman & CEO David L. Turney; Principal
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 333,131
<SECURITIES> 1,267,524
<RECEIVABLES> 3,480,214
<ALLOWANCES> 0
<INVENTORY> 2,215,785
<CURRENT-ASSETS> 7,477,887
<PP&E> 887,542
<DEPRECIATION> 481,477
<TOTAL-ASSETS> 9,965,369
<CURRENT-LIABILITIES> 2,233,906
<BONDS> 0
35
0
<COMMON> 267,407
<OTHER-SE> 7,464,021
<TOTAL-LIABILITY-AND-EQUITY> 9,965,369
<SALES> 5,303,983
<TOTAL-REVENUES> 5,303,983
<CGS> 2,704,047
<TOTAL-COSTS> 2,704,047
<OTHER-EXPENSES> 1,578,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,799
<INCOME-PRETAX> (336,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (336,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (336,240)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
