<PAGE> 1
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 MARCH 31, 1998
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)
2300 ENGLERT DRIVE, SUITE B
DURHAM, NORTH CAROLINA 27713
(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 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 April 30, 1998
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
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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
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DIGITAL RECORDERS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 December 31,
Assets (Unaudited) 1997
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 717,987 472,285
Trade accounts receivable 3,033,018 3,173,959
Other receivables 38,213 54,288
Inventories 3,915,815 3,723,446
Prepaids and other current assets 122,988 74,486
------------ -----------
Total current assets 7,828,021 7,498,464
------------ -----------
Property and equipment, net 512,255 528,033
Goodwill, net 1,476,900 1,515,281
Intangible assets, net 378,830 403,263
Other assets 118,958 6,152
------------ -----------
$ 10,314,964 9,951,193
============ ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings $ 2,453,000 1,893,540
Accounts payable 1,560,953 1,112,285
Accrued expenses 169,591 237,048
Accrued commissions 203,164 261,165
Accrued warranty reserve 271,914 146,892
Dividends payable 39,825 39,825
Deferred revenue -- 80,585
------------ -----------
Total current liabilities 4,698,447 3,771,340
------------ -----------
Total liabilities 4,698,447 3,771,340
------------ -----------
Series AAA Redeemable, Convertible, Nonvoting Preferred Stock, $.10 par value,
Liquidation Preference of $5,000 per share, 20,000 shares authorized; 354 shares
issued and outstanding at March 31, 1998 and December 31, 1997, respectively 1,770,000 1,770,000
Stockholders' Equity:
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 267,407 267,407
Additional paid-in capital 10,654,618 10,694,443
Translation adjustment (229,615) (186,081)
Accumulated deficit (6,845,893) (6,365,916)
------------ -----------
Total stockholders' equity 3,846,517 4,409,853
------------ -----------
$ 10,314,964 9,951,193
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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DIGITAL RECORDERS, INC.
Consolidated Statements of Operations (Unaudited)
For the three month periods ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Net sales $ 2,894,305 2,398,210
Cost of sales 1,681,846 1,175,821
----------- ----------
Gross profit 1,212,459 1,222,389
Selling, general and administrative expenses 1,370,418 1,159,620
Research and development expenses 278,917 238,432
----------- ----------
Operating loss (436,876) (175,663)
Other income (expense):
Interest income 1,962 29,558
Interest expense (45,063) (3,186)
Other income, net -- 1,782
----------- ----------
Total other income (expense) (43,101) 28,154
Loss before income taxes (479,977) (147,509)
Income tax expense -- --
----------- ----------
Net loss (479,977) (147,509)
Preferred dividend requirements (39,825) (39,825)
----------- ----------
Net loss applicable to common stockholders $ (519,802) (187,334)
=========== ==========
Basic net loss per common share $ (0.19) (0.07)
=========== ==========
Diluted net loss per common share $ (0.19) (0.07)
=========== ==========
Weighted average number of common shares outstanding
for basic and diluted calculations 2,674,075 2,674,075
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the three month periods ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (479,977) (147,509)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization of
property and equipment 69,329 73,733
Amortization of goodwill and intangible assets 72,205 40,527
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 140,941 (302,660)
Decrease in other receivables 16,075 49,605
Decrease (increase) in inventories (192,369) 153,090
Increase in prepaids and other current assets (48,502) (68,080)
Increase in intangible assets (9,391) (64,972)
Increase in other assets (112,806) --
Increase (decrease) in accounts payable 448,668 (357,691)
Increase (decrease) in accrued expenses (436) 5,730
Decrease in deferred revenue (80,585) --
----------- ----------
Net cash used by operating activities (176,848) (618,227)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (53,551) (46,727)
Purchases of short-term investments -- (38,239)
----------- ----------
Net cash used by investing activities (53,551) (84,966)
----------- ----------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 2,309,460 873,000
Principal payments on short-term bank borrowings (1,750,000) (873,000)
Payment of dividends on preferred stock (39,825) (26,325)
----------- ----------
Net cash provided (used) by financing activities 519,635 (26,325)
----------- ----------
Effect of exchange rate changes (43,534) (59,857)
----------- ----------
Net increase (decrease) in cash and cash equivalents 245,702 (789,375)
Cash and cash equivalents at beginning of period 472,285 1,328,944
----------- ----------
Cash and cash equivalents at end of period $ 717,987 539,569
=========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 28,276 3,186
=========== ==========
Cash paid during the period for income taxes $ -- --
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the three month periods ended March 31, 1998 and 1997
Supplemental disclosures of noncash financing activities:
The Company declared $39,825 in dividends on Series AAA Preferred Stock in each
of the three month periods ended March 31, 1998 and 1997. The Company paid
$26,325 in cash dividends in the three month period ended March 31, 1997. The
remaining $13,500 of declared dividends for the three months ended March 31,
1997 were offset against an other receivable.
6
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DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998 and 1997
(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,
1997. The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full
calendar year.
(2) Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes new standards for computing and
presenting basic and diluted earnings per share. As required by SFAS No. 128,
the Company adopted the provisions of the new standard with retroactive
effect beginning in 1997. Accordingly, all net income (loss) per common share
amounts for all prior periods have been restated to comply with SFAS No. 128.
The basic net income (loss) per common share has been computed based
upon the weighted average of shares of common stock outstanding. Diluted net
income (loss) per common share assuming dilution has been computed based upon
the weighted average shares of common stock outstanding and shares that would
have been outstanding assuming the issuance of common stock for all dilutive
potential common stock outstanding. The Company's outstanding stock options
and warrants represent the only dilutive potential common stock outstanding.
The amounts of income (loss) used in the calculations of diluted and basic
income (loss) per common share were the same for all the periods presented.
Diluted net income (loss) per common share is equal to the basic net income
(loss) per common share for the three month periods ended March 31, 1998 and
1997, respectively, as all common equivalent shares from stock options and
stock warrants would have an antidilutive effect.
(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> 8
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued (Unaudited)
(4) Debt
On February 26, 1998, the Company renewed its $2,500,000 secured line
of credit facility and $1,000,000 secured letter of credit facility through
February of 1999. Both facilities are with the same financial institution.
These facilities provide for short-term borrowings and import letters of
credit, are subject to certain loan covenants, are secured by substantially
all of the Company's accounts receivable, inventory and equipment, and bear
interest, payable monthly, at the 90 day LIBOR base rate plus 4.0%.
(5) Subsequent Events
On April 6, 1998 the holders of the Series AAA Preferred Stock approved
an amendment to the Company's Articles of Incorporation to (i) extend the
mandatory redemption date of the Series AAA Preferred Stock (the "Preferred
Shares") to December 31, 2003, (ii) permit the earlier redemption of the
Preferred Shares at the Company's option at any time upon 30 days' written
notice, (iii) increase the amount of the quarterly dividend payable with
respect to each Preferred Share from $112.50 to $125.00, and (iv) increase
the number of shares of Common Stock of the Company issuable upon conversion
of each Preferred Share from 500 shares of Common Stock to 625 shares of
Common Stock. Such amendment will be presented to a vote of the holders of
Common Stock in the Company's fiscal 1997 Proxy Statement and, if approved by
a majority of the holders of Common Stock, will be adopted by the Company.
On April 14, 1998, the Company sold its Highway Information Systems
("HIS") business group to Quixote Corporation for $2.8 million in cash plus
other consideration of approximately $200,000. The Company realized a gain on
disposal, before applicable income taxes, of approximately $1,100,000. The
income tax expense on this transaction, which the Company will offset with
the tax loss carryforwards which existed as of December 31, 1997, totaled
approximately $450,000. Operating revenues from the HIS business group
comprised 24% of the Company's revenues in each of the three months ended
March 31, 1998 and 1997. Net proceeds to the Company will be used primarily
to reduce bank borrowings under the Company's credit facility.
