<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
DIGITAL RECORDERS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
DIGITAL RECORDERS, INC.
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AT 11:00 A.M. ON JUNE 30, 1998
---------------------
To the Shareholders:
An Annual Meeting of the shareholders of Digital Recorders, Inc. (the
"Company") will be held in the auditorium at the Microelectronics Center of
North Carolina, 3021 Cornwallis Road, Research Triangle Park, North Carolina
27709 on Tuesday, June 30, 1998 at 11:00 a.m., followed by lunch in Conference
Rooms A and B at 12:00 p.m., for the following purposes:
1. To elect eight directors, each to serve for a one-year term
expiring in 1998, or until their successors shall have been duly elected
and qualified;
2. To consider and act upon an amendment to the Company's Incentive
Stock Option Plan to permit the issuance of an additional 150,000 shares of
Common Stock pursuant to the Plan.
3. To consider and act upon a proposal to approve an amendment to the
Company's Articles of Incorporation to (i) extend the mandatory redemption
date of the shares of 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, to be effective as of the originally scheduled mandatory redemption
date which applies to each Preferred Share;
4. To ratify the appointment of McGladrey & Pullen LLP as independent
certified public accountants; and
5. To consider and transact such other business as may properly come
before the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on May 18, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at such meeting and any adjournment thereof.
All Company employees will be in attendance to host our shareholders. We
value our shareholders and sincerely hope you will attend.
By order of the Board of Directors,
David L. Turney, Chairman of the Board
May 29, 1998
IMPORTANT
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
CANNOT ATTEND THE MEETING, PLEASE MARK, DATE, SIGN, NOTE ANY CHANGE OF ADDRESS
AND RETURN THE ENCLOSED PROXY CARD IMMEDIATELY IN THE ENCLOSED, SELF-ADDRESSED
ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES. DELAY IN
RETURNING YOUR PROXY MAY SUBJECT THE COMPANY TO ADDITIONAL EXPENSE. IF YOU
ATTEND THE MEETING, WE WILL BE GLAD TO RETURN YOUR PROXY SO THAT YOU MAY VOTE IN
PERSON AT THE MEETING.
<PAGE> 3
DIGITAL RECORDERS, INC.
2300 ENGLERT DRIVE, SUITE B
DURHAM, NORTH CAROLINA 27713
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 30, 1998
INTRODUCTION
The enclosed proxy is solicited by the Board of Directors of Digital
Recorders, Inc. (hereinafter referred to as the "Company") for use at the Annual
Meeting of Shareholders (the "Annual Meeting") to be held at the
Microelectronics Center of North Carolina, 3021 Cornwallis Road, Research
Triangle Park, North Carolina 27709, on Tuesday, June 30, 1998 at 11:00 a.m.,
for the purposes set forth in the foregoing Notice of Annual Meeting of
Shareholders. This Proxy Statement and the form of proxy will be mailed to
shareholders on or about June 1, 1998.
VOTING OF SECURITIES
The record date with respect to this solicitation is May 18, 1998 (the
"Record Date"). All holders of record of Common Stock of the Company as of the
close of business on the Record Date are entitled to vote at the Annual Meeting.
As of that date, the Company had 2,674,075 shares of Common Stock outstanding,
which shares constitute the only class of outstanding shares of the Company
entitled to notice of, and to vote at, the Annual Meeting. Each share of Common
Stock is entitled to one vote.
A majority of the outstanding shares of Common Stock must be represented in
person or by proxy at the Annual Meeting in order to constitute a quorum for the
transaction of business. If a quorum exists, a proposal is approved if the votes
cast in person or by proxy favoring the proposal exceed the votes cast opposing
the proposal. Directors are elected by a plurality of the votes cast at a
meeting at which a quorum is present. Shareholders may not cumulate their votes
for directors. Abstentions and broker non-votes are not counted in the
calculation of the vote. A proxy may be revoked by the shareholder at any time
prior to its being voted by giving notice to the Secretary of the Company, by
executing and delivering a proxy with a later date or by voting in person at the
Annual Meeting. Unless the proxy is revoked, or unless it is received in such
form as to render it invalid, the shares represented by it will be voted in
accordance with the instructions of the shareholder contained therein. If the
proxy is signed and returned without specifying choices, the shares will be
voted in accordance with the recommendations of the Board of Directors.
The cost of this solicitation will be borne by the Company, including
expenses incurred in connection with preparing and mailing this Proxy Statement.
Such expenses will include charges by brokers, banks or their nominees, other
custodians and fiduciaries for forwarding proxy material to the beneficial
owners of shares held in the name of a nominee. Proxies may be solicited
personally or by mail, facsimile, telephone or telegraph. Employees and
directors of the Company may solicit proxies but will not receive any additional
compensation for such solicitation.
As a matter of policy, proxies, ballots and voting tabulations that
identify individual shareholders are held confidential by the Company. Such
documents are available for examination only by the inspectors of election who
are employees appointed to tabulate the votes. The identity of the vote of any
shareholder is not disclosed except as may be necessary to meet legal
requirements.
1
<PAGE> 4
COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of April 27, 1998 by (i) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, (ii)
each director or nominee, (iii) each other executive officer named in the
Summary Compensation Table, and (iv) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
NAME NUMBER PERCENT
- ---- --------- ---------
<S> <C> <C>
David L. Turney(2).......................................... 21,117 *
J. Phillips L. Johnston(3).................................. 125,844 4.5%
John D. Higgins, Sr.(4)..................................... 10,000 *
C. James Meese, Jr.(5)...................................... 11,320 *
John K. Pirotte(6).......................................... 51,028 1.9
John M. Reeves, II(7)....................................... 170,740 6.0
Juliann Tenney(8)........................................... 21,315 *
John W. Thomas, Jr.(9)...................................... 43,909 1.6
Michael A. Connor, Jr.(5)................................... 5,667 *
Jonathan E. Kennedy(5)...................................... 10,000 *
Bruce R. Thomas(10)......................................... 21,592 *
Andrew L. Turner, III(11)................................... 22,926 *
All current directors and officers as a group (14
persons)(12).............................................. 538,029 16.8
</TABLE>
- ---------------
* Less than one percent of the shares of Common Stock.
