<PAGE>
DIGITAL RECORDERS, INC.
4900 PROSPECTUS DRIVE, SUITE 1000
RESEARCH TRIANGLE PARK, NC 27709-4068
PROXY STATEMENT
RELATING TO THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 20, 1997
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2)).
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12
DIGITAL RECORDERS, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:1
(Set forth the amount on which the filing fee is calculated and state how
it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
DIGITAL RECORDERS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AT 11:00 A.M. ON MAY 20, 1997
TO THE SHAREHOLDERS:
An Annual Meeting of the shareholders of Digital Recorders, Inc. (the
"Company") will be held in the auditorium at the Microelectronics Center of
North Carolina, 3021 Cornwallis Road, Research Triangle Park, North Carolina
27709 on Tuesday, May 20, 1997 at 11:00 a.m., followed by lunch in Conference
Rooms A and B at 12:00 p.m., for the following purposes:
1. To elect nine directors, each to serve for a one-year term expiring in
1998, or until their successors shall have been duly elected and
qualified;
2. 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;
3. To ratify the appointment of KPMG Peat Marwick LLP as independent
certified public accountants; and
4. To consider and transact such other business as may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 7, 1997 as
the record date for the determination of shareholders entitled to notice of and
to vote at such meeting and any adjournment thereof.
All Company employees will be in attendance to host our shareholders. We
value our shareholders and sincerely hope you will attend.
By order of the Board of Directors,
/s/ J. Phillips L. Johnston
J. PHILLIPS L. JOHNSTON,
CHAIRMAN OF THE BOARD
April 24, 1997
IMPORTANT
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
CANNOT ATTEND THE MEETING, PLEASE MARK, DATE, SIGN, NOTE ANY CHANGE OF ADDRESS
AND RETURN THE ENCLOSED PROXY CARD IMMEDIATELY IN THE ENCLOSED, SELF-ADDRESSED
ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES. DELAY IN
RETURNING YOUR PROXY MAY SUBJECT THE COMPANY TO ADDITIONAL EXPENSE. IF YOU
ATTEND THE MEETING, WE WILL BE GLAD TO RETURN YOUR PROXY SO THAT YOU MAY VOTE IN
PERSON AT THE MEETING.
<PAGE>
DIGITAL RECORDERS, INC.
4900 Prospectus Drive, Suite 1000
Research Triangle Park, North Carolina 27709-4068
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 20, 1997
INTRODUCTION
The enclosed proxy is solicited by the Board of Directors of Digital
Recorders, Inc. (hereinafter referred to as the "Company") for use at the Annual
Meeting of Shareholders (the "Annual Meeting") to be held in the auditorium at
the North Carolina Microelectronics Center, 3021 Cornwallis Road, Research
Triangle Park, North Carolina 27709, on Tuesday, May 20, 1997 at 11:00 a.m., for
the purposes set forth in the foregoing Notice of Annual Meeting of
Shareholders. This Proxy Statement and the form of proxy will be mailed to
shareholders on or about April 29, 1997.
VOTING OF SECURITIES
The record date with respect to this solicitation is April 7, 1997 (the
"Record Date"). All holders of record of Common Stock of the Company as of the
close of business on the Record Date are entitled to vote at the Annual Meeting.
As of that date, the Company had 2,674,075 shares of Common Stock outstanding,
which shares constitute the only class of outstanding shares of the Company
entitled to notice of, and to vote at, the Annual Meeting. Each share of Common
Stock is entitled to one vote.
A majority of the outstanding shares of Common Stock must be represented in
person or by proxy at the Annual Meeting in order to constitute a quorum for the
transaction of business. If a quorum exists, a proposal is approved if the votes
cast in person or by proxy favoring the proposal exceed the votes cast opposing
the proposal. Directors are elected by a plurality of the votes cast at a
meeting at which a quorum is present. Shareholders may not cumulate their votes
for directors. Abstentions and broker non-votes are not counted in the
calculation of the vote. A proxy may be revoked by the shareholder at any time
prior to its being voted by giving notice to the Secretary of the Company, by
executing and delivering a proxy with a later date or by voting in person at the
Annual Meeting. Unless the proxy is revoked, or unless it is received in such
form as to render it invalid, the shares represented by it will be voted in
accordance with the instructions of the shareholder contained therein. If the
proxy is signed and returned without specifying choices, the shares will be
voted in accordance with the recommendations of the Board of Directors.
The cost of this solicitation will be borne by the Company, including
expenses incurred in connection with preparing and mailing this Proxy Statement.
Such expenses will include charges by brokers, banks or their nominees, other
custodians and fiduciaries for forwarding proxy material to the beneficial
owners of shares held in the name of a nominee. Proxies may be solicited
personally or by mail, facsimile, telephone or telegraph. Employees and
directors of the Company may solicit proxies but will not receive any additional
compensation for such solicitation.
As a matter of policy, proxies, ballots and voting tabulations that
identify individual shareholders are held confidential by the Company. Such
documents are available for examination only by the inspectors of election who
are employees appointed to tabulate the votes. The identity of the vote of any
shareholder is not disclosed except as may be necessary to meet legal
requirements.