8
<PAGE> 9
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"). On
April 14, 1998, the Company divested the HIS business group as more fully
described in Footnote 5 to the consolidated financial statements.
The Company's products are currently marketed to the mass transit and
law enforcement markets. Customers include municipalities, regional
transportation districts, federal, state, and local departments of
transportation, 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. During the three months ended March
31, 1998 and 1997, sales to three customers accounted for approximately 30% and
40% of net sales, respectively.
The Company typically recognizes revenue upon shipment of products to
customers or on a percentage of completion basis for certain longer-term
contracts. Because the Company's operations are characterized by significant
research and development expenses preceding a product introduction, net sales
and their related expenses may not be recorded in the same period, thereby
producing fluctuations in operating results. The Company's dependence on a small
number of relatively large customers or projects may increase the magnitude of
fluctuations in operating results.
The 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> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Net sales ............................. 100% 100%
Cost of sales ......................... 58 49
---- ----
Gross profit .......................... 42 51
Operating expenses :
Selling, general and administrative 47 48
Research and development .......... 10 10
---- ----
Total operating expenses .............. 57 58
---- ----
Operating loss ........................ (15) (7)
Other income (expense), net ........... (2) 1
---- ----
Loss before income taxes .............. (17) (6)
Income tax expense .................... -- --
---- ----
Net loss .............................. (17) (6)
==== ====
</TABLE>
Comparison of Three Ended March 31, 1998 and 1997.
Net sales for the three months ended March 31, 1998 were $2,894,305, an
increase of $496,095, or 21%, as compared to $2,398,210 for the comparable three
months in 1997. This increase is primarily attributable to increases in sales at
HIS and TwinVision, offset somewhat by a decrease in sales at DAC.
During the three months ended March 31, 1998, HIS sales increased
$119,765, or 21%, from the corresponding three months in the prior year. This
increase was due to increased sales of both the DR2000 computer-controlled and
Solar Max products.
During the three months ended March 31, 1998, TCS sales decreased
$2,320, or less than 1%, from the corresponding three months in the prior year.
The TCS business group is continuing to aggressively market its products;
however, the timing of large orders may continue to cause fluctuations in TCS
revenues.
During the three months ended March 31, 1998, DAC sales decreased
$306,654, or 53%, from the corresponding three months in the prior year. This
decrease primarily related to decrease in international sales occuring in the
first three months of 1998.
During the three months ended March 31, 1998, Transit-Media sales
increased $86,642, or 32%, from the corresponding three months in the prior
year. This increase reflects the fact that this subsidiary was still in its
start-up phase in the first three months of the prior year. During the three
months ended March 31, 1998, TwinVision sales totaled $585,962. The first sales
of this subsidiary did not occur until the second quarter of 1997.
Gross profit for the three months ended March 31, 1998 was $1,212,459, a
decrease of $9,930, or 1%, over gross profit of $1,222,389 for the three months
ended March 31, 1997. As a percentage of sales, gross profit during the three
months ended March 31, 1998 was 42% of net sales, as compared to 51% during the
corresponding three months in 1997. The decrease in gross profit percentage were
caused primarily by increased sales by Transit-Media and TwinVision, which sell
their products at lower gross margins than the Company's other business groups.
Selling, general and administrative expenses during the three months
ended March 31, 1998 were $1,370,418, an increase of $210,798, or 18%, as
compared to expenses of $1,159,620 during the three months ended March 31, 1997.
This increase is attributable to the overall growth of the Company and,
specifically, to the expenses incurred at Transit-Media and TwinVision as these
subsidiaries moved from their start-up phase in the prior year.
10
<PAGE> 11
Research and development expenses for the three months ended March 31,
1998 were $278,917, an increase of $40,485, or 17%, as compared to expenses of
$238,432 during the three months ended March 31, 1997. This increase related
primarily to additional product development in every business group but DAC.
Operating losses increased by $261,213 from $175,663 for the three
months ended March 31, 1997 to $436,876 for the three months ended March 31,
1998 primarily due to the factors set forth above.
Total other income (expense) for the three months ended March 31, 1998
was a net expense of $43,101, a decrease of $71,255 as compared to other income
for the three months ended March 31, 1997 of $28,154. 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 fund working capital needs and operating losses.
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 March 31, 1998 and 1997, the Company did not record any income tax
expense. 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
$2,845,535 as of December 31, 1997. This carryforward will be available to
offset federal taxable income, if any, through 2012. Also, as of December 31,
1997, one of the Company's subsidiaries had a net economic loss carryforward for
state income tax purposes of $758,446, which will be available to offset future
state taxable income, if any, through 2002. Following utilization of the
existing federal and state loss carryforwards, the Company's future operations,
if profitable, will be subject to income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
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.
The funds from this offering satisfied the Company's working capital
requirements until 1997. During 1997, the Company started to borrow money under
a $2,000,000 unsecured credit facility from a financial institution. On July 24,
1997, the Company's $2,000,000 unsecured credit facility from this 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 the same
financial institution.
On February 27, 1998 the Company renewed its $2,500,000 secured line of
credit facility and $1,000,000 secured letter of credit facility through
February of 1999. Both facilities are with the same financial institution. These
facilities provide for short-term borrowings and import letters of credit, are
subject to certain loan covenants, are secured by substantially all of the
Company's accounts receivable, inventory and equipment, and bear interest,
payable monthly, at the 90 day LIBOR base rate plus 4.0%. At March 31, 1998,
there were $2,453,000 of borrowings outstanding under the line of credit
agreement. In addition, at March 31, 1998, there was $127,380 committed under
import letters of credit for inventory purchases from an overseas supplier.
As of March 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $717,987, accounts receivable of
$3,033,018 and short-term bank borrowings of $2,453,000 providing the Company
with net working capital of $3,129,574.
The Company's operating activities used cash of $176,848 and $618,227
during the three month periods ended March 31, 1998 and 1997, respectively. For
the three month period ended March 31, 1998, increases in inventory and accounts
payable of $192,369 and $448,668, respectively 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 span between the time the Company must pay its suppliers
and the time the Company receives payment from its customers, particularly its
governmental customers.
11
<PAGE> 12
The Company's investing activities used cash of $53,551 and $84,966
during the three month periods ended March 31, 1998 and 1997, respectively.
Investing activities during the three month period ended March 31, 1998 related
entirely to capital expenditures of $53,551. Investing activities during the
three month period ended March 31, 1997 related to capital expenditures of
$46,727 and purchases of short-term investments totaling $38,239.
The Company's financing activities provided cash of $519,635 during the
three month period ended March 31, 1998 and used cash of $26,325 during the
three month period ended March 31, 1997. Financing activities during the three
month period ended March 31, 1998 related to net proceeds from short-term bank
borrowings totaling $559,460 and to the payment of dividends on preferred stock
of $39,825. Financing activities during the three months ended March 31, 1997
related to the payment of dividends on preferred stock of $26,325.
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 a combination of its net working capital, the borrowing capacity
available under its credit facility, the cash proceeds received from the sale in
April 1998 of the Highway Information Systems business group and the
modification of the terms of the Series AAA Preferred Stock will provide the
liquidity and capital resources necessary to satisfy the Company's currently
anticipated cash requirements for 1998. In addition, the Company is reviewing
various proposals which would provide additional capital resources to the
Company.
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; timely collection of accounts receivable; that the Company's
working capital and existing credit arrangement will be adequate to fund its
operations; 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 AND USE OF PROCEEDS
None.