(1) Beneficial ownership includes both outstanding Common Stock and shares
issuable upon exercise of options or warrants that are currently
exercisable or will become exercisable within 60 days after the date
hereof. Unless otherwise noted, sole voting and dispositive power is
possessed with respect to all Common Stock shown. All percentages are
calculated based on the number of outstanding shares plus shares which a
person or group has the right to acquire within 60 days. The address for
all persons listed is 2300 Englert Drive, Suite B, Durham, North Carolina
27713.
(2) Includes 2,667 shares subject to currently exercisable options.
(3) Includes 75,865 shares subject to currently exercisable options.
(4) Consists solely of shares subject to currently exercisable warrants.
(5) Consists solely of shares subject to currently exercisable options.
(6) Includes 1,333 shares subject to currently exercisable options.
(7) Includes 2,000 shares subject to currently exercisable options and shares
owned of record by the Sarah C. Reeves Trust. Sara Reeves is the mother of
John M. Reeves, II.
(8) Includes 3,333 shares subject to currently exercisable options.
(9) Includes 3,333 shares subject to currently exercisable options.
(10) Includes 21,320 shares subject to currently exercisable options.
(11) Includes 22,654 shares subject to currently exercisable options.
(12) Includes 189,063 shares subject to currently exercisable options and
warrants. Does not include 49,667 shares subject to options and warrants
which have not yet become exercisable.
I. ELECTION OF DIRECTORS
The eight nominees for election as directors are identified below. All
nominees are now members of the Board of Directors. The Board of Directors knows
of no reason why any nominee would be unable to serve as a director. If any
nominee should for any reason become unable to serve, the shares represented by
all valid proxies will be voted for the election of such other person as the
Board of Directors may designate or the Board of Directors may reduce the number
of directors to eliminate the vacancy.
The following material contains information concerning the nominees,
including their recent employment, positions with the Company, other
directorships and age as of the date of this Proxy Statement.
2
<PAGE> 5
David L. Turney, age 54, has served as Chairman of the Board and Chief
Executive Officer of the Company since April 1998 and as a director of the
Company since May 1996. Mr. Turney is also Chairman and CEO of Robinson Turney
International, Inc. ("RTI"), a consulting firm which Mr. Turney co-founded in
August 1994. RTI is engaged in business development, marketing services,
advisory services, and merger, acquisition and financing assignments for
selected clients, including the Company, who are primarily in the transit and
transportation equipment industries. From March 1994 to December 1995, Mr.
Turney was also engaged in strategic planning and development consulting
services for his former employer, Mark IV Industries, Inc. ("Mark IV"), a New
York Stock Exchange listed company. From February 1991 to February 1994, he was
President and Group Executive of Mark IV Transportation Products Group, a group
of nine companies, subsidiaries and operating units of Mark IV serving transit
and transportation markets worldwide, which group Mr. Turney was responsible for
developing. From 1984 to 1991, Mr. Turney was President of the Luminator
division of Gulton Industries, Inc., which became a wholly-owned subsidiary of
Mark IV in 1987. Luminator is a primary competitor of the Company. Prior to
1984, he served in various managerial and engineering capacities in four
corporations spanning the telecommunications, industrial hard goods, consumer
electronics and electromagnetic components industries. Mr. Turney received his
B.S. degree in industrial management from the University of Arkansas.
J. Phillips L. Johnston, age 58, has served on the Board of Directors and
as President and Special Programs Administrator of the Company since April 1998.
Until April 1998 he had served as the Chairman of the Board and Chief Executive
Officer of the Company since April 1990 and as President since March 1991. He
was the Administrator of the North Carolina Credit Union Division of the North
Carolina Department of Commerce from September 1987 to April 1990. From October
1979 to September 1987, Mr. Johnston served as President and Chief Executive
Officer of Data Pix, Inc., Norman Perry, Chantry, Ltd., and Erwin-Lambeth, Inc.,
each of which were privately-held companies based in North Carolina. From 1971
through 1979, he was President and Chief Executive Officer of Currier Piano
Company, Marion, North Carolina. Mr. Johnston received his A.B. degree in
economics from Duke University and his law degree from the University of North
Carolina.
John D. Higgins, Sr., age 65, was elected a director of the Company in
February 1998. Since 1990, Mr. Higgins has been Senior Vice President of
Corporate Finance for Royce Investment Group, Inc. He is also a director of
Iatros Health Network Birman Managed Care, Inc., a publicly-owned company which
is the provider of health care services and IRATA, Inc., a publicly-owned
company which operates amusement park phone booths. Mr. Higgins holds B.B.A. and
M.B.A. degrees from Hofstra University.
C. James Meese, Jr., age 56, has served as a director of the Company since
April 1991 and was an independent sales representative for the TCS business
group from February 1993 through May 1995. Since 1989 he has provided advice and
assistance to high growth companies on issues of market development,
capitalization and organizational structuring through Business Development
Associates, Inc., for which he currently serves as President. Prior to 1989 he
spent approximately 20 years in various senior corporate marketing and finance
positions. Mr. Meese is a director of A&J Sports, Inc., a Raleigh, North
Carolina based collegiate sports media company; Maize Genetic Resources, Inc., a
Raleigh, North Carolina based crop sciences company; BillPayers, Inc., a
Greensboro, North Carolina based consumer financial services firm; and NECCO, an
environmental contracting company based in Winston-Salem, North Carolina. Mr.
Meese received a B.A. degree in economics from the University of Pennsylvania
and an M.B.A. from Temple University.
John K. Pirotte, age 48, became a director of the Company in May 1996.
Since 1990, he has served as Chairman and Chief Executive Officer of CORPEX
Technologies, Incorporated, a privately-held company that develops and markets
surface active chemical technology. In addition, Mr. Pirotte has operated a
private investment company since 1987. He was the Chief Financial Officer from
1979 to 1981 and Chairman and Chief Executive Officer from 1981 until 1987 of
The Aviation Group, Inc. He also served in various capacities, including
manager, in Acquisition Advisory Services for an international public accounting
firm from 1972 to 1979. Mr. Pirotte was a director of Microwave Laboratories,
Inc., a venture capital-backed company which filed a petition for bankruptcy in
1994. He is a founding director of North Carolina Enterprise Corp., a venture
capital fund and serves on the Advisory Board of Intersouth I, a venture capital
fund.