1
<PAGE>
COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of April 7, 1997 by (i) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, (ii)
each director or nominee, (iii) each other executive officer named in the
Summary Compensation Table, and (iv) all executive officers and directors as a
group. Each person has sole voting and sole investment power with respect to the
shares shown except as noted.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
(1)
NAME NUMBER PERCENT
<S> <C> <C>
J. Phillips L. Johnston (2)............................................................. 117,177 4.3%
John M. Cochran, Jr. (3)................................................................ 24,904 *
Curtis I. Kring (4)..................................................................... 53,677 2.0
C. James Meese, Jr. (5)................................................................. 9,987 *
John K. Pirotte (6)..................................................................... 44,695 1.7
John M. Reeves, II (7).................................................................. 170,740 6.4
Juliann Tenney (8)...................................................................... 19,982 *
John W. Thomas, Jr. (9)................................................................. 42,576 1.6
David L. Turney......................................................................... 18,450 *
Bruce R. Thomas (10).................................................................... 20,259 *
Andrew L. Turner, III (11).............................................................. 20,259 *
Intersouth Partners..................................................................... 216,075 8.1
All directors and officers as a group
(Sixteen persons) (12)................................................................ 594,287 20.7%
</TABLE>
* Less than one percent of the shares of Common Stock.
(1) Beneficial ownership includes both outstanding Common Stock and shares
issuable upon exercise of options or warrants that are currently
exercisable or will become exercisable within 60 days after the date
hereof. Unless otherwise noted, sole voting and dispositive power is
possessed with respect to all Common Stock shown. All percentages are
calculated based on the number of outstanding shares plus shares which a
person or group has the right to acquire within 60 days. The address for
Intersouth Partners is 1000 Park Forty Plaza, Suite 290, Durham, North
Carolina 27713 and the address for all other persons listed is 4900
Prospectus Drive, Suite 1000, P.O. Box 14068, Research Triangle Park, North
Carolina 27709.
(2) Includes 69,198 shares subject to currently exercisable options.
(3) Includes 20,999 shares subject to currently exercisable options.
(4) Includes 9,714 shares subject to currently exercisable options.
(5) Consists solely of shares subject to currently exercisable options.
(6) Excludes securities owned by Intersouth Partners, of which Mr. Pirotte is a
limited partner. Mr. Pirotte disclaims beneficial ownership of securities
owned by Intersouth Partners.
(7) Includes 2,000 shares subject to currently exercisable options and shares
owned of record by the Sarah C. Reeves Trust. Sarah C. Reeves is the mother
of John M. Reeves, II. Excludes securities owned by Intersouth Partners, of
which Mr. Reeves is a limited partner. Mr. Reeves disclaims beneficial
ownership of securities owned by Intersouth Partners.
(8) Includes 2,000 shares subject to currently exercisable options.
(9) Includes 2,000 shares subject to currently exercisable options.
(10) Includes 19,987 shares subject to currently exercisable options.
(11) Includes 19,987 shares subject to currently exercisable options.
(12) Includes 191,489 shares subject to currently exercisable options and
warrants and 13,508 shares deemed to be beneficially owned by certain
executive officers although such shares are owned of record by family
members and by trusts formed for the benefit of such officers and certain
family members. Does not include 52,669 shares subject to options and
warrants which have not yet become exercisable.
2
<PAGE>
I. ELECTION OF DIRECTORS
The nine nominees for election as directors are identified below. All
nominees are now members of the Board of Directors. The Board of Directors knows
of no reason why any nominee would be unable to serve as a director. If any
nominee should for any reason become unable to serve, the shares represented by
all valid proxies will be voted for the election of such other person as the
Board of Directors may designate or the Board of Directors may reduce the number
of directors to eliminate the vacancy.
The following material contains information concerning the nominees,
including their recent employment, positions with the Company, other
directorships and age as of the date of this Proxy Statement.
J. PHILLIPS L. JOHNSTON, age 57, has served as Chairman of the Board and
Chief Executive Officer since April 1990 and as President since March 1991. He
was Administrator of the North Carolina Credit Union Division of the North
Carolina Department of Commerce from September 1987 to April 1990. From October
1979 to September 1987, Mr. Johnston served as President and Chief Executive
Officer of Data Pix, Inc., Norman Perry, Chantry, Ltd., and Erwin-Lambeth, Inc.,
each of which were privately-held companies based in North Carolina. From 1971
through 1979, he was President and Chief Executive Officer of Currier Piano
Company, Marion, North Carolina. Mr. Johnston received his A.B. degree in
economics from Duke University and his law degree from the University of North
Carolina.
JOHN M. COCHRAN, JR., age 61, has served as a director of the Company since
April 1991. In January 1996, he became Executive Vice President and General
Manager of the Transit Communications Systems ("TCS") business group of the
Company. From April 1995 until joining the Company in January 1996, Mr. Cochran
was President of Cochran & Associates. From August 1992 to April 1995, he served
as Vice President of Manufacturing Services for TEXFI Industries, Inc.
("TEXFI"), a New York Stock Exchange listed company, and from January 1989 to
August 1992, he served as President of Highland Yarn Mills, Inc., a subsidiary
of TEXFI. Mr. Cochran was Vice President and Technology Manager at TEXFI from
February 1988 to January 1989. From September 1987 to February 1988, he was
President of Cochran & Associates and prior thereto he served as Executive Vice
President of Frontier Electronics, Inc. for 20 years. Mr. Cochran received a
B.S. degree in electrical engineering from Georgia Tech and a masters degree in
electrical engineering from the Massachusetts Institute of Technology. Mr.
Cochran is a registered professional engineer.
CURTIS I. KRING, age 70, became a director of the Company in April 1991. In
July 1993, he assumed responsibility for the Company's Highway Information
Systems ("HIS") business group and, in March 1995, he assumed responsibility
for, and became Chairman and managing director of, the Digital Audio Company
("DAC") business group. Since January 1986, Mr. Kring has operated his own
consulting firm, which provides sales, marketing and management services,
particularly in the area of federal government contracting. From March 1977 to
September 1991, he was employed by Broadcast Electronics, Inc. as Vice President
of Marketing and Sales and prior to that time he was employed by Harris
Corporation and General Electric in sales and engineering positions. Mr. Kring
received a degree in electronic engineering from DeVry Institute.