12
<PAGE> 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.21.2 Note, Commitment Letter and General Security
Agreement, dated February 27, 1998, by and between
Wachovia Bank, N.A. and the Company.
27 Financial Data Schedule
(B) The Company filed a report on Form 8-K, dated April 14, 1998,
regarding the divestiture of the Highway Information Systems
business group.
(B) The Company filed a report on Form 8-K, dated May 12, 1998,
regarding a change in the Company's independent public accountants.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-QSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: May 14, 1998 By: /s/ DAVID L. TURNEY
--------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: May 14, 1998 By: /s/ LAWRENCE A. TAYLOR
-----------------------
Lawrence A. Taylor, Chief Financial Officer
13
<PAGE> 1
[WACHOVIA LETTERHEAD]
February 26, 1998
Mr. Phillips L. Johnson
President and Chief Executive Officer
Digital Recorders, Inc.
P.O. Box 14068
Research Triangle Park, NC 27709-4068
Dear Phil:
Wachovia Bank, N.A., ("the Bank") agrees to make available to Digital Recorders,
Inc. ("the Borrower") a $3,500,000.00 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," of "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 the earlier of on demand or February 26, 1999. 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.
DIRECT BORROWING AVAILABILITY: Up to $2,500,000, subject to advance rates set
forth in the Borrowing Base below, of this credit facility shall be available to
the Borrower for direct borrowings until and including July 31, 1998. From
August 1, 1998 until expiration of this credit facility up to $3,000,000 subject
to advance rates set forth in the Borrowing Base below, shall be available for
direct borrowings, subject to receipt and review of the Borrower's July 31, 1998
financial statements and subject to compliance by the Borrower of all terms,
conditions, and covenants set forth in this commitment.
LETTER OF CREDIT AVAILABILITY: Up to $1,000,000 of this credit facility shall be
available to the Borrower for support of Letters of Credit issued on behalf of
the Borrower until and including July 31, 1998. From August 1, 1998 until
expiration of this credit facility up to $500,000 shall be available for Letters
of Credit issued on behalf of the Borrower, subject to receipt and review of the
Borrower's July 31, 1998 financial statements and subject to compliance by the
Borrower of all terms, conditions, and covenants set forth in this commitment.
TOTAL AVAILABILITY: At no time shall direct borrowings and Letters of Credit
issued on behalf of the Borrower under this credit facility in aggregate exceed
$3,500,000.
<PAGE> 2
BORROWING BASE: From March 31, 1998 to April 30, 1998, advances will be limited
to 80% of domestic accounts receivable less than 90 days past due and 50% of
those domestic accounts receivable greater than 90 days past due, excluding
intercompany accounts, tainted accounts, or any other account determined by the
Bank as questionable. The Borrower will provide the Bank with a written
statement, signed by the officers of the company, attesting that there are no
disputes involved with those receivables greater than 90 days past due and that
those receivables are collectible.
From May 1, 1998 until maturity of this credit facility, advances will be
limited to 80% of eligible domestic accounts receivable. Beginning with
receipt of the borrowing base report for the period ending April 30, 1998,
eligible receivables are defined as those domestic accounts less than 90 days
past due, other than intercompany accounts, tainted accounts, or any other
account determined by the Bank as questionable.
INTEREST RATE: Monthly LIBOR Index plus 400 basis points as further defined in
the note.
INTEREST PAYMENTS AND PRINCIPAL PAYMENTS: Interest only shall be due and
payable monthly on the first day of the month, beginning April 1, 1998 and
continuing until expiration of this credit facility. All outstanding principal
and all accrued but unpaid interest shall be due upon expiration. Interest
shall be calculated on a 360 day basis for the actual days elapsed.
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.
USE OF PROCEEDS: Credit facility to finance short-term working capital
purposes and Import Letters of Credit.
COLLATERAL: General Security Agreement between the Borrower and the Bank will
be held as collateral for this facility. Additionally, the Bank will have a
first priority lien position on all assets of the company. There shall be no
secondary lien positions by any other party without prior consent of the Bank.
This consent shall not be unreasonably withheld in the event the Borrower
obtains subordinated debt or other forms of junior capital.
FINANCIAL REPORTS: The following information will be required:
Audited year-end Financial Statements for the Company
Monthly Balance Sheet and Income Statement
Monthly Borrowing Base Report and Receivables Aging shall be received
by the Bank within 20 days of month end.
<PAGE> 3
LOAN CONVENANTS: Unless the Bank shall otherwise agree in writing, for so long
as this agreement shall remain in effect and until all of the Obligations are
paid in full, the Borrower agrees as follows:
1. The Borrower shall maintain a senior management team acceptable to the Bank
at all times. The Borrower shall not make any change to the senior management
team without prior notification to the Bank.
2. The Borrower will secure additional minimum capital of $1,500,000 within the
first 2 Quarters of the Company's fiscal year 1998 acceptable to the Bank. In
the event The Borrower is able to secure a total of $2,000,000 in capital
within the first 3 Quarters of the Company's fiscal year 1998 the line of
credit facility shall be priced at Monthly LIBOR Index plus 3.75% beginning in
the month following verification of the capital injection. Acceptable capital
shall include sale of assets, subordinated debt, or equity.
3. Earnings Before Interest and Taxes, (EBIT), as defined by the Borrower's
budgeted numbers dated 1/9/98 (see attached), shall meet the following
requirements on a Rolling 3 month basis:
<TABLE>
<CAPTION>
Period Ending EBIT greater than or equal to:
<S> <C>
March 31, 1998 (476,711)
April 30, 1998 (210,697)
May 30, 1998 (157,704)
June 30, 1998 (63,428)
July 31, 1998 (40,649)
August 31, 1998 232,633
September 30, 1998 517,650
October 31, 1998 739,546
November 30, 1998 743,673
December 31, 1998 887,004
</TABLE>
4. Debt/Worth should meet the following requirements on a monthly basis:
<TABLE>
<CAPTION>
Period Ending Debt to Worth less than equal to:
<S> <C>
March 31, 1998 .442
April 30, 1998 .478
May 30, 1998 .562
June 30, 1998 .600
July 31, 1998 .731
August 31, 1998 .740
September 30, 1998 .769
October 31, 1998 .764
November 30, 1998 .611
December 31, 1998 .608
</TABLE>
<PAGE> 4
OTHER: This facility will not be attached to a Financial Management Account.
Evidence of Board Approval for 1998 Budget shall be received prior to
closing this facility.
EVENTS OF DEFAULT: The occurrence of any one or more of the following Events of
Default will constitute a default by the Borrower under this commitment,
whereupon the Note and all indebtedness of the Borrower to the Bank will, at
the option of the Bank, immediately become due and payable without
presentation, demand, protest or notice of any kind, all of which are hereby
expressly waived, and the Borrower will pay the reasonable attorney's fees
incurred by the Bank in connection with such default or recourse against any
collateral held by the Bank as security for the indebtedness owed by the
Borrower:
a) Non-payment when due, whether by acceleration or otherwise, of any
principal payment on the Note;
b) Non-payment within ten days after due date of interest on the Note, or
any premium, fee or other charge under this Commitment;
c) A breach or failure of performance by the Borrower of any provision of
this Commitment which is not remedied within 30 days after written
notice is sent from the Bank;
d) The Borrower: (1) files a petition or has a petition filed against it
under the Bankruptcy Code or any proceeding for the relief of insolvent
debtors; (2) generally fails to pay its debts as such debts become due;
(3) has a custodian appointed for the Borrower or its assets; (4)
benefits from or is subject to the entry of an order for relief by any
court or insolvency; (5) makes an admission of insolvency seeking the
relief provided in the Bankruptcy code or any other insolvency law; (6)
makes an assignment for the benefit of creditors; (7) has a receiver
appointed, voluntarily or otherwise, for its property; (8) suspends
business; (9) permits a judgment in the amount of $5,000 or more to be
obtained against it which is not promptly paid or promptly appealed and
secured pending appeal; (10) becomes insolvent, however otherwise
evidenced; or (11) defaults in payment of any other indebtedness, or
permits the time of payment of any other indebtedness to be
accelerated.