3
<PAGE> 6
Mr. Pirotte received his B.A. degree in economics from Princeton University and
an M.S. in accounting from New York University.
John M. Reeves, II, age 43, has served as a director of the Company since
April 1993. He co-founded and since March 1992 has served as President of First
Exim Financial Limited, which provides trade finance and factoring to exporters
and importers. From August 1991 to February 1992, he was employed by Allen
Commercial Services advising small, closely-held companies with respect to
capitalization issues. Since 1988 he has been engaged in real estate development
activities through Reeves Development Corporation, a company controlled by him.
Mr. Reeves is a director of Horizon Financial Services, a Hastings, England
firm, and Angell Communications, a company based in Santa Monica, California.
Mr. Reeves has both graduate and undergraduate degrees in civil engineering from
North Carolina State University and an M.B.A. from Duke University.
Juliann Tenney, age 45, has served as a director of the Company since April
1991. Since July 1993 Ms. Tenney has been an instructor in the non-profit
management program at Duke University. From August 1990 through July 1993, she
served as Executive Director of the Southern Growth Policies Board, an
interstate alliance charged with designing economic development and growth
strategies for southern Governors and legislators. From August 1988 to August
1990, Ms. Tenney served as Director for the Economic and Corporate Development
Division of the North Carolina Biotechnology Center and also as their House
Legal Counsel. From November 1987 to August 1988, Ms. Tenney was Assistant
Secretary at the North Carolina Department of Commerce. From August 1985 to
November 1987, she was Executive Director of the North Carolina Technological
Development Authority. Prior to that time, she was a practicing attorney. Ms.
Tenney received a B.A. degree from the University of North Carolina and a law
degree from Duke University.
John W. Thomas, Jr., age 70, has served as a director of the Company since
March 1992. He has held various engineering and management positions with Thomas
Built Buses since 1949, including serving as the President, Chairman and Chief
Executive Officer. He is a National Board Member for the Boy Scouts of America
and recently completed a three-year term as National Commissioner of that
organization. Mr. Thomas received a B.S. degree in industrial engineering from
Virginia Tech and was recently recognized by his alma mater as a "Distinguished
Graduate."
BOARD COMPENSATION
No employee of the Company receives any additional compensation for his or
her services as a director. Non-management directors receive no salary for their
services as such, although the Board of Directors has authorized payment of
reasonable travel or other out-of-pocket expenses incurred by non-management
directors in attending meetings of the Board of Directors. Certain directors of
the Company are consultants or advisors to the Company and receive compensation
for such services. See "Certain Relationships and Related Transactions". During
the fiscal year 1997, the Board of Directors granted 14,000 options to two
employee directors and 12,000 options to five non-employee directors. Such
options are exercisable at a price of $2.38 per share.
EXECUTIVE OFFICERS
The following material contains information concerning the executive
officers of the Company who are not nominees for election as directors,
including their recent employment, positions with the Company and age as of the
date of this Proxy Statement.
Michael A. Connor, Jr., age 55, was named Vice President and General
Manager of the Digital Audio Company ("DAC") business group on February 1, 1997.
From April 1994 until February 1997, he was Manager, Sales and Marketing for
DAC. From November 1987 until April 1994, Mr. Connor was President and owner of
Mike Connor Construction, Inc., a general contracting firm specializing in
high-end custom residential construction. Mr. Connor has a bachelor's degree in
aerospace engineering from the University of Florida and a master's degree in
mechanical engineering from Tulane University. Mr. Connor is a registered
professional engineer in North Carolina.
4
<PAGE> 7
Lawrence A. Hagemann, age 54, has served as Executive Vice President and
General Manager of TwinVision Corp. of North America, Inc. ("TwinVision"), a
wholly-owned subsidiary of the Company since February 1998. From July 1996 until
February 1998, Mr. Hagemann was Vice President and General Manager of TwinVision
Corp. of North America, Inc. From July 1995 until July 1996 he served as Vice
President of ADDAX Sound Company, a privately-held company based in Illinois.
From April 1991 to December 1993 he served as Assistant to the President of
Vapor-Mark IV. Since October 1993 he has served as a Director of Transtel
Communications Ltd., a developer of news media software based in London,
England. From 1973 through December 1990, he served as Vice President of Sales
and Marketing for Extel Corporation of Illinois and as a Director of Excom
Communications Limited (UK) and Extel Overseas Limited (HK). He is a co-editor
of the 1995 book titled Hoover's Guide to Computer Companies. Mr. Hagemann
received his bachelors degree in electrical engineering from the University of
Detroit and his M.B.A. from Loyola University (Chicago).
Tanya L. Johnson, age 34, has served as Vice President and General Manager
of the Transit Communications ("TCS") business group since February 1998. She
has been employed in various management positions with the TCS business group
since June 1990. Ms. Johnson also served as an Engineering Specialist for TCS
from January 1988 to May 1989. Ms. Johnson served as a Component Engineer at
Teletec Corporation from June 1989 through May 1990. Ms. Johnson led the
development of the Talking Bus(R) product line. Ms. Johnson holds a B.S. degree
in electrical engineering from Duke University.
Lawrence A. Taylor, age 51, has served as Chief Financial Officer and
Secretary of the Company since May 1998. From March 1997 to the present, Mr.
Taylor has been a partner with Tatum CFO Partners, LLP., a professional
partnership of career CFO's. From March 1995 to August 1996, Mr. Taylor was
Senior Vice President of Precept Business Products, Inc., a privately held
holding company whose principal businesses are a distributor of business forms,
construction and on demand courier delivery service. From May 1991 through
December 1994, Mr. Taylor was Vice President and Group Controller of Mark IV
Transportation Products Group ("Mark IV TPG"), a group of nine companies,
subsidiaries and operating units serving transit and transportation markets
worldwide. Mark IV TPG was an operating group of Mark IV Industries, Inc., a New
York Stock Exchange listed company. Prior to 1991, Mr. Taylor served in various
financial managerial capacities in the food processing, commercial construction,
and oil patch supply industries as well as other manufacturing environments. Mr.