C. JAMES MEESE, JR., age 55, has served as a director of the Company since
April 1991 and was an independent sales representative for the TCS business
group from February 1993 through May 1995. Since 1989 he has provided advice and
assistance to high growth companies on issues of market development,
capitalization and organizational structuring through Business Development
Associates, Inc., for which he currently serves as President. Prior to 1989 he
spent approximately 20 years in various senior corporate marketing and finance
positions. Mr. Meese is a director of A&J Sports, Inc., a Raleigh, North
Carolina collegiate sports media company, and NECCO, a Winston-Salem, North
Carolina environmental contracting company. Mr. Meese received a B.A. degree in
economics from the University of Pennsylvania and an M.B.A. from Temple
University.
JOHN K. PIROTTE, age 47, became a director of the Company in May 1996.
Since 1990, he has served as Chairman and Chief Executive Officer of CORPEX
Technologies, Incorporated, a privately-held company that develops and markets
surface active chemical technology. In addition, Mr. Pirotte has operated a
private investment company since 1987. He was the Chief Financial Officer from
1979 to 1981 and Chairman and Chief Executive Officer from 1981 until 1987 of
The Aviation Group, Inc. He also served in various capacities, including
manager, in Acquisition Advisory Services for an international public accounting
firm from 1972 to 1979. Mr. Pirotte was a director of Microwave Laboratories,
Inc., a venture capital-backed company which filed a petition for bankruptcy in
1994. He is a founding director of North Carolina Enterprise Corp., a venture
capital fund, and serves on the Advisory Board of Intersouth I, a venture
capital fund of which Intersouth Partners is the general partner. Mr. Pirotte
received his B.A. degree in economics from Princeton University and an M.S. in
accounting from New York University.
3
<PAGE>
JOHN M. REEVES, II, age 42, has served as a director of the Company since
April 1993. He co-founded and since March 1992 has served as President of First
Exim Financial Limited, which provides trade finance and factoring to exporters
and importers. From August 1991 to February 1992, he was employed by Allen
Commercial Services advising small, closely-held companies with respect to
capitalization issues. Since 1988 he has been engaged in real estate development
activities through Reeves Development Corporation, a company controlled by him.
Mr. Reeves is a director of Horizon Financial Services, a Hastings, England
firm. Mr. Reeves has both graduate and undergraduate degrees in civil
engineering from North Carolina State University and an M.B.A. from Duke
University.
JULIANN TENNEY, age 44, has served as a director of the Company since April
1991. Since July 1993 Ms. Tenney has been a consultant and an instructor in the
non-profit management program at Duke University. From August 1990 through June
1993, she served as Executive Director of the Southern Growth Policies Board, an
interstate alliance charged with designing economic development and growth
strategies for southern Governors and legislators. From August 1988 to August
1990, Ms. Tenney served as Director for the Economic and Corporate Development
Division of the North Carolina Biotechnology Center and also as their House
Legal Counsel. From November 1987 to August 1988, Ms. Tenney was Assistant
Secretary at the North Carolina Department of Commerce. From August 1985 to
November 1987, she was Executive Director of the North Carolina Technological
Development Authority. Prior to that time, she was a practicing attorney. Ms.
Tenney received a B.A. degree from the University of North Carolina and a law
degree from Duke University.
JOHN W. THOMAS, JR., age 69, has served as a director of the Company since
March 1992. He has held various engineering and management positions with Thomas
Built Buses since 1949, including the President, Chairman and Chief Executive
Officer. He is a National Board Member for the Boy Scouts of America and was
recently named National Commissioner of that organization. Mr. Thomas received a
B.S. degree in industrial engineering from Virginia Tech.
DAVID L. TURNEY, age 53, became a director of the Company in May 1996. He
is Chairman and CEO of Robinson Turney International, Inc. ("RTI"), a consulting
firm which Mr. Turney co-founded in August 1994. RTI is engaged in business
development, marketing services, advisory services, and merger, acquisition and
financing assignments for selected clients, including the Company, who are
primarily in the transit and transportation equipment industries. From March
1994 to December 1995, Mr. Turney was also engaged in strategic planning and
development consulting services to his former employer, Mark IV Industries, Inc.
("Mark IV"), a New York Stock Exchange listed company. From February 1991 to
February 1994, he was President and Group Executive of Mark IV Transportation
Products Group, a group of nine companies, subsidiaries and operating units of
Mark IV serving transit and transportation markets worldwide, which group Mr.
Turney was responsible for developing. From 1984 to 1991, Mr. Turney was
President of the Luminator division of Gulton Industries, Inc., which became a
wholly-owned subsidiary of Mark IV in 1987. Prior to 1984, he served in various
managerial and engineering capacities in four corporations spanning the
telecommunications, industrial hard goods, consumer electronics and
electromagnetic components industries. Mr. Turney received his B.S. degree in
industrial management from the University of Arkansas.
BOARD COMPENSATION
No employee of the Company receives any additional compensation for his or
her services as a director. Non-management directors receive no salary for their
services as such, although the Board of Directors has authorized payment of
reasonable travel or other out-of-pocket expenses incurred by non-management
directors in attending meetings of the Board of Directors. Certain directors of
the Company are consultants or advisors to the Company and receive compensation
for such services. See "Certain Relationships and Related Transactions". The
Board of Directors also granted 32,000 options to an officer who is also a
director during the fiscal year ended December 31, 1996. Such options are
exercisable at prices ranging from $4.75 to $6.75 per share.