APPLICABLE LAW: This commitment shall be interpreted, construed, enforced, and
governed by the laws of the State of North Carolina.
Upon return by your company to the Bank of a fully-executed copy of this
commitment by February 27, 1998, this commitment will be considered accepted
and will constitute an
<PAGE> 5
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 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) 755-7628.
Sincerely,
/s/ Heather Byrd
Heather Byrd
Banking Officer
ACCEPTED THE 27 DAY OF FEBR, 1998:
DIGITAL RECORDERS, INC.
By: /s/ J. Phillips L. Johnston
-------------------------------
Title: Chairman/President
-----------------------------
Accepted Copy Received by Bank:
By: /s/ Heather Byrd
----------------------------
Date: 2-27-98
--------------------------
<PAGE> 6
[WACHOVIA LOGO]
NOTE AND SECURITY AGREEMENT This Note is a renewal of an existing Note
between Borrower and Lender.
RALEIGH, NORTH CAROLINA
- ---------------------------------------
Date February 27, 1998 $ 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. (hereinafter called the
"Lender") at its office, where borrowed, in immediately available funds of
lawful money of the United States, the sum of Two Million Five Hundred Thousand
and no/100 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 [ ] included in the payments described
described above; above.
Payable at the rate per annum of: [ ] Prime Rate [ ] ___% of Prime [ ] ___%
plus ___%; 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.
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 monthly beginning April 1, 1998.
--------------------------------
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 the greater of 150% of the Prime Rate, or 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.
To the extent not prohibited by law, a late charge of four percent (4%) or the
applicable statutory maximum, whichever is greater, shall be assessed on any
payment remaining past due for fifteen (15) days or more unless interest on this
Note is payable in advance, in which case such period shall instead be thirty
(30) days or more; provided, however, that if any applicable statute allows a
shorter minimum time period for the imposition of a late charge, such shorter
time period shall prevail.
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, in accordance with the then current
billing statement applicable to this Note, first to accrued interest, then to
fees, then to principal due and then to late charges. Any remaining funds shall
be applied to the further reduction of principal. Notwithstanding the foregoing,
upon the occurrence of a default hereunder, payments shall be applied as
determined by Lender in its sole discretion.
[ ] 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 February 26, 1998
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.
In addition to any other collateral specified herein and in other agreements,
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, now existing or hereafter incurred or arising (hereinafter sometimes
referred to as the "Obligations"), except for other indebtedness, obligations
and liabilities owing to Lender that constitute (a) consumer credit as defined
in
<PAGE> 7
Federal Reserve Board Regulation Z or (b) non-consumer credit if under
applicable state law the maximum interest rate of such credit is reduced when
secured (herein collectively) referred to as "Restricted Debt"), the Borrower
does hereby grant to the Lender a security interest in and security title to,
and does hereby assign, pledge, transfer and convey to Lender the following
described property:
collateral more particularly described in a Security Agreement - Commercial
- ------------------------------------------------------------------------------
dated February 27, 1998 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 and/or
proceeds of any of the foregoing. In no event, however, shall the Lender 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 a security interest in and security title to, and does hereby assign,
pledge, transfer and convey to Lender. (i) all other property of the Borrower
of every kind or description now or hereafter in the possession or control of
the Lender, exclusive of any such property in the possession or control of the
Lender 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, and the Lender may at any time, without demand or notice,
appropriate and apply any of such to the payment of any of the Obligations
(except for Restricted Debt), whether or not due. All property described in
this paragraph, in which the Borrower has granted to the Lender 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 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.
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 be 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 or from time to 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 investments securities forming a part of the Collateral; (iv) to
notify the obligors on any Obligation 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.
Borrower will at Lender's request maintain insurance on the Collateral in
amounts at least equal to the fair market value of the Collateral and against
casualty, public liability and property damage risks and such other risks as
Lender may request, provided, however, if the Collateral described above is a
vehicle(s), Borrower agrees to obtain and maintain liability insurance as
required by law and collision and comprehensive insurance with deductible not
exceeding $500.00. All insurance shall be with companies with a Best Insurance
Report Rating of B+ or better, and Borrower will pay all premiums for insurance
when due. Unless and until requested by Lender, Borrower shall not be required
to name Lender as additional insured in such policy or to provide Lender a copy
of the policy for or certificate evidencing such insurance, but when and if
requested by Lender, the Borrower shall immediately (but not later than five (5)
calendar days) (i) cause all policies of such insurance to specify that Lender
is an additional insured as its interests may appear and to provide that such
insurance shall not be cancellable by Borrower or the insurer without at least
30 days advance written notice to Lender and that proceeds are payable to Lender
regardless of any act or omission of Borrower which would otherwise result in a
denial of a claim; and (ii) deliver all policies or certificates thereof (with
copies of such policies) to Lender. In the event any or all of such insurance
is cancelled, any returned premium thereon may be collected by Lender and
applied by Lender to any part of the Obligations, either 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.
The undersigned will also pay all taxes and other impositions on the Collateral
as well as the cost of repairs or maintenance to the Collateral. If the
undersigned fails to maintain such insurance or fails to pay any and all amounts
for taxes, repairs, maintenance and other costs, Lender may, at its option, but
shall not be required to, purchase such insurance or pay any premium owing with
respect to such insurance or pay such amounts for taxes, repairs, maintenance
and other cots, and any such sum paid by Lender shall be payable by the Borrower
on demand by Lender or at its option may be added to the Obligations and secured
hereby. The loss, injury or destruction or the Collateral, with or without the
fault of Borrower, shall not release the Borrower from any liability hereunder
or in any way affect Borrower's liability hereunder. Upon (i) 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, 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
Lender or any other creditor or to allow or permit any other liabilities,
indebtedness or obligations to Lender or 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 or any guaranty securing 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 judgement
or lien or garnishment or attachment against any Obligor or his property,
whether actual or threatened; (vii) the 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, to the extent permitted by the law, 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 and 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 or the State 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
<PAGE> 8
SCHEDULE 1
This Schedule is referenced on the Note and Security Agreement dated February
27, 1998 in the stated amount of $2,500,000.00 between Digital Recorders, Inc.
as Borrower and Wachovia Bank, N.A. as Lender and shall be considered a part
thereof to the same extent as if written therein.
The Note shall bear interest from the date hereof at a rate per annum
equal to the "Monthly LIBOR Index" for the applicable Interest Period plus four
hundred (400) basis points.
As used herein, the "Monthly LIBOR Index" for an applicable Interest
Period shall mean a rate per annum equal to the quotient obtained by dividing
(i) the applicable "LIBOR" for such Interest Period by (ii) 1.00 minus the
"Eurodollar Reserve Percentage".
As used herein, the "LIBOR" shall mean for the applicable Interest
Period the rate per annum, at which deposits of United States dollars with
maturities comparable to the applicable 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 designated by the British Bankers' Association for the purpose of
displaying London Interbank Offered Rates for U.S. dollar deposits), determined
as of 11:00 a.m. (London time)(rounded upward to the next higher of 1/10,000 of
1%), two (2) business days prior to the commencement of the applicable Interest
Period.
As used herein, "Eurodollar Reserve Percentage" means for any day that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank of
the Federal Reserve System in respect of "Eurocurrency liabilities" (as
adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage).