Taylor received a B.S. degree in accounting from Wayne State University. Mr.
Taylor is a certified public accountant.
Bruce R. Thomas, age 43, has served as Vice President of Sales for the TCS
business group since January 1991. From 1990 to 1991, he was a money manager
consultant for MA Thomas, Inc. From 1990 through December 1993, Mr. Thomas was
also a registered representative of Capital Investment Group, Inc., a securities
brokerage firm. From 1987 to 1989, he was Executive Vice President of Advance
Investments Co., Inc., where he directed money manager tracking and consulting
services. From 1986 to 1987, he was a Vice President for Baker and Thomas, a
money management consulting firm. From 1981 to 1986, he served as National
Commercial Bus Sales Manager for Thomas Built Buses. Mr. Thomas received an B.A.
degree from Washington and Lee University.
KEY EMPLOYEE
Dr. James E. Paul, Jr., age 54, has served as the Chief Scientist of
Company since March 1997. Prior to assuming that position, he had served as
President of the DAC business group since February 28, 1995 when the Company
acquired substantially all of the assets of Digital Audio Corporation ("Digital
Audio"). Dr. Paul founded Digital Audio in 1979 and had served as its President
and chief engineer since its inception. Digital Audio designed, manufactured and
marketed digital signal processing equipment to law enforcement agencies, and
the Company had employed Dr. Paul to continue such business operations as a
business group of the Company. From 1979 to 1981, Dr. Paul taught in the
Electrical Engineering and the Computer Science Departments of California State
University, Fullerton. From 1969 to 1979, he served as the senior research
engineer and manager of the Audio Science Group at Rockwell International
Corporation. He received B.S., M.E.E. and Ph.D. degrees in electrical
engineering from North Carolina State University.
5
<PAGE> 8
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three fiscal years ended December 31, 1997 of J. Phillips L. Johnston, the Chief
Executive Officer and President of the Company during the fiscal year ended
December 31, 1997, and Michael A. Connor, Jr., Jonathan E. Kennedy, Bruce R.
Thomas and Andrew L. Turner, the Company's four most highly compensated
executive officers other than Mr. Johnston who were serving as executive
officers at the end of the fiscal year ended December 31, 1997 (the "Named
Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS/SARS(#)(1)
- --------------------------- ---- -------- ------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
J. Phillips L. Johnston............. 1997 $150,000 $ -- $ 7,526(2) 10,000
Former Chief Executive 1996 150,000 70,000 14,975(3) --
Officer 1995 120,000 45,000 26,107(4) --
Michael A. Connor, Jr............... 1997 $ 58,333 $49,525 $ 12,993(6) 7,000
Vice President and 1996 40,583 -- 28,657(6) --
General Manager, DAC 1995 39,167 -- 3,400(6) 1,000
Jonathan E. Kennedy................. 1997 $105,000 $ -- $ -- 4,000
Former Chief Financial Officer 1996(5) 9,375 -- -- 11,000
and Secretary
Bruce R. Thomas..................... 1997 $ 46,000 $ -- $ 96,463(6) 2,000
Vice President of Sales -- 1996 40,000 -- 120,216(6) --
TCS 1995 40,000 -- 112,099(7) --
Andrew L. Turner, III............... 1997 $ 80,000 $26,944 $ 6,000(8) 4,000
Vice President and General 1996 79,167 -- 6,000(8) --
Manager, HIS 1995 67,500 43,149 9,658(9) --
</TABLE>
- ---------------
(1) Such options were granted pursuant to the Company's Incentive Stock Option
Plan.
(2) Includes reimbursements for club dues and related expenses.
(3) Includes reimbursements of $7,169 for medical expenses and $7,806 for club
dues and related expenses.
(4) Includes $17,255 in medical expense reimbursements, usage of a company car,
reimbursement of club dues and related expenses.
(5) Mr. Kennedy was first employed as an executive officer of the Company in
November 1996.
(6) Represents commissions earned.
(7) Includes $24,000 forgiveness of a note payable and $88,099 in commissions
earned.
(8) Represents an automobile expense allowance.
(9) Includes $4,158 in commissions and an automobile expense allowance.
6
<PAGE> 9
Option Grants Table. The following table sets forth information concerning
grants of stock options to the Named Officers pursuant to the Company's stock
option plan during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED (SHARES) FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Phillips L. Johnston................... 10,000 11.9% $2.38 6/23/07
Michael A. Connor, Jr..................... 3,000 3.6 3.28 2/03/07
Michael A. Connor, Jr..................... 4,000 4.7 2.38 6/23/07
Jonathan E. Kennedy....................... 4,000 4.7 2.38 6/23/07
Bruce R. Thomas........................... 2,000 2.4 2.38 6/23/07
Andrew L. Turner, III..................... 4,000 4.7 2.38 6/23/07
</TABLE>
Fiscal Year-End Options/Option Values Table. No stock options were
exercised by the Named Officers in the fiscal year ended December 31, 1997. The
following table shows the stock option values for the Named Officers as of
December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Phillips L. Johnston.......................... 75,865 3,333 -- --
Michael A. Connor, Jr. .......................... 5,667 2,333 -- --
Jonathan E. Kennedy.............................. 10,000 5,000 -- --
Bruce R. Thomas.................................. 21,320 667 -- --
Andrew L. Turner, III............................ 22,654 1,333 -- --
</TABLE>
- ---------------
(1) The exercise price of all options exceeded $1.75 per share, the closing sale
price of the Common Stock on December 31, 1997.
401(k) Plan. In January of 1996 the Company implemented a defined
contribution savings plan ("Savings Plan") for all eligible employees (as
defined). The Savings Plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. Under the Savings Plan, a participant
may contribute from one to fifteen percent of his or her compensation, not to
exceed an amount which would cause the plan to violate Section 401(k) and other
applicable sections of the Internal Revenue Code. The Company does not make any
matching contributions to the Savings Plan. All participant's contributions are
invested, in accordance with the participant's election, in various investment
funds managed by the plan trustee. The Savings Plan permits withdrawals in the
event of disability, death, attainment of age fifty nine and one-half,
termination of employment or proven financial hardship. The Company pays all the
costs of administering the Savings Plan.