EXECUTIVE OFFICERS
The following material contains information concerning the executive
officers of the Company who are not nominees for election as directors,
including their recent employment, positions with the Company and age as of the
date of this Proxy Statement.
MICHAEL A. CONNOR, JR., age 54, was named Vice President and General
Manager of the DAC business group on February 1, 1997. From April 1994 until
February 1997, he was Manager, Sales and Marketing for DAC. From November 1987
until April 1994, Mr. Connor was President and owner of Mike Connor
Construction, Inc., a general contracting firm specializing in high-end custom
residential construction. Mr. Connor has a bachelor's degree in aerospace
engineering from the
4
<PAGE>
University of Florida and a master's degree in mechanical engineering from
Tulane University. Mr. Connor is a registered professional engineer in North
Carolina.
VIRGIL D. DUNCAN, age 76, is the founder of the Company. Mr. Duncan served
as President of the Company from its inception through June 1986, and since that
date he has served as Vice President of Research & Development. Mr. Duncan
served as a director of the Company from its inception in 1983 to April 1991 and
has since served as a director emeritus. Mr. Duncan also founded TIS, Inc.,
which is now a wholly-owned but inactive subsidiary of the Company. Mr. Duncan
received a B.S. degree in electrical engineering from North Carolina State
University. Mr. Duncan is a registered professional engineer in North Carolina,
Florida and the District of Columbia.
LAWRENCE A. HAGEMANN, age 53, has served as Vice President and General
Manager of TwinVision Corp. of North America, Inc., a wholly-owned subsidiary of
the Company, since July 1996. From July 1995 until July 1996 he served as Vice
President of ADDAX Sound Company, a privately-held company based in Illinois.
From April 1991 to December 1993 he served as Assistant to the President of
Vapor-Mark IV. Since October 1993 he has served as a Director of Transtel
Communications Ltd., a developer of news media software based in London,
England. From 1973 through December 1990 he served as Vice President of Sales
and Marketing for Extel Corporation of Illinois and as a Director of Excom
Communications Limited (UK) and Extel Overseas Limited (HK). He is a co-editor
of the 1995 book titled HOOVER'S GUIDE TO COMPUTER COMPANIES. Mr. Hagemann
received his bachelors degree in electrical engineering from the University of
Detroit and his M.B.A. from Loyola University (Chicago).
TANYA L. JOHNSON, age 33, has served as Assistant Secretary since January
1997 and as Director of Program Management and Operations of the TCS business
group since November 1995. Ms. Johnson also served as Manager of Engineering for
TCS from June 1990 to October 1995 and as an Engineering Specialist from January
1988 to May 1989. Ms. Johnson served as a Component Engineer at Teletec
Corporation from June 1989 through May 1990. Ms. Johnson led the development of
the Talking Bus product line and she shares the design patent for the Solar Max.
Ms. Johnson holds a B.S. degree in electrical engineering from Duke University.
JONATHAN E. KENNEDY, age 37, has served as Chief Financial Officer and
Secretary of the Company since November 1996. From January 1996 to November
1996, Mr. Kennedy was the Vice President and Chief Financial Officer for Coastal
Physician Services, Inc., a wholly-owned subsidiary of Coastal Physician Group,
Inc. ("Coastal") which is a New York Stock Exchange listed company. From May
1995 to January 1996, he was the Vice President and Corporate Controller for
Coastal and from September 1993 to May 1995 he was the Vice President of
Planning & Analysis for Coastal. From July 1984 until September 1993 he served
in various capacities, including five years as a manager or senior manager, with
KPMG Peat Marwick LLP, an international public accounting firm. Mr. Kennedy
received his B.S. degree in business administration from the University of North
Carolina and his M.B.A. from Duke University. Mr. Kennedy is a certified public
accountant.
BRUCE R. THOMAS, age 42, has served as Vice President of Sales for the TCS
business group since January 1991. From 1990 to 1991, he was a money manager
consultant for MA Thomas, Inc. From 1990 through December 1993, Mr. Thomas was
also a registered representative of Capital Investment Group, Inc., a securities
brokerage firm. From 1987 to 1989, he was Executive Vice President of Advance
Investments Co., Inc., where he directed money manager tracking and consulting
services. From 1986 to 1987, he was a Vice President for Baker and Thomas, a
money management consulting firm. From 1981 to 1986, he served as National
Commercial Bus Sales Manager for Thomas Built Buses. Mr. Thomas received a B.A.
degree from Washington and Lee University.
ANDREW L. TURNER, III, age 46, has served as Vice President and General
Manager of the HIS business group since February 1995 and as a Vice President of
the Company since March 1991. He served as President of Turner & Associates and
as Managing Director of Magnolia Capital Group from May 1986 to April 1991. Mr.
Turner was Vice President of Sales and Marketing of Management Systems
Associates, which markets computer systems to hospitals and health care
organizations, from June 1979 to May 1986. From 1980 to 1982, he served
concurrently as a sales executive with Distributed Data Systems, an affiliate of
Management Systems Associates. From June 1972 to August 1977, Mr. Turner served
as an engineer with the North Carolina Department of Transportation. Mr. Turner
received his B.S. degree in civil engineering from the Virginia Military
Institute and an M.B.A. from the University of Virginia. Mr. Turner is a
registered professional engineer.