As used herein, "Interest Period" shall mean each successive calendar
month, with the first Interest Period being the period from the date of the
Note until the last day of that calendar month.
Notwithstanding any provisions herein to the contrary, if the Lender
should at any time determine that it is not possible to determine the Monthly
LIBOR Index or that the Monthly LIBOR Index is no longer available, then the
Note shall continue to bear interest at the rate in effect during the last
Interest Period in which the Monthly LIBOR Index is available or determinable
until the beginning of the next Interest Period in which the Monthly LIBOR
Index is available or determinable.
<PAGE> 9
(WACHOVIA LOGO)
SECURITY AGREEMENT - COMMERCIAL
RALEIGH, NORTH CAROLINA
Digital Recorders, Inc., a corporation with its principal place of business
located at 2300 Englert Drive, Suite B, RTP., North Carolina 27709 (the
"Pledgor"), for value received, hereby assigns, conveys, transfers and grants a
continuing lien and security interest and title in and to WACHOVIA BANK, N.A.,
with an address of 100 N. Main Street, Winston-Salem, North Carolina (the
"Lender") in the Collateral as defined, checked and filled in below:
COLLATERAL check appropriate box(es):
[X] ACCOUNTS. Each and every account, chattel paper, general intangible and
instrument, as those terms are defined in the UCC (as defined below), and all
other rights of Pledgor to the payment of money of every nature, type and
description, whether now owing to Pledgor or hereafter arising, and all monies
and other proceeds (cash or non-cash), including, without limitation, the
following: all accounts, accounts receivable, book debts, securities,
instruments and chattel paper, books of account and records of Pledgor, deposit
account balances, notes, drafts, acceptances, rents, guest room receipts,
payments under leases or sales of Equipment or Inventory (as defined below) and
other forms of obligations now or hereafter received by or belonging or owing to
Pledgor for goods sold or leased and/or services rendered by it, and all of
Pledgor's rights in, to and under all purchase orders, instruments and other
documents now or hereafter received by it evidencing obligations for and
representing payment for goods sold or leased and/or services rendered, and all
monies due or to become due to Pledgor under all contracts for the sale or lease
of goods and/or the performance of services by it, now in existence or
hereafter arising, including, without limitation, the right to receive the
proceeds of said purchase orders and contracts; all contracts, leases,
instruments, undertakings, documents or other agreements in or under which
Pledgor may now or hereafter have any right, title or interest; all customer
lists, tax refunds due Pledgor from any governmental agency; and any and all
proceeds of any of the above;
[X] INVENTORY. All "inventory", as such term is defined in the UCC, now owned
or hereafter acquired by Pledgor, of every nature, type and description,
wherever located, including, without limitation, all of Pledgor's goods or
personal property held for lease or sale or being processed for lease or sale,
all raw materials, work in progress, finished goods, packaging materials, goods
held for display or demonstration, goods on lease or consignment, returned and
repossessed goods and all other materials or supplies used or consumed or to be
used or consumed in Pledgor's business or in the processing, packaging or
shipping of the same, excluding any toxic, hazardous or radioactive material or
any other material which may be disposed of lawfully only pursuant to a special
permit or at a government approved facility, all documents including, without
limitation, documents of title, warehouse receipts and bills of lading covering
all or any portion of such inventory, and all customer lists; and any and all
proceeds and products of any of the above;
[X] EQUIPMENT. All "equipment", as such term is defined in the UCC, now owned
or hereafter acquired or leased by Pledgor, including, without limitation, any
equipment described on a schedule attached hereto, all tools and items of
machinery and equipment of any kind, nature and description whether affixed to
real property or not, as well as trucks and vehicles of every description,
trailers, handling and delivery equipment, furnishings, leasehold improvements,
fixtures and office furniture and all other tangible personal property of
Pledgor of every nature, type and description, and any and all additions to,
substitutions for and replacements of or accessions to and property similar to
any of the foregoing, wherever located, together with all attachments,
components, parts (including spare parts), equipment and accessories installed
thereon or affixed thereto and all fuel for any thereof; and any and all
proceeds of any of the above;
[X] GENERAL INTANGIBLES. All "general intangibles", as such term is defined in
the UCC, now owned or hereafter acquired by Pledgor or in which Pledgor now has
or hereafter acquires any right, title or interest, including, without
limitation, (a) all of Pledgor's choses in action, suits, actions, causes of
action and claims of every kind and nature, whether at law or in equity, (b) all
condemnation awards and insurance proceeds, (c) all tax refunds, rights and
claims thereto and other payments from any local, state or federal government
authority or agency, (d) all contract rights, licenses, permits, zoning
approvals, rights, agreements and all other private or governmental documents of
every kind or character whatsoever and (e) all customer lists, servicing rights,
patents and patent rights (whether or not registered), licenses, permits,
certificated and uncertificated securities, investment property, trade marks,
service marks, trade names, logos, copyrights, computer programs and software,
goodwill; and any and all proceeds of any of the above;
[ ] OTHER. ________________________________________________________________ and
any and all proceeds thereof and any and all replacements of or accessions to
and property similar to the foregoing; all collectively referred to hereinafter
as "Other Collateral."
(The Accounts, Inventory, Equipment, General Intangibles and Other Collateral,
or such as are checked above, including all instruments, documents, securities,
cash, property, books and records, computer storage media and ledger books
arising out of or related in any way to any of the foregoing, owned by Pledgor
or in which Pledgor has an interest, which now or hereafter are at any time in
the possession or control of Lender or in transit by mail or carrier to or from
Lender or in the possession of any third party acting on behalf of Lender,
without regard to whether Lender received the same in pledge, for safekeeping,
as agent for collection or transmission or otherwise or whether Lender had
conditionally released the same, and any deposit accounts of Pledgor with
Lender against which Lender may exercise its right of setoff, are hereinafter
collectively referred to as the "Collateral"). Proceeds of the Collateral shall
include any proceeds of insurance thereon against fire or physical damage
whether or not such policy shall contain an endorsement in favor of Lender.
"UCC" as used herein shall mean Article 9 of the Uniform Commercial Code of
the State of North Carolina as in effect on the date hereof. All other terms
used herein which are defined in the UCC shall have the meanings therein stated.
1. OBLIGATIONS SECURED.
The security interest hereby granted is to secure the payment to Lender and
the performance of all indebtedness, liabilities and obligations of Pledgor to
Lender whatsoever, whether existing as of the date hereof or hereafter arising,
and whether direct, indirect, absolute or contingent, joint or several, as
maker, endorser, guarantor, surety or otherwise, including without limiting the
generality of the foregoing, (i) any indebtedness, liability or obligation of
Pledgor to Lender for any credit extended to Pledgor by Lender prior to the date
hereof, and any and all extensions or renewals thereof in
<PAGE> 10
whole or in part, (ii) any indebtedness, liability or obligation of Pledgor to
Lender under any later or future advances or loans made by Lender to Pledgor,
and any and all extensions or renewals thereof in whole or in part; and (iii)
all costs, expenses and reasonable attorneys' fees incurred by Lender in
connection with the collection of any of the foregoing or in the protection or
enforcement of Lender's rights or remedies hereunder or under any instrument or
document given in connection with any of the foregoing (hereinafter collectively
referred to as the "Obligations"), provided, however, that the security interest
hereby granted shall not include (a) consumer credit as defined in Federal
Reserve Board Regulation Z or (b) non-consumer credit if under applicable state
law the maximum interest rate for such credit is reduced when secured.