BOARD COMMITTEES AND ADVISORY BOARD
The Board of Directors has delegated certain of its authority to a
Compensation Committee, Audit Committee, Acquisition and Alliance Committee and
Marketing Committee. In addition, the Company has a Technology Advisory Board.
No member of any committee is an officer or employee of the Company. Mr. Turney
and Mr. Johnston serve as ex-officio members of all committees.
The Compensation Committee is currently composed of Ms. Tenney and Mr.
Thomas, chaired by Ms. Tenney. The Compensation Committee held five meetings in
fiscal year 1997. The primary function of the Compensation Committee is to
review and make recommendations to the Board with respect to the compensation of
the Company's officers and to administer the Company's stock option plan.
The Audit Committee is currently composed of Mr. Meese and Mr. Higgins with
Mr. Meese as Chairman. The Audit Committee held one meeting in fiscal year 1997.
The function of the Audit Committee
7
<PAGE> 10
is to review and approve the scope of audit procedures employed by the Company's
independent auditors, to review and approve the audit reports rendered by the
Company's independent auditors and to approve the audit fee charged by the
independent auditors. The Audit Committee reports to the Board of Directors with
respect to such matters and recommends the selection of independent auditors.
The Acquisition and Alliance Committee is currently composed of Mr. Reeves
and Mr. Pirotte with Mr. Reeves serving as Chairman. The Acquisition and
Alliance Committee held five meetings in fiscal year 1997. The function of the
Acquisition and Alliance Committee is to research and evaluate potential
business acquisitions and alliances for the Company.
The Marketing Committee, which was discontinued as of January 1, 1998, held
three meetings in fiscal year 1997. The function of the Marketing Committee had
been to develop the broad marketing strategy for the Company.
The Company also has a Technology Advisory Board, currently composed of Mr.
Hagemann and Drs. Ron Gyurcsik, Matt Kuhn and James Paul with Mr. Hagemann
serving as Chairman. The function of the Technology Advisory Board is to closely
monitor technological developments related to the Company's products and markets
and to establish priorities, time-to-market and return on investment objectives
of the Company's research and development projects.
BOARD AND COMMITTEE ATTENDANCE
In fiscal year 1997, the Board of Directors held five meetings. All
directors attended more than 75% of the aggregate of board and committee
meetings held during fiscal year 1997.
THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS THAT SHAREHOLDERS VOTE
FOR THE DIRECTOR NOMINEES IDENTIFIED ABOVE.
II. PROPOSAL TO APPROVE AMENDMENT TO THE INCENTIVE STOCK OPTION PLAN
The Company's Incentive Stock Option Plan (the "Plan") was adopted
effective April 27, 1993 and amended effective October 18, 1994. The Board of
Directors feels that the Plan has proved to be of substantial value in
recruiting new employees as well as stimulating the efforts of existing
employees. The Board of Directors has adopted an amendment to the Plan to
increase the number of shares available for issuance under the Plan by an
additional 150,000 shares of Common Stock.
The provisions of the existing Plan, as well as the proposed amendment
thereto, are summarized below.
SUMMARY OF THE INCENTIVE STOCK OPTION PLAN
The Company's Incentive Stock Option Plan was adopted by the Board of
Directors and approved by the shareholders of the Company effective April 1993.
An aggregate of 350,000 shares of Common Stock are reserved for issuance under
the Plan. The Plan provides for the granting of incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), non-qualified stock options and
stock appreciation rights ("SARs"). Non-qualified stock options may be granted
to employees, directors and advisors of the Company, while Incentive Stock
Options may be granted only to employees. No options may be granted under the
Plan subsequent to April 2003.
The Plan is administered by the Compensation Committee of the Board of
Directors, which determines the terms and conditions of the options and SARs
granted under the Plan, including the exercise price, number of shares subject
to the option and the exercisability thereof.
The exercise price of all Incentive Stock Options granted under the Plan
must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant. In the case of an optionee who owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company, the exercise price of Incentive Stock Options
shall be not less than 110% of the fair market value of the Common Stock on the
date of grant. The exercise price of all non-qualified stock options granted
under the Plan shall be determined by the Compensation Committee. The Company
agreed with the underwriter of
8
<PAGE> 11
its initial public offering that the exercise price of all non-qualified stock
options granted under the Plan will not be less than 85% of the fair market
value of the Common Stock. The term of options granted under the Plan may not
exceed ten years. The Plan may be amended or terminated by the Board of
Directors, but no such action may impair the rights of a participant under a
previously granted option.
The Plan provides the Board of Directors or the Compensation Committee the
discretion to determine when options granted thereunder shall become exercisable
and the vesting period of such options. Upon termination of a participant's
employment, directorship or advisory relationship with the Company, all unvested
options terminate and are no longer exercisable. Vested options either terminate
immediately or remain exercisable for a specified period of time depending on
the nature and circumstances of the termination.
The Plan provides that, in the event the Company enters into an agreement
providing for the merger of the Company into another corporation or the sale of
substantially all of the Company's assets, any outstanding unexercised option
shall become exercisable at any time prior to the effective date of such
agreement. Upon the consummation of the merger or sale of assets, such options
shall terminate unless they are assumed or another option is substituted
therefor by the successor corporation.
The Plan provides the Board of Directors or the Compensation Committee
discretion to grant SARs in connection with any grant of options. Upon the
exercise of a SAR, the holder shall be entitled to receive a cash payment in an
amount equal to the difference between the exercise price per share of options
then exercised by him and the fair market value of the Common Stock as of the
exercise date. The holder is required to exercise options covering twice the
number of shares which are subject to the SAR so exercised. SARs are not
exercisable during the first six months after the date of grant, and may be
transferred only by will or the laws of descent and distribution.
As of December 31, 1997, a total of 336,958 non-qualified and Incentive
Stock Options were outstanding, with exercise prices ranging from $2.19 to
$7.25. There were no SARs outstanding as of December 31, 1997.
