<PAGE> 1
FORM 10-KSB\A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from ____________ to ____________
Commission file number: 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer in its charter)
NORTH CAROLINA 56-1362926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 ENGLERT DRIVE, SUITE B
DURHAM, NORTH CAROLINA 27713
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (919) 361-2155
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $.10 PAR VALUE BOSTON STOCK EXCHANGE, INC.
WARRANTS TO PURCHASE COMMON STOCK BOSTON STOCK EXCHANGE, INC.
Securities registered pursuant to section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were $11,672,773.
As of February 28, 1998, 2,674,075 shares of the issuer's Common Stock were
outstanding. The aggregate market value of the 2,309,145 shares of Common Stock
held by non-affiliates was $3,463,718 as of February 28, 1998. The market value
of the shares was calculated based on the closing bid price of such shares on
The Nasdaq SmallCap Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Name Position
- ---- --------
David L. Turney.............. Chairman of the Board and Chief Executive Officer
J. Phillips L. Johnston...... President and Special Programs Administrator
John D. Higgins, Sr.......... Director
C. James Meese, Jr........... Director
John K. Pirotte.............. Director
John M. Reeves, II........... Director
Juliann Tenney............... Director
John W. Thomas, Jr........... Director
Michael A. Connor, Jr........ Vice President and General Manager - DAC
Lawrence A. Hagemann......... Executive Vice President and General Manager -
TwinVision
Tanya L. Johnson............. Vice President and General Manager - TCS;
Assistant Secretary, Digital Recorders
Jonathan E. Kennedy.......... Chief Financial Officer and Secretary
Bruce R. Thomas.............. Vice President of Sales - TCS
DIRECTORS
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
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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. 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
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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."
EXECUTIVE OFFICERS
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.
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.
Jonathan E. Kennedy, age 38, has served as Chief Financial Officer and
Secretary of the Company
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since November 1996. From January 1996 to November 1996, Mr. Kennedy was the
Vice President and Chief Financial Officer for Coastal Physician Services, Inc.,
a wholly-owned subsidiary of Coastal Physician Group, Inc. ("Coastal") which is
a New York Stock Exchange listed company. From May 1995 to January 1996, he was
the Vice President and Corporate Controller for Coastal and from September 1993
to May 1995 he was the Vice President of Planning & Analysis for Coastal. From
July 1984 until September 1993 he served in various capacities, including five
years as a manager or senior manager, with KPMG Peat Marwick LLP, an
international public accounting firm. Mr. Kennedy received his B.S. degree in
business administration from the University of North Carolina and his M.B.A.
from Duke University. Mr. Kennedy is a certified public accountant.
Bruce R. Thomas, age 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.
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 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
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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.
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.
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ITEM 10. 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 ----------------------
NAME AND PRINCIPAL -------------------------------------- SECURITIES UNDERLYING
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
Chief Financial Officer 1996 9,375 --- --- 11,000
and Secretary (5)
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 $4,158 in commissions and an automobile expense allowance.
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Option Grants Table. The following table sets forth information
concerning grants of stock options to the Named Officers pursuant to the
Company's stock option plan during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE
NAME GRANTED (SHARES) FISCAL YEAR ($/SHARE) EXPIRATION DATE
---- ---------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
J. Phillips L. Johnston 10,000 11.9% $2.38 6/23/07
Michael A. Connor, Jr. 3,000 3.6 3.28 2/03/07
Michael A. Connor, Jr. 4,000 4.7 2.38 6/23/07
Jonathan E. Kennedy 4,000 4.7 2.38 6/23/07
Bruce R. Thomas 2,000 2.4 2.38 6/23/07
Andrew L. Turner, III 4,000 4.7 2.38 6/23/07
</TABLE>
Fiscal Year-End Options/Option Values Table. No stock options were
exercised by the Named Officers in the fiscal year ended December 31, 1997. The
following table shows the stock option values for the Named Officers as of
December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED IN-
LYING UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(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.
Stock Option Plan. The Company's Incentive Stock Option Plan (the
"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
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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 its initial public offering that the exercise
price of all non-qualified 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's
directors, its executive officers, and
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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.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
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<PAGE> 12
ITEM 12. 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 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.
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.
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.
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<PAGE> 13
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIGITAL RECORDERS, INC.
Date: April 30, 1998 By: /s/ David L. Turney
---------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David L. Turney Chairman of the Board, Chief April 30, 1998
- --------------------------- Executive Officer (Principal
David L. Turney Executive Officer)
/s/ J. Phillips L. Johnston President and Special Programs April 30, 1998
- --------------------------- Administrator
J. Phillips L. Johnston
/s/ Jonathan E. Kennedy Chief Financial Officer and April 30, 1998
- --------------------------- Secretary (Principal Financial
Jonathan E. Kennedy and Accounting Officer)
/s/ John D. Higgins, Sr. Director April 30, 1998
- ---------------------------
John D. Higgins, Sr.
/s/ C. James Meese, Jr. Director April 30, 1998
- ---------------------------
C. James Meese, Jr.
/s/ John K. Pirotte Director April 30, 1998
- ---------------------------
John K. Pirotte
/s/ John M. Reeves, II Director April 30, 1998
- ---------------------------
John M. Reeves, II
/s/ Juliann Tenney Director April 30, 1998
- ---------------------------
Juliann Tenney
/s/ John W. Thomas, Jr. Director April 30, 1998
- ---------------------------
John W. Thomas, Jr.
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