2. REPRESENTATIONS. Pledgor 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 Obligation) as follows:
(a) Pledgor now owns, or will use the proceeds of the loan advances hereby to
become the owner of the Collateral and has the right to grant to Lender a
security interest therein. Pledgor has full authority from its directors
and/or shareholders, members or partners (if any) to grant a security interest
in the Collateral to Lender.
(b) Pledgor's legal name is the name set forth in the first paragraph of this
Agreement and the following is a list of any and all names used by Pledgor
during all or any part of the five year period preceding the date of this
Agreement: N/A
--------------------------------------------------------------------
(c) Pledgor's chief executive office and principal place of business is at the
address set forth in the first paragraph of this Agreement and the following is
a list of all business addresses used by Pledgor during all or part of any of
the five year period preceding the date of this Agreement:
4900 Prospectus Drive, Suite 1000, RTP, North Carolina 27709
- -------------------------------------------------------------------------------
(d) The records relating to the Collateral will be located at the address set
forth in the first paragraph of this Agreement unless a different address is
hereby specified: N/A
--------------------------------------------------------------
(e) The Collateral will be located at the address set forth in the first
paragraph of this Agreement unless a different address is hereby specified:
N/A
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(f) All or a part of the Collateral is or will be attached to real estate
described as N/A and its record owner is N/A (if more than one record owner, all
must be shown). Notwithstanding the above, and regardless of the manner of the
affixation, the Collateral shall remain personal property and will not become
part of the real estate.
(g) Pledgor has not previously assigned or encumbered any Collateral, the
Collateral is free and clear of any and all security interests, liens, and
encumbrances whatsoever, other than those to Lender, and no financing
statement covering the Collateral or any proceeds thereof is on file in any
public office except those in favor of Lender.
(h) The Accounts hereby assigned are bona fide and correct in amount, and there
are no set-offs, counterclaims or defenses of any kind thereto, except as may
have been disclosed to Lender in writing.
(i) The Collateral is not and shall not be used for personal, family, household
or farming use.
(j) Pledgor has delivered or will deliver to Lender all documents of title
evidencing Inventory, including, but not limited to, bills of lading, dock
warrants, dock receipts and warehouse receipts.
3. COVENANTS. Until the Obligations are paid and/or performed in full and
Lender is no longer obligated to extend additional extensions of credit or
financial accommodations on the Obligations, Pledgor agrees:
(a) To promptly pay, without offset or deduction, any amount due under any
Obligation, whether principal, interest, late charges or otherwise, even if the
Collateral is lost, damaged, or destroyed.
(b) To pay when due all taxes, licenses, repair bills and other assessments and
public or private charges and to forward to Lender upon request evidence of
such payments.
(c) To maintain insurance on the Collateral in amounts at least equal to the
fair market value of the Collateral and against casualty, public liability and
property damage risks and such other risks as Lender may request. All
insurance shall be with reputable companies with a Best Insurance Report Rating
of B+ or better, and Pledgor will pay all premiums for insurance when due.
Unless and until requested by Lender, Pledgor shall not be required to name
Lender as additional insured in such policy or to provide Lender a copy of the
policy for or certificate evidencing such insurance, but when and if requested
by Lender, Pledgor shall immediately (but no later than five (5) calendar days)
(i) cause all policies of such insurance to specify that Lender is an additional
insured as its interests may appear and to provide that such insurance shall
not be cancellable by Pledgor or the insurer without at least 30 days advance
written notice to Lender and that proceeds are payable to Lender regardless of
any act or omission of Pledgor which would otherwise result in a denial of a
claim; and (ii) deliver all policies or certificates thereof (with copies of
such policies) to Lender. In the event any or all insurance hereinbefore
provided for is cancelled, any returned premium thereon may be collected by
Lender and applied by Lender to any part of the Obligations, whether matured or
unmatured.
(d) To keep and maintain, at Pledgor's own expense, satisfactory, complete and
current records of the Collateral, including, but not limited to, a record of
all shipments received, deliveries made, payments received, credits granted
thereon and other dealings therewith; and to furnish such reports on Pledgor
and the Collateral to Lender as Lender may request from time to time.
(e) To keep the Collateral in good order and repair, at Pledgor's expense.
Pledgor will not violate any federal, state or local law or regulations,
including, without limitation, environmental laws and regulations, in the use,
operation, manufacture or storage of the Collateral.
(f) To execute and deliver on demand such further assurances and to take such
steps as may be necessary to perfect and maintain Lender's security interest in
the Collateral (including, but not limited to, obtaining certificates of title
showing Lender's lien and executing assignments and financing and
<PAGE> 11
requirement for the payment of periodic interest or the recitation of defaults
and the right of Lender to declare any Obligation due and payable shall not
constitute an election by Lender to waive its right to demand payment under a
demand at any time and in any event as Lender in its sole discretion may deem
appropriate.
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. All prior agreements to the extent
inconsistent with the terms of this Note shall be construed in accordance with
the provisions hereof. 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 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 affecting the
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 all obligations of the
Borrowers shall bind the heirs, legal representatives, successors and assigns of
the Borrower. The Borrower and each endorser, surely or guarantor of this Note,
whether bound by this or by separate instrument or agreement, shall be jointly
and severally liable for the indebtedness evidenced by this Note and hereby
severally (1) waive presentment for payment, demand, protest, notice of
nonpayment or dishonor and of protest and any and all other notices and demands
whatsoever; (2) consent that at any time, or from time to time, payment of any
sum payable under this Note may be extended without notice whether for a
definite or indefinite time; and (3) agree to remain liable until 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, 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. The
Borrower shall pay to the holder on demand all expenses, including reasonable
attorneys' fees and expenses of legal counsel, incurred by the holder in any way
arising from or relating to the enforcement or attempt enforcement of the Note
and any related guaranty, collateral document or other document and the
collection or attempted collection, whether by litigation or otherwise, of the
Note. Time is of the essence.
Borrower acknowledges that Lender may reproduce (by electronic means or
otherwise) any of the documents evidencing and/or securing the Obligations and
thereafter may destroy the original documents. Borrower does hereby agree that
any document so reproduced shall be and remain the binding obligation of
Borrower, enforceable and admissible in evidence against it to the same extent
as if the original documents had not been destroyed.
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.
(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]
<PAGE> 12
continuation statements) and to preserve the priority of Lender's security
interest and lien on the Collateral. Pledgor will reimburse Lender for all
expenses incurred in the filing and obtaining of such documents and perfecting
its security interest in the Collateral.
(g) To pay promptly upon demand Lender's costs and expenses, including
reasonable attorneys' fees, in connection with any litigation, claim, action or
proceeding that may arise in connection with the collection, enforcement or
protection of the Obligations or the Collateral.
(h) Not to sell, rent, lend, grant a security interest in, encumber,
transfer or otherwise dispose of any of the Collateral or any portion thereof
without prior written consent of Lender, except for the processing and sale of
Inventory in the ordinary course of business for cash or on open account or
other terms customarily extended by Pledgor to Pledgor's customers as long as no
"Event of Default" (as defined below) has occurred. Pledgor will not permit any
liens or security interests to attach to any of the Collateral except those
created by this Agreement, will not permit any of the Collateral to be levied
upon or seized under any legal process and will not do or permit anything to be
done that may impair the security intended to be afforded by this Agreement.
(i) Not to change the location of the principal place of business or the
Collateral or cause such Collateral to be moved, maintained or stored in any
other location (except in connection with the delivery of Inventory to
purchasers in the ordinary course of business) without giving Lender at least
thirty (30) days prior written notice, and Pledgor will not move the Collateral
from the state without prior written consent of Lender.
(j) To obtain, upon Lender's request, a waiver or disclaimer in favor of
Lender and in a form satisfactory to Lender, signed by all persons owning or
having an interest in real estate upon which all or part of the Collateral is or
will be attached or used.