KEY EMPLOYEE
DR. JAMES E. PAUL, JR., age 53, has served as the Chief Scientist of the
Company since March 1997. Prior to assuming that position, he had served as
President of the DAC business group since February 28, 1995 when the Company
acquired substantially all of the assets of Digital Audio Corporation ("Digital
Audio"). Dr. Paul founded Digital Audio in 1979 and
5
<PAGE>
had served as its President and chief engineer since its inception. Digital
Audio designed, manufactured and marketed digital signal processing equipment to
law enforcement agencies, and the Company had employed Dr. Paul to continue such
business operations as a business group of the Company. From 1979 to 1981, Dr.
Paul taught in the Electrical Engineering and the Computer Science Departments
of California State University, Fullerton. From 1969 to 1979, he served as the
senior research engineer and manager of the Audio Science Group at Rockwell
International Corporation. He received B.S., M.E.E. and Ph.D. degrees in
electrical engineering at North Carolina State University.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three years ended December 31, 1996 of J. Phillips L. Johnston, President and
Chief Executive Officer of the Company, John M. Cochran, Jr., Executive Vice
President and General Manager of the TCS business group, Bruce R. Thomas, Vice
President of Sales of the TCS business group and Andrew L. Turner, III, Vice
President and General Manager of the HIS business group (the "Named Officers"),
the only executive officers whose total annual salary and bonus exceeded
$100,000 for such fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND ANNUAL COMPENSATION OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS OTHER (SHARES)(#)(1)
<S> <C> <C> <C> <C> <C>
J. Phillips L. Johnston 1996 $150,000 $70,000 $ 14,975(2) --
Chairman of the Board, 1995 120,000 45,000 26,107(3) --
President and Chief 1994 110,000 -- 19,020(4) 38,000
Executive Officer
John M. Cochran, Jr. 1996 $ 94,467 $38,066(5) $ -- 32,000
Executive Vice President and 1995 -- -- -- --
General Manager, TCS 1994 -- -- -- --
Bruce R. Thomas 1996 $ 40,000 $ -- $120,216(6) --
Vice President of Sales, TCS 1995 40,000 -- 112,099(7) --
1994 36,000 -- 47,748(6) 14,000
Andrew L. Turner, III 1996 $ 79,167 $ -- $ 6,000(8) --
Vice President and General 1995 67,500 43,149(5) 9,658(9) --
Manager, HIS 1994 40,000 -- 49,402(6) 14,000
</TABLE>
(1) The options described above were granted pursuant to the Company's 1993
Incentive Stock Option Plan.
(2) Includes reimbursements of $7,169 for medical expenses and $7,806 for club
dues and related expenses.
(3) Includes $17,255 in medical expense reimbursements, usage of a company car,
reimbursement of club dues and reimbursement of related expenses.
(4) Includes $6,000 in consideration for a loan guaranty, an automobile expense
allowance, reimbursement of club dues and reimbursement of related expenses.
(5) Represents bonus under an executive incentive compensation plan.
(6) Represents commissions earned.
(7) Includes $24,000 forgiveness of a note payable and $88,099 in commissions
earned.
(8) Represents an automobile expense allowance.
(9) Includes $4,158 in commissions and an automobile expense allowance.
OPTION GRANTS TABLE. The following table sets forth information concerning
grants of stock options to the Named Officers pursuant to the Company's stock
option plan during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED (SHARES) FISCAL YEAR ($/SHARE) EXPIRATION DATE
<S> <C> <C> <C> <C>
John M. Cochran, Jr.................................... 25,000 35.8% $6.75 January 7, 2006
John M. Cochran, Jr.................................... 7,000 10.0 4.75 September 29, 2006
</TABLE>
6
<PAGE>
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE. No stock options were
exercised by the Named Officers in the fiscal year ended December 31, 1996. The
following table shows the stock option values for the Named Officers as of
December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-
MONEY
NUMBER OF SECURITIES OPTIONS AT
UNDERLYING UNEXERCISED FISCAL
OPTIONS AT FISCAL YEAR-END YEAR-END
(#) ($)(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
J. Phillips L. Johnston.............................................. 69,198 -- $ 1,560 --
John M. Cochran, Jr.................................................. 20,999 13,001 -- --
Bruce R. Thomas...................................................... 19,987 -- 299 --
Andrew L. Turner, III................................................ 19,987 -- 299 --
</TABLE>
(1) The dollar values are calculated by determining the difference between $3.25
per share, the closing sale price of the Common Stock on December 31, 1996,
and the exercise price of the options.
401(K) PLAN. In January of 1996 the Company implemented a defined
contribution savings plan ("Savings Plan") for all eligible employees (as
defined). The Savings Plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. Under the Savings Plan, a participant
may contribute from one to fifteen percent of his or her compensation, not to
exceed an amount which would cause the plan to violate Section 401(k) and other
applicable sections of the Internal Revenue Code. The Company does not make any
matching contributions to the Savings Plan. All participant's contributions are
invested, in accordance with the participant's election, in various investment
funds managed by the plan trustee. The Savings Plan permits withdrawals in the
event of disability, death, attainment of age fifty nine and one-half,
termination of employment or proven financial hardship. The Company pays all the
costs of administering the Savings Plan.
EMPLOYMENT AGREEMENTS. The Company entered into an employment agreement
with Mr. Johnston in November 1994. The agreement with Mr. Johnston requires
that the executive devote his full business time to the Company, may be
terminated by the Company for "cause" (as defined in the agreement), and
prohibits the executive from competing with the Company for one year following
termination of his agreement. Pursuant to his employment agreement, Mr. Johnston
currently receives an annual salary of $150,000, together with such bonuses or
other compensation as may be awarded by the Board of Directors or as provided in
the agreement. The employment agreement terminates on October 17, 1997. The
Company also has agreements with Messrs. Duncan and Paul.