SUMMARY OF AMENDMENT
The Board of Directors proposes to amend the Plan by making an additional
150,000 shares of Common Stock available for grant. If the amendment is
approved, options to purchase these additional 150,000 shares would be granted
to Mr. David L. Turney, Chairman of the Board and Chief Executive Officer of the
Company, and would vest and become exercisable upon the achievement of the
following: (i) 75,000 options would vest when and if the Company stock is
trading for ten consecutive business days at or above $4.00 per share and (ii)
the remaining 75,000 options would vest when and if the Company stock is trading
for ten consecutive business days at or above $5.00 per share. Assuming adoption
of the amendment, a total of 500,000 shares of Common Stock would be reserved
for issuance under the Plan.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE INCENTIVE STOCK OPTION
PLAN TO PERMIT THE ISSUANCE OF AN ADDITIONAL 150,000 SHARES PURSUANT TO THE
PLAN.
III. PROPOSAL TO APPROVE AMENDMENT TO ARTICLES OF INCORPORATION
TERMS OF THE AMENDMENT
The Board of Directors has adopted, subject to shareholder approval, the
Amendment to the Articles of Incorporation in the form attached to this Proxy
Statement as Appendix A (the "Amendment"). The purpose of the Amendment is to
make certain changes in the rights and preferences of the Company's outstanding
Series AAA Preferred Stock (the "Preferred Shares") in order to enhance the
Company's ability to raise additional capital. These changes consist of (i)
extending the mandatory redemption date of the Preferred to December 31, 2003,
(ii) permitting the earlier redemption of the Preferred Shares at the Company's
option at any time upon 30 days' written notice, (iii) increasing the amount of
the quarterly dividend payable with respect to each Preferred Share from $112.50
to $125.00, and (iv) increasing the number of shares of Common Stock of the
Company issuable upon conversion of each Preferred Share from 500 shares of
9
<PAGE> 12
Common Stock to 625 shares of Common Stock. (The foregoing modification of the
dividend and conversion rates is to be effective upon the Existing Redemption
Dates, as defined below.)
Pursuant to the Company's existing Articles of Incorporation, the Preferred
Shares are subject to mandatory redemption on the fifth anniversary date of
their issuance. The redemption price is equal to $5,000 per share plus all
accrued but unpaid dividends. The outstanding Preferred Shares were issued
either on December 31, 1993 or June 30, 1994. Accordingly, in the absence of the
proposed Amendment, certain of the Preferred Shares are subject to mandatory
redemption on December 31, 1998 and the remaining Preferred Shares are subject
to mandatory redemption on June 30, 1999 (the "Existing Redemption Dates").
The Amendment, if approved, would extend the mandatory redemption date of
all outstanding Preferred Shares to December 31, 2003. However, the Amendment
would also permit the Company, at its option, to redeem all or any portion of
the Preferred Shares at any time on 30 days' written notice. In addition, the
Amendment would, effective as of the respective Existing Redemption Date, (i)
increase the quarterly dividend payable with respect to each Preferred Share
from $112.50 to $125.00 and (ii) modify the conversion terms of the Preferred
Shares to provide that each Preferred Share will convert into 625 shares of
Common Stock rather than 500 shares of Common Stock as currently provided.
REASONS FOR THE AMENDMENT
The Board of Directors believes that the changes contained in the Amendment
will significantly enhance the Company's ability to raise additional funds for
expected growth. A special meeting of the holders of the Preferred Shares was
held at the Company's principal offices on April 6, 1998. At such meeting,
holders representing 348 Preferred Shares or 98.3% of the 354 outstanding
Preferred Shares were present in person or by proxy. Of those present, holders
of 346 shares voted in favor of the Amendment and holders of two shares voted
against the Amendment. Under North Carolina law, holders of the Preferred Shares
had the right to dissent and be paid the "fair value" for their Preferred
Shares. None of the holders of Preferred Shares exercised their dissenter's
rights. If the Amendment is not approved and the Company cannot obtain
additional financing, the Board of Directors believes that the Company may have
insufficient capital to be able to redeem the Preferred Shares on the Existing
Redemption Dates.
IMPACT OF AMENDMENT ON HOLDERS OF COMMON STOCK
The Board of Directors also believes that the Amendment will have minimal
impact on the holders of Common Shares. There may be certain disadvantages
suffered by shareholders of the Company's Common Stock as a result of
effectiveness of the Amendment. These include additional dilution to present
Common Stockholders' percentage ownership of the Common Stock if the Preferred
Shares are converted to Common Stock at the increased conversion ratio. If
holders of the Preferred Shares converted their Preferred Shares as presently
constituted, the Company would be obligated to issue 177,000 shares of Common
Stock which would represent 6.21% of the outstanding shares of Common Stock
after the conversion. If holders of the Preferred Shares converted their
Preferred Shares at the proposed increased conversion ratio, the Company would
be obligated to issue 221,250 shares of Common Stock which would represent 7.64%
of the outstanding shares of Common Stock after the conversion at the new
proposed ratio, an increase of 44,250 shares of Common Stock and an additional
1.43% ownership interest.
The Company is currently obligated to pay quarterly dividends of $39,825.
If the Amendment is approved, the Company will be obligated to pay quarterly
dividends of $44,250, an increase of $4,425 per quarter. The dividends would
increase from an effective rate of 9.0% to 10.0%.
The Board of Directors believes that the benefits of the Amendment more
than offset any negative impact to be experienced by current and future
shareholders of Common Stock.
10
<PAGE> 13
EFFECTIVE DATE OF AMENDMENT
The Amendment will become effective at such time as it is filed with the
North Carolina Secretary of State. It is anticipated that the Amendment will be
filed as soon as practicable if approved by the holders of the Company's Common
Stock at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT.