(k) To furnish Lender from time to time, upon request, with Pledgor's then
current financial statement in form and detail satisfactory to Lender, as well
as such other financial information as Lender may request from time to time.
(l) To maintain its existence in good standing as may be from time to
time required by applicable law. Pledgor will not merge, consolidate or change
control, without prior written approval of Lender. Pledgor will not change its
name without giving Lender at least thirty (30) days prior written notice and
delivering to Lender financing statements in the new name, duly filed in each
jurisdiction where financing statements must be filed to perfect a security
interest in the Collateral. At the request of Lender, Pledgor will qualify to do
business and obtain all requisite licenses and permits in each state in which
such qualification may be necessary in order to maintain any action to collect
any Account.
(m) To permit Lender or its agent to enter upon Pledgor's premises at any
time and without hindrance or delay to inspect the Collateral and to inspect,
audit, copy and make extracts from the books, records, journals, orders,
receipts, correspondence, computer storage media or data related or pertaining
thereto; and for the further security of Lender, it is agreed that Lender has a
special property interest in all books and records of Pledgor pertaining to
Accounts. Lender shall also have the right at any time to make direct
verification with any account debtors as concerns the Collateral. Pledgor shall,
at its own expense and cost, deliver any such books, account ledgers and records
to Lender or any designated agent of Lender at any time upon request.
(n) To notify Lender immediately in the event that any Inventory
purchased by or to be delivered to Pledgor shall be evidenced by a bill of
lading, dock warrant, dock receipt, warehouse receipt or other document of
title, and to deliver such documents to Lender upon request. Pledgor also agrees
to deliver to Lender on demand all Collateral of which Lender is required to
take possession in order to perfect its security interest therein, promptly upon
the acquisition by Pledgor of any interest in such Collateral after the date
hereof.
(o) Not to compromise, modify or discount any Account, except for
ordinary trade discounts or allowances for prompt payment, without the prior
written consent of Lender.
(p) If any of the Accounts are or should become evidenced by promissory
notes, trade acceptances or other instruments, to immediately notify Lender and
upon request by Lender to deliver the same to Lender appropriately endorsed or
assigned with recourse to Lender's order, and regardless of the form of such
endorsement or assignment, Pledgor hereby waives presentment, demand, notice of
dishonor, protest and notice of protest and all other notices with respect
thereto.
(q) Lender hereby authorized Pledgor to collect the Accounts, but Lender
may, without cause or notice, curtail or terminate this authority at any time.
Upon notice by Lender to Pledgor, Pledgor shall forthwith, upon receipt of all
checks, drafts, cash and other remittances in payment of or on account of the
Accounts, deposit the same in one or more special accounts maintained with
Lender, over which Lender alone shall have the power of withdrawal. The
remittance of the proceeds of such Accounts shall not, however, constitute
payment or liquidation of such Accounts until Lender shall receive good funds
for such proceeds. Funds placed in such special accounts shall be held by Lender
as security for the Obligations. These proceeds shall be deposited in precisely
the form received, except for the endorsement of Pledgor where necessary to
permit collection of items, which endorsement Pledgor agrees to make, and which
endorsement Lender is also hereby authorized to make on behalf of Pledgor. In
the event Lender has notified Pledgor to make deposits to a special account,
pending such deposit, Pledgor agrees that it will not commingle any such checks,
drafts, cash or other remittances with any funds or other property of Pledgor
but will hold them separate and apart therefrom, and upon an express trust for
Lender until deposit thereof is made in the special account. Lender will from
time to time apply the whole or any part of collateral funds on deposit in this
special account against such Obligations secured hereby as lender may in its
discretion elect. At the sole election of Lender, any portion of said funds on
deposit in the special account which Lender shall elect not to apply to such
Obligations, shall be paid over by Lender to Pledgor. Lender, or its agents,
shall have the right at any time, whether or not an Event of Default (as defined
below) shall have occurred (i) to notify any and all account debtors to make
payment directly to Lender and otherwise to notify the account debtors of this
assignment, (ii) to ask for, demand, collect, institute and maintain suits for,
receive, compound, compromise and give acquittances for any and all sums owing,
which are now or may hereafter become due upon said Accounts, and to enforce
payment thereof either in its own name or in Pledgor's name, (iii) to endorse
the name of Pledgor on checks, drafts or other items tendered or received in
payment of said Accounts and (iv) to enter upon the premises of Pledgor at any
time for the purpose of reducing to possession the Collateral (including chattel
paper) and all cash or non-cash proceeds thereof.
(r) Lender shall have the right at any time to apply the net proceeds of
the Accounts whether or not an Event of Default shall have occurred under this
Agreement, and the net proceeds of the sale or other disposition of the
Inventory, Equipment, or General Intangibles upon the occurrence of an Event of
Default under this Agreement, and any other proceeds arising under this
Agreement, first, to any Obligation owed Lender under this Agreement and the
then balance, if any, to other indebtedness of Pledgor owed to Lender.
(s) If Pledgor fails to perform any of Pledgor's duties and obligations
under this Agreement, Lender may, at its option, but without obligation, perform
such duty or obligation and any cost, fees and expenses incurred by Lender in
connection therewith shall be payable by Pledgor on Lender's demand for same and
until paid shall bear interest at the highest rate permitted by law. In
connection therewith, Pledgor hereby irrevocably designates, appoints and
<PAGE> 13
empowers Lender, at Pledgor's cost and expense, to do in the name of Pledgor any
and all actions which Lender may deem necessary or advisable to carry out the
terms hereof upon the failure, refusal or inability of Pledgor to do so and
Pledgor hereby agrees to indemnify and hold Lender harmless from any cost,
damage, expense or liability arising against or incurred by Lender in connection
therewith.
4. EVENTS OF DEFAULT. Any one of the following events will constitute an "Event
of Default" under this Agreement:
(a) If any payment on an Obligation or hereunder is not paid when due, or if any
payment of any other present or future debt, liability or obligation of Pledgor,
or any endorser, surety or guarantor of any Obligation (pledgor, or any
endorser, surety or guarantor of any Obligation may be referred to generally as
a "Party") to Lender is not paid when due.
(b) If any Party defaults under or breaches any covenant or provision of an
Obligation or defaults under or breaches any covenant or provision of this
Agreement or any other instrument or agreement delivered to Lender in connection
with this Agreement or any other transaction or agreement with Lender; or if any
Party makes a materially false or misleading statement to Lender.
(c) If any Collateral is lost, stolen, abandoned, destroyed, severely damaged,
involved in a legal proceeding, sold, encumbered or transferred except as
permitted by prior agreement with Lender.
(d) If any Party dissolves, merges, consolidates, changes control or ceases to
be a going concern.
(e) If a petition or complaint in bankruptcy, for arrangement or reorganization
or for relief under any insolvency law is filed by or against any Party, or if
any Party admits an inability to pay such Party's debts as they mature.
(f) If any property of any Party is seized, attached or levied on, or if a
receiver or custodian is appointed for any Party.
(g) If Lender in good faith believes that (i) the prospect of payment or
performance is impaired, (ii) any Collateral is insecure or (iii) a material
adverse change has occurred in any Party's financial condition.
(h) If any guaranty obtained in connection with an Obligation is terminated.
(i) If there shall occur a default under any lien or security interest affecting
the Collateral, either superior or inferior to the security interests created by
this Agreement.
5. REMEDIES. If an Event of Default occurs, then without prior notice (unless
otherwise provided below), and in addition to any other rights or remedies
provided by law or by contract or accorded to a secured party under the UCC,
Lender may in its sole discretion exercise any of the following rights or
remedies:
(a) Lender may refuse any further request for advances to Pledgor and/or may
declare all sums due under any of the Obligations immediately due and payable.