COMMITTEES OF THE BOARD
The Board of Directors has delegated certain of its authority to a
Compensation Committee, Audit Committee, Technology Committee, Marketing
Committee and Acquisition and Alliance Committee. No member of any committee is
a current officer or employee of the Company with the exception of Messrs.
Cochran and Duncan, who serve on the Technology Committee, and Mr. Turner, who
serves on the Marketing Committee. Mr. Johnston serves ex-officio on all
committees and Mr. Kennedy serves ex-officio on the Audit Committee.
The Compensation Committee is currently composed of Ms. Tenney and Mr.
Pirotte, chaired by Ms. Tenney. The Compensation Committee held two meetings in
fiscal year 1996. The primary function of the Compensation Committee is to
review and make recommendations to the Board with respect to the compensation,
including bonuses, of the Company's officers and to administer the Company's
Stock Option Plan. This committee also performs the functions of a nominating
committee.
The Audit Committee is currently composed of Messrs. Meese, Kring and
Reeves with Mr. Meese as Chairman. The Audit Committee held two meetings in
fiscal year 1996. The function of the Audit Committee is to review and approve
the scope of audit procedures employed by the Company's independent public
accountants, to review and approve the audit reports rendered by the Company's
independent public accountants and to approve the audit fee charged by the
independent public accountants. The Audit Committee reports to the Board of
Directors with respect to such matters and recommends the selection of
independent public accountants.
The Technology Committee is currently composed of Dr. Ron Gyurcsik, Dr.
Matt Kuhn, Dr. Paul and Messrs. Duncan and Cochran. Mr. Cochran is Chairman of
this Committee. The Technology Committee held three meetings in fiscal year
1996. The function of the Technology Committee is to closely monitor
technological developments related to the Company's products and markets. The
Technology Committee also establishes priorities as well as time-to-market and
return on investment objectives of the Company's research and development
projects.
7
<PAGE>
The Marketing Committee is currently composed of Messrs. Kring, Meese,
Thomas, Turner and Turney. Mr. Kring serves as Chairman. The Marketing Committee
held four meetings in fiscal year 1996. The function of the Marketing Committee
is to develop the broad marketing strategy for the Company.
The Acquisition and Alliance Committee is currently composed of Messrs.
Reeves, Pirotte and Turney with Mr. Reeves as Chairman. The Acquisition and
Alliance Committee held three meetings in fiscal year 1996. The function of the
Acquisition and Alliance Committee is to research and evaluate potential
business acquisitions and alliances for the Company.
BOARD AND COMMITTEE ATTENDANCE
In fiscal year 1996, the Board of Directors held four meetings. All
directors attended more than 75% of the aggregate of board and committee
meetings held during fiscal year 1996.
THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS THAT SHAREHOLDERS VOTE
FOR THE DIRECTOR NOMINEES IDENTIFIED ABOVE.
II. PROPOSAL TO APPROVE AMENDMENT
TO THE 1993 INCENTIVE STOCK OPTION PLAN
The Company's 1993 Incentive Stock Option Plan (the "Plan") was adopted
effective April 27, 1993 and amended effective October 18, 1994. The Board of
Directors feels that the Plan has proved to be of substantial value in
recruiting new employees as well as stimulating the efforts of existing
employees. In light of the Company's continued growth, the number of shares
remaining for issuance under the Plan is insufficient to provide adequately for
participation by the increased number of eligible employees, directors and
consultants to whom the Compensation Committee would consider granting options
during the forthcoming fiscal year. The Board of Directors has adopted an
amendment to the Plan to increase the number of shares available for issuance
under the Plan by an additional 100,000 shares of Common Stock.
The provisions of the existing Plan, as well as the proposed amendment
thereto, are summarized below.
SUMMARY OF THE 1993 INCENTIVE STOCK OPTION PLAN
The Company's 1993 Incentive Stock Option Plan was adopted by the Board of
Directors and approved by the shareholders of the Company effective April 1993.
An aggregate of 200,000 shares of Common Stock were initially reserved for
issuance under the Plan. In October 1994, the Plan was amended to reserve an
aggregate of 250,000 shares for issuance under the Plan. The Plan provides for
the granting of incentive stock options ("Incentive Stock Options") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and stock appreciation rights ("SARs").
Nonqualified stock options may be granted to employees, directors and advisors
of the Company, while Incentive Stock Options may be granted to employees only.
No options may be granted under the Plan subsequent to April 2003.
The Plan is administered by the Compensation Committee of the Board of
Directors, which determines the terms and conditions of the options and SARs
granted under the Plan, including the exercise price, number of shares subject
to the option and the exercisability thereof.
The exercise price of all Incentive Stock Options granted under the Plan
must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant. In the case of an optionee who owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company, the exercise price of Incentive Stock Options
shall be not less than 110% of the fair market value of the Common Stock on the
date of grant. The exercise price of all nonqualified stock options granted
under the Option Plan shall be determined by the Compensation Committee. The
exercise price of nonqualified stock options granted under the Plan will not be
less than 85% of the fair market value of the Common Stock. The term of all
options granted under the Plan may not exceed ten years. The Plan may be amended
or terminated by the Board of Directors, but no such action may impair the
rights of a participant under a previously granted option.
The Plan provides the Board of Directors or the Compensation Committee the
discretion to determine when options granted thereunder shall become exercisable
and the vesting period of such options. Upon termination of a participant's
employment or consulting relationship with the Company, all unvested options
terminate and are no longer exercisable. Vested options shall remain exercisable
for a specified period of time following the termination date. The length of
such
8
<PAGE>
extended exercise period generally ranges from 60 days to one year, depending on
the nature and circumstances of the termination.