IV. RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP has examined the financial statements of
the Company since fiscal year 1990. The Board of Directors has adopted a
rotation policy for its independent public accountants. The firm of McGladrey &
Pullen LLP has been appointed by the Board of Directors to serve as the
Company's independent accountants for the 1998 fiscal year. Representatives of
both KPMG Peat Marwick LLP and McGladrey & Pullen LLP are expected to be present
at the Annual Meeting with the opportunity to make a statement if it is their
desire to do so, and will be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF MCGLADREY &
PULLEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE COMPANY.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission and the Company. Specific due dates for these
reports have been established and the Company is required to disclose in this
proxy statement any failure to file, or late filing, of such reports with
respect to the fiscal year 1997. To the Company's knowledge, based solely on a
review of the copies of reports furnished to the Company and written
representations with respect to filing of such reports, the Company believes
that all Section 16(a) filing requirements applicable to the Company's executive
officers, directors and greater than ten percent beneficial owners were complied
with for the fiscal year ended December 31, 1997, except that John M. Cochran,
Jr., Michael A. Connor, Jr., Virgil D. Duncan, Lawrence A. Hagemann, J. Phillips
L. Johnston, Jonathan E. Kennedy, C. James Meese, Jr., John K. Pirotte, Juliann
Tenney, Bruce R. Thomas, John W. Thomas, Jr., Andrew L. Turner, III and David L.
Turney failed to timely file reports on Form 5 with respect to options granted
during the fiscal year. All such reports were subsequently filed.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective March 1996, the Company entered into various marketing,
distribution, licensing and management agreements with Robinson Turney
International, Inc., an entity in which David L. Turney, an officer and director
of the Company, holds a 50% ownership interest. The Company paid fees and
commissions earned under these various agreements totaling $233,660 and $173,880
during 1997 and 1996, respectively.
In connection with the Company's acquisition on Digital Audio Corporation,
the Company entered into an agreement with Dr. James E. Paul, the former
President of the DAC business group, to lease the office building in which
Digital Audio Corporation had been headquartered to accommodate the new business
group. In March 1997, the Company entered into a new lease agreement with Dr.
Paul for expanded office space. The lease agreement, as amended, contains
monthly rental rates ranging from $4,241 to $5,013 during the life of the
agreement, which is from April 1997 to December 2002. The Company paid Dr. Paul
$43,369 and $20,800 in rental fees during 1997 and 1996, respectively.
In April 1996, the Company modified an existing distributor agreement with
First Exim Financial Limited ("Exim"), an affiliate of John M. Reeves, II, a
principal shareholder and director of the Company, to
11
<PAGE> 14
change the work scope to acquisition consulting services only. The agreement was
renewed for an additional year in April 1997. The Company paid fees under this
agreement to Exim totaling $36,000 and $33,250 during 1997 and 1996,
respectively.
Effective February 1993, the Company engaged Business Development
Associates, Inc. ("BDA"), an affiliate of C. James Meese, Jr., a director of the
Company, as an independent sales representative in marketing the Company's
products. Pursuant to such agreement, as amended effective May 15, 1994, BDA
received a monthly draw of $3,000 against commissions and reimbursement of
business expenses. The agreement has terminated and no commissions were paid
under this agreement in 1997. The Company paid fees under this agreement
totaling $26,179 during 1996 before discontinuance.
The Company had retained Curtis I. Kring, a former director of the Company,
to perform certain business consulting services for the Company. The Company
paid fees under this agreement totaling $83,860 and $67,000 during 1997 and
1996, respectively before discontinuance.
The Company has adopted a policy pursuant to which material transactions
between the Company and its executive officers, directors and principal
shareholders (i.e. shareholders owning beneficially 5% or more of the
outstanding voting securities of the Company) shall be submitted to the Board of
Directors for approval by a disinterested majority of the directors voting with
respect to the transaction.
SHAREHOLDER PROPOSALS
Shareholders who intend to submit proposals for inclusion in the Proxy
Statement for the 1998 Annual Meeting of Shareholders must do so by sending the
proposal and supporting statements, if any, to the Company no later than January
31, 1999. Such proposals should be sent to the attention of Mr. Lawrence A.
Taylor, 2300 Englert Drive, Suite B, Durham, North Carolina 27713.
OTHER MATTERS
Except for the matters described herein, management does not intend to
present any matter for action at the Annual Meeting and knows of no matter to be
presented at such Annual Meeting that is a proper subject for action by the
shareholders. However, if any other matters should properly come before the
Annual Meeting, it is intended that votes will be cast pursuant to the authority
granted by the enclosed Proxy in accordance with the best judgment of the person
acting under the Proxy.
ANNUAL REPORT
The Annual Report to Shareholders for the fiscal year ended December 31,
1997 is being sent to all shareholders with this Proxy Statement. The Annual
Report to Shareholders does not form any part of the material for the
solicitation of any Proxy.
A COPY OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1997 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS, IS
AVAILABLE WITHOUT CHARGE TO ANY SHAREHOLDER OF THE COMPANY UPON WRITTEN REQUEST
TO MR. LAWRENCE A. TAYLOR, 2300 ENGLERT DRIVE, SUITE B, DURHAM, NORTH CAROLINA
27713.
12
<PAGE> 15
APPENDIX A
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION
OF DIGITAL RECORDERS, INC.
The undersigned Corporation hereby executes these Articles of Amendment for
the purpose of amending its Articles of Incorporation.
1. The name of the Corporation is Digital Recorders, Inc.
2. The following amendment to the Articles of Incorporation of the
Corporation was adopted by its Shareholders in the manner prescribed by law:
Article IV, Part II, of the Articles of Incorporation shall be amended by
adding the following as Section 1, subsection (f) thereto:
(f) Subject to the prior and superior rights of the Series B Preferred
Stock, the Series AA Preferred Stock, the Series C Preferred Stock, and the
Series A Preferred Stock (and any class or shares of preferred stock), the
holders of Series AAA Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors of the Corporation, consistent
with applicable law, dividends which shall accrue at a quarterly rate of
One Hundred Twenty Five Dollars and No Cents ($125.00) per share quarterly.
Dividends shall accrue as of March 31st, June 30th, September 30th, and
December 31st of each year. The adjusted dividend rate under this
subsection (f) shall become effective only upon the fifth anniversary date
of the respective issuance dates of the Series AAA Preferred Stock.
Dividends shall be cumulative if not paid when and as they accrue.