If a note constituting any of the Obligations shall be a demand instrument,
however, the recitation of the right of Lender to declare any and all of the
Obligations to be immediately due and payable or the recitation of Events of
Default 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.
(b) Upon the occurrence of any Event of Default, Lender may take possession of
the Collateral and exercise its rights hereunder without giving Pledgor any
opportunity for hearing to be held before Lender, through judicial process or
otherwise. PLEDGOR DOES HEREBY EXPRESSLY AND VOLUNTARILY WAIVE ALL RIGHTS THAT
PLEDGOR HAS OR MAY HAVE AS TO NOTICE AND TO A JUDICIAL HEARING PRIOR TO SEIZURE
OF THE COLLATERAL BY LENDER. Lender may require and Pledgor agrees upon demand
to assemble the Collateral and make it available to Lender at a place to be
designated by Lender that is reasonably convenient to both parties, and/or
Lender may enter any premises and take possession of the Collateral or any part
thereof. Unless the Collateral is perishable or threatens to decline speedily in
value or is of type customarily sold on a recognized market, Lender will give
Pledgor reasonable notice of time and place of any public sale thereof or the
time after which any private sale or any other intended disposition thereof is
to be made. The requirement of reasonable notice shall be met if notice is
mailed, postage prepaid to Pledgor at its above mentioned address, at least ten
(10) days before the time of sale or disposition of the Collateral. Lender may
apply cash proceeds from a sale or disposition first to the expenses of such
sale or disposition or other enforcement measures, including reasonable
attorney's fees and legal expenses, and then to the Obligations in such order as
to principal or interest as Lender may desire. Pledgor will remain liable for
and will pay to Lender any deficiency remaining after such application of
proceeds.
(c) Lender may appropriate, set off and apply for the payment of any or all of
the Obligations, any and all balances, sums, property, claims, credits,
deposits, accounts, reserves, collections, drafts, notes or other items or
proceeds of the Collateral in or coming into the possession of Lender or its
agents and belonging or owing to Pledgor, without notice to Pledgor and in such
manner as Lender may in its discretion determine.
(d) All payments received by Pledgor under or in connection with any of the
Collateral shall be segregated from other funds of Pledgor, held in trust for
Lender and promptly upon receipt turned over to Lender, duly endorsed to Lender,
if required. Lender shall hold such payments a collateral security and apply
them to the Obligations in such order as Lender may elect. Any balance of such
payments remaining after payment in full of the Obligations shall be paid to
Pledgor or to whomever is lawfully entitled to receive such payments.
(e) Pledgor shall pay to Lender, on demand, any and all costs and expenses,
including all reasonable attorneys' fees, incurred or paid by Lender in
protecting or enforcing its rights, powers and remedies hereunder or under any
other agreement with any Party or any Obligation secured hereby or thereby or in
any way connected with any proceeding or action, judicial or otherwise, by
whomsoever initiated concerning the protection or enforcement thereof.
(f) All rights and remedies of Lender under any law, under this Agreement or
under any agreement given in connection with this Agreement shall be cumulative
and not exclusive and may be exercised successively or concurrently.
6. MISCELLANEOUS.
(a) No lawful act of commission or omission upon the part of Lender, or any
delay in exercising its rights hereunder, shall in any way or at any time
affect, impair or waive the rights of Lender to enforce any right, power or
benefit hereunder. The provisions of this Agreement may be amended only by the
written agreement of Lender and Pledgor.
<PAGE> 14
(b) Pledgor hereby waives presentment, notice of dishonor and protest of all
instruments relating to the Obligations or the Collateral and any notices and
demands (except as expressly provided herein) whether or not relating to such
instruments.
(c) Any notice or demand given hereunder shall be deemed to have been
sufficiently given or served for all purposes by being sent by certified mail,
return receipt requested, postage prepaid, to Pledgor and/or Lender at the
addresses for each as mentioned above, but noting herein shall be construed to
invalidate any other form of communication actually received by the party to
whom the same is directed.
(d) Upon the payment in full of all Obligations, Lender shall have no duty to
release the Collateral nor to release Pledgor from any duty or obligation
hereunder unless a period of 95 days, beginning with the date of the last
payment made by any Party who shall be so obligated or shall elect to pay, as
the case may be, shall elapse during which period no petition in bankruptcy
shall be filed by or against any Party. In the event any Obligation secured
hereby is paid by Pledgor, or any maker, endorser or guarantor of the
Obligations and because of bankruptcy or other law relating to creditor's
rights, such payment is deemed to constitute a preference, Pledgor agrees to
remain liable hereunder if Lender is compelled to repay any such Obligation or
any part thereof to any trustee, receiver, custodian or otherwise.
(c) All rights of Lender hereunder shall inure to the benefit of its
successors and assigns and all obligations of Pledgor hereunder shall bind his,
her, or its heirs, personal representatives, successors and assigns, but
nothing herein shall authorize Pledgor to assign this Agreement or its rights
in and to the Collateral.
(f) Pledgor shall protect, indemnify and save harmless Lender from and against
all liabilities, obligations, claims, damages, penalties, causes of action,
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) imposed upon, incurred by, or asserted against, Lender on account
of (i) any failure or alleged failure of Pledgor to comply with any of the
terms or representations in this Agreement, (ii) any claim or loss or damage to
the Collateral or any injury or claim of injury to, or death of, any person or
property that may be occasioned by any cause whatsoever pertaining to the
Collateral or the use, occupancy or operation thereof or (iii) any failure or
alleged failure of Pledgor to comply with any law, rule or regulation regarding
the use, occupancy or operation of the Collateral, provided that such
indemnity shall be effective only to the extent of any loss, cost or damage
that may be sustained by Lender in excess of any net proceeds received by it
from any insurance (other than self-insurance) carried with respect to such
loss. Nothing contained herein shall require Pledgor to indemnify Lender for
any claim or liability resulting from its gross negligence or its willful and
wrongful acts. The covenants in this Paragraph shall survive payment of the
Obligations. The indemnity provided for herein shall extend to the officers,
directors, employees and duly authorized agents of Lender.
(g) Nothing in this Agreement shall be construed to impose any obligation upon
Lender to expend funds or to extend or continue any credit whatsoever to
Pledgor or Obligor or to take any other discretionary act herein permitted,
except to the extent that Lender may from time to time obligate itself to do so
in writing, and Lender shall have no liability or obligation for any delay or
failure to take any discretionary act.
(h) If any Obligation secured hereby concerns a guarantor or other indirect or
contingent obligation related to another party, Pledgor represents to Lender
that Lender will have no duty or obligation to investigate such party's
financial affairs for the benefit of Pledgor or to advise Pledgor of any fact
respecting, or of any change in, such other party's financial condition or
affairs which might come to Lender's attention.
(i) The rights, powers, and remedies of Lender under this Agreement shall be in
addition to all rights, powers and remedies given to Lender by virtue of
statute, rule of law, any documents executed in conjunction with any agreement
or instrument evidencing or securing the Obligations or any other agreement,
all of which rights, powers and remedies shall be cumulative and may be
exercised successively or concurrently without impairing Lender's security
interest in the Collateral.
(j) This Agreement shall be governed by the laws of the State of North Carolina.
IN WITNESS WHEREOF, Pledgor has caused this Agreement to be signed under seal
as of the day and year first above written.
Digital Recorders, Inc.
---------------------------------------
Name of Corporation/LLC
By: /s/ J. Phillips L. Johnston (SEAL)
---------------------------------------
Title: President
Attest: /s/ Jonathan E. Kennedy
---------------------------------------
[Corporate Seal] Sec/Asst. Sec.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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