The Plan provides that, in the event the Company enters into an agreement
providing for the merger of the Company into another corporation or the sale of
substantially all of the Company's assets, any outstanding unexercised options
shall become exercisable at any time prior to the effective date of such
agreement. Upon the consummation of the merger or sale of assets, such options
shall terminate unless they are assumed or another option is substituted
therefor by the successor corporation.
The Plan provides the Board of Directors or the Compensation Committee
discretion to grant SARs in connection with any grant of options. Upon the
exercise of a SAR, the holder shall be entitled to receive a cash payment in an
amount equal to the difference between the exercise price per share of options
then exercised by him and the fair market value of the Common Stock as of the
exercise date. The holder is required to exercise options covering twice the
number of shares which are subject to the SAR so exercised. SARs are not
exercisable during the first six months after the date of grant, and may be
transferred only by will or the laws of descent and distribution.
As of December 31, 1996, a total of 246,259 nonqualified and Incentive
Stock Options were outstanding, with exercise prices ranging from $3.20 to $7.25
per share. Also, as of December 31, 1996, there were no SARs outstanding.
SUMMARY OF AMENDMENT
The Board of Directors proposes to amend the Plan by making an additional
100,000 shares of Common Stock available for grant. Assuming adoption of the
amendment, a total of 350,000 shares of Common Stock would be reserved for
issuance under the Plan.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE 1993 INCENTIVE STOCK
OPTION PLAN TO PERMIT THE ISSUANCE OF AN ADDITIONAL 100,000 SHARES PURSUANT TO
THE PLAN.
III. RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP has examined the financial statements of
the Company since fiscal year 1990. Subject to shareholder approval, such firm
has been re-appointed by the Board of Directors to serve as the Company's
independent public accountants for the 1997 fiscal year. Representatives of KPMG
Peat Marwick LLP are expected to be present at the Annual Meeting with the
opportunity to make a statement if it is their desire to do so, and will be
available to respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF KPMG PEAT
MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE COMPANY.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors,
certain officers and any persons holding more than ten percent of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and the Company. Specific due dates for these reports have
been established and the Company is required to disclose in this proxy statement
any failure to file, or late filing, of such reports with respect to the fiscal
year 1996. To the Company's knowledge, based solely on a review of the copies of
reports furnished to the Company and written representations with respect to
filing of such reports, the Company believes that all persons subject to Section
16(a) filing requirements applicable to the Company's securities have complied
with such requirements in the 1996 fiscal year except that (i) Messrs. Hagemann,
Pirotte and Claude G. Robinson failed to timely file a report on Form 3 in 1996,
(ii) Messrs. Johnston and Reeves failed to file one report on Form 4 with
respect to the sale of Common Stock during the 1996 fiscal year, (iii) Mr.
Duncan failed to file two reports on Form 4 with respect to two separate sales
of Common Stock during the 1996 fiscal year, and (iv) Messrs. Hagemann, Robinson
and Turney failed to file four, one, and one report(s), respectively, on Form 4
with respect to purchases of Common Stock during the 1996 fiscal year. All such
reports were subsequently filed.
9
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective March 1996, the Company entered into various marketing,
distribution, licensing and management agreements with RTI, an affiliate of
David L. Turney, a director of the Company. These agreements primarily relate to
the sublicensing of technology to, and management oversight of, Transit-Media
GmbH and TwinVision Corp. of North America, Inc., which are two wholly-owned
subsidiaries of the Company. During 1996, the Company paid $73,880 to RTI for
fees and commissions earned under these various agreements. In addition, the
Company paid $100,000 to RTI during 1996 for services rendered in connection
with the acquisition of Transit-Media GmbH. During 1996, the Company also
granted 30,000 warrants to RTI which allow RTI to purchase one share of Common
Stock for each warrant granted. Exercise of these warrants into common shares is
contingent upon the market price of the Company's common shares exceeding prices
ranging from $6.50 to $14.00 per share for ninety consecutive calendar days
prior to the exercise date. These warrants expire in April 2006.
The Company has retained Curtis I. Kring, a director of the Company and the
Chairman of the DAC business group, to perform certain business consulting
services for the Company. The Company paid fees under this agreement totaling
$67,000 and $55,000 during 1996 and 1995, respectively.
In connection with the Company's acquisition of Digital Audio Corporation,
the Company entered into an agreement with Dr. James E. Paul, the former
President of the DAC business group, to lease the office building in which
Digital Audio Corporation had been headquartered to accommodate the new business
group. The Company paid Dr. Paul $20,800 and $17,333 in rental fees during 1996
and 1995, respectively.
In March 1997, the Company entered into a new lease agreement for this
recently expanded office building with Dr. Paul. This lease agreement contains
monthly rental rates ranging from $4,241 to $5,013 during the life of the
agreement, which is from April 1997 to December 2002.
Effective June 1994, the Company entered into a distributor agreement with
First Exim Financial Limited ("Exim"), an affiliate of John M. Reeves, II, a
director of the Company. Pursuant to such agreement, Exim was appointed as the
Company's non-exclusive distributor in Canada and Puerto Rico and as the
Company's exclusive distributor in all other foreign countries. The agreement
provided that Exim would be entitled to purchase products from the Company at
75% of the Company's standard list price (or 60% of the standard list price in
the case of initial sales within a given country) for sale to Exim's customers.