In the event any shares of Series AAA Preferred Stock are issued during any
calendar quarter or are redeemed by the Corporation during any calendar quarter,
the accrued dividends shall be prorated in proportion to the number of days
during that calendar year during which such shares were outstanding. All accrued
but unpaid dividends shall be paid upon redemption of the shares of Series AAA
Preferred Stock.
Article IV, Part II, Section 4, subsection (b) of the Articles of
Incorporation shall be deleted in its entirety and the following substituted in
lieu thereof:
(b) Subject to paragraph (c) below: (i) each share of issued and
outstanding Series B Preferred Stock and Series C Preferred Stock shall be
redeemed by the Company on the fifth anniversary of the issuance of such
shares; (ii) each share of issued and outstanding Series AA Preferred Stock
shall be redeemed by the Company on the fifth anniversary of the latest
date of issuance of any shares of Series AA Preferred Stock or June 30,
1997, whichever is earlier; and (iii) each share of issued and outstanding
Series AAA Preferred Stock shall be redeemed by the Company on December 31,
2003. At the sole option of the Company, the Company may redeem the Series
AAA Preferred Stock prior to December 31, 2003 upon providing the holders
of such shares to be redeemed written notice of the number of shares to be
redeemed, the redemption price and the redemption date in accordance with
Article IV, Part II, Section 4, subsection (g) of the Articles of
Incorporation. Notwithstanding the ten (10) day notice prescribed by
Section 4(g), 30 days' notice shall be given with respect to any optional
redemption of the Series AAA Preferred Stock
Article IV, part II, Section 7, subsection (a) of the Articles of
Incorporation shall be deleted in its entirety and the following substituted in
lieu thereof:
(a) Right to Convert. Each share of Series AAA Preferred Stock shall
be convertible, at the option of the holder thereof, at any time commencing
twenty-four (24) months after the effective date of the initial public
offering of the Corporation's Common Stock at the office of the Corporation
or any transfer agent for the Common Stock into Five Hundred (500) fully
paid and nonassessable shares of Common Stock. In the event each share of
issued and outstanding Series AAA Preferred Stock is not redeemed by the
Company by the fifth anniversary of the issuance of such shares pursuant to
Article IV, Part I, Section 4, subsection (b)(i) of the Articles of
Incorporation, as amended, each share of Series AAA Preferred Stock shall
be convertible, at the option of the holder thereof, at any time at the
13
<PAGE> 16
office of the Corporation or any transfer agent for the Common Stock into
Six Hundred Twenty Five (625) fully paid and nonassessable shares of Common
Stock.
3. The date of the adoption of these Articles of Amendment by the Series
AAA Preferred Stockholders was April 6, 1998. The date of the adoption of these
Articles of Amendment by the Common Stockholders was June 30, 1998.
4. These Articles of Amendment do not effect an exchange, reclassification
or cancellation of issued shares of the Corporation.
Dated this 30th day of June, 1998.
DIGITAL RECORDERS, INC.
/s/ DAVID L. TURNEY
--------------------------------------
David L. Turney
Chairman of the Board
14
<PAGE> 17
DIGITAL RECORDERS, INC.
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 30, 1998
KNOW ALL MEN BY THESE PRESENTS: that the undersigned shareholder of Digital
Recorders, Inc. (the "Company") hereby constitutes and appoints David L. Turney
and Lawrence A. Taylor, or either of them, as attorneys and proxies, each with
the power to appoint his substitute, and hereby authorizes them to represent and
vote, as designated below, all of the shares of stock of the Company which the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company to be held June 30, 1998, and at any and all adjournments thereof with
respect to the matters set forth below and described in the Notice of Annual
Meeting of Shareholders and Proxy Statement dated May 29, 1998, receipt of which
is acknowledged.
1. To consider and act upon a proposal to elect the nominees presented below as
directors to hold office for one-year terms or until their successors are
elected and qualified.
<TABLE>
<S> <C>
[ ] FOR election of all nominees listed [ ] WITHHOLD AUTHORITY to vote for all nominees listed
(Except as shown below)
</TABLE>
INSTRUCTION: To withhold authority to vote for any individual nominee, strike
through the nominee's name below:
David L. Turney, J. Phillips L. Johnston, John D. Higgins, Sr., C. James Meese,
Jr., John K. Pirotte, John M. Reeves, II, Juliann Tenney, John W. Thomas, Jr.
2. To consider and act upon a proposal to approve an amendment to the Company's
Incentive Stock Option Plan to permit the issuance of an additional 150,000
shares of Common Stock pursuant to the Plan.
[ ] FOR PROPOSAL [ ] AGAINST PROPOSAL [ ] ABSTAIN
3. TO CONSIDER AND ACT UPON A PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION TO (I) EXTEND THE MANDATORY REDEMPTION DATE OF THE
SHARES OF 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, TO BE EFFECTIVE AS
OF THE ORIGINALLY SCHEDULED MANDATORY REDEMPTION DATE WHICH APPLIES TO EACH
PREFERRED SHARE.
[ ] FOR PROPOSAL [ ] AGAINST PROPOSAL [ ] ABSTAIN
4. To ratify the appointment of McGladrey & Pullen LLP as the independent
certified public accountants of the Company.
[ ] FOR RATIFICATION [ ] AGAINST RATIFICATION [ ] ABSTAIN
5. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any and all adjournments
thereof.
[ ] AUTHORIZED TO VOTE [ ] ABSTAIN
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder(s). IF NO INDICATION IS MADE, THIS PROXY
WILL BE VOTED FOR THE NOMINEES LISTED AND FOR PROPOSALS 2, 3 AND 4 AND THE PROXY
HOLDERS WILL VOTE ON ANY PROPOSAL UNDER 5 IN THEIR DISCRETION AND IN THEIR BEST
JUDGMENT.
Please mark, date, and sign exactly as your name appears on your stock
certificate. When shares are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Dated: , 1998
------------------
------------------------------
Signature
Dated: , 1998
------------------
------------------------------
Signature if held jointly
If this Proxy is not dated,
the Proxy will be deemed to
bear the date the form was
mailed to the shareholder.