No sales were made by Exim in 1995. Effective July 1995, the Company modified
this agreement to change the work scope to acquisition consulting services only.
The agreement was renewed for an additional year in April 1996. The Company paid
fees under this agreement to Exim totaling $33,250 and $23,750 during 1996 and
1995, respectively.
In January 1993, the Company redeemed all outstanding shares of Series C
Preferred Stock in exchange for 64,948 shares of Common Stock, a promissory note
in the principal amount of $85,843 payable to John M. Reeves, II, a current
director and at that time a director nominee and son of a shareholder, and
$150,000 in cash paid as dividends on the Series C Preferred Stock. The
promissory note was unsecured, bore interest at the rate of 6% per annuum, and
provided for 20 quarterly payments of $5,000 which commenced on April 1, 1993.
This note was paid in full on March 6, 1995.
Effective February 1993, the Company engaged Business Development
Associates, Inc. ("BDA"), an affiliate of C. James Meese, Jr., a director of the
Company, as an independent sales representative in marketing the Company's
products. Pursuant to such agreement, as amended effective May 15, 1994, BDA
received a monthly draw of $3,000 against commissions and reimbursement of
certain business expenses. The Company paid fees under this agreement totaling
$26,179 and $17,521 during 1996 and 1995, respectively.
The Company has adopted a policy pursuant to which material transactions
between the Company and its executive officers, directors and principal
shareholders (i.e. shareholders owning beneficially 5% or more of the
outstanding voting securities of the Company) shall be submitted to the Board of
Directors for approval by a disinterested majority of the directors voting with
respect to the transaction.
SHAREHOLDER PROPOSALS
Shareholders who intend to submit proposals for inclusion in the Proxy
Statement for the 1998 Annual Meeting of Shareholders must do so by sending the
proposal and supporting statements, if any, to the Company no later than
November 30, 1997. Such proposals should be sent to the attention of Mr.
Jonathan E. Kennedy, P.O. Box 14068, 4900 Prospectus Drive, Suite 1000, Research
Triangle Park, North Carolina 27709.
10
<PAGE>
OTHER MATTERS
Except for the matters described herein, management does not intend to
present any matter for action at the Annual Meeting and knows of no matter to be
presented at such Annual Meeting that is a proper subject for action by the
shareholders. However, if any other matters should properly come before the
Annual Meeting, it is intended that votes will be cast pursuant to the authority
granted by the enclosed Proxy in accordance with the best judgment of the person
acting under the Proxy.
ANNUAL REPORT
The Annual Report to Shareholders for the fiscal year ended December 31,
1996 is being sent to all shareholders with this Proxy Statement. The Annual
Report to Shareholders does not form any part of the material for the
solicitation of any Proxy.
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS, IS
AVAILABLE WITHOUT CHARGE TO ANY SHAREHOLDER OF THE COMPANY UPON WRITTEN REQUEST
TO MR. JONATHAN E. KENNEDY, P.O. BOX 14068, 4900 PROSPECTUS DRIVE, SUITE 1000,
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709.
11
<PAGE>
*******************************************************************************
APPENDIX
DIGITAL RECORDERS, INC.
P R O X Y
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 20, 1997
KNOW ALL MEN BY THESE PRESENTS: that the undersigned shareholder of Digital
Recorders, Inc. (the "Company") hereby constitutes and appoints J. Phillips L.
Johnston and Jonathan E. Kennedy, or either of them, as attorneys and proxies,
each with the power to appoint his substitute, and hereby authorizes them to
represent and vote, as designated below, all of the shares of stock of the
Company which the undersigned is entitled to vote at the Annual Meeting of
Shareholders of the Company to be held May 20, 1997, and at any and all
adjournments thereof with respect to the matters set forth below and described
in the Notice of Annual Meeting of Shareholders and Proxy Statement dated April
24, 1997, receipt of which is acknowledged.
1. To consider and act upon a proposal to elect the nominees presented below as
directors to hold office for one-year terms or until their successors are
elected and qualified.
[ ] FOR election of all nominees listed
[ ] WITHHOLD AUTHORITY TO VOTE FOR all nominees listed
Instruction: To withhold authority to vote for any individual nominee, strike
through the nominee's name below:
<TABLE>
<S> <C> <C> <C> <C>
John M. Cochran, Jr. Curtis I. Kring John K. Pirotte Juliann Tenney David L. Turney
J. Phillips L. Johnston C. James Meese, Jr. John M. Reeves, II John W. Thomas, Jr.
</TABLE>
2. 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 PROPOSAL [ ] AGAINST PROPOSAL [ ] ABSTAIN
3. To ratify the appointment of KPMG Peat Marwick LLP as the independent
certified public accountants of the Company for the fiscal year ending
December 31, 1997.
[ ] FOR RATIFICATION [ ] AGAINST RATIFICATION [ ] ABSTAIN
<PAGE>
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any and all adjournments
thereof.
[ ] AUTHORIZED TO VOTE [ ] ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO INDICATION IS MADE, THIS PROXY
WILL BE VOTED FOR THE NOMINEES LISTED AND FOR PROPOSALS 2 AND 3 AND THE PROXY
HOLDERS WILL VOTE ON ANY PROPOSAL UNDER 4 IN THEIR DISCRETION AND IN THEIR BEST
JUDGMENT.
PLEASE MARK, DATE, AND SIGN EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK
CERTIFICATE. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
DATED:
SIGNATURE
SIGNATURE IF HELD JOINTLY
IF THIS PROXY IS NOT DATED, THE
PROXY WILL BE DEEMED TO BEAR THE
DATE THE FORM WAS MAILED TO THE
SHAREHOLDER.
