Preliminary Proxy | |
Statement Filed | |
Pursuant to | |
Rule 14a-6 |
1. | To elect three class two directors to serve until the Annual Meeting in the year 2006 |
2. | To amend the Articles of Incorporation to increase the number of authorized shares of common stock from 10,000,000 shares to 25,000,000 shares and the authorized preferred stock from 1,000,000 shares to 5,000,000 shares |
3. | To authorize the Company to issue an undetermined number of shares of a new series of preferred stock and warrants that could convert into an aggregate of up to 2,000,000 shares of common stock in connection with a potential equity financing |
4. | To ratify conversion rights granted in connection with the issuance of convertible subordinated debentures |
5. | To approve the 2003 stock option plan and the _____ shares of common stock reserved thereunder |
6. | To ratify the selection of independent auditors for the year 2003 |
7. | To transact such other business as may be properly brought before the meeting and any adjournment or postponement thereof |
For the convenience of our shareholders, a continental breakfast will be available at 9:30 a.m. (Eastern) at the meeting location. Shareholders of record at the close of business on March 24, 2003, will be entitled to notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof. |
By Order of the Board of Directors, /s/ DAVID L. TURNEY Chairman, Chief Executive Officer and President _____________, 2003 |
To ensure your representation at the Annual Meeting, please fill in, sign, date and return the Proxy submitted herewith using the enclosed addressed envelope. The giving of such Proxy will not affect your right to revoke such Proxy by appropriate written notice or to vote in person should you later decide to attend the Annual Meeting. Please note, however, if your shares are held of record by a broker, bank or nominee and you wish to vote at the meeting, you must obtain from the record holder a proxy issued in your name. |
THIS PAGE WAS INTENTIONALLY LEFT BLANK.2 |
Preliminary Proxy | |
Statement Filed | |
Pursuant to | |
Rule 14a-6 |
o | Four Class One directors (Stephanie L. Pinson, Joseph Tang, Lawrence A. Taylor, and Juliann Tenney, J.D.) |
o | Three Class Two directors (C. James Meese Jr., John K. Pirotte, and David L. Turney) |
o | Three Class Three directors (Russell C. Cleveland, John D. Higgins Sr., and J. Phillips L. Johnston, J.D.) |
NOMINEES | ||||||||
---|---|---|---|---|---|---|---|---|
Name | Current Position | Term Expires (If Elected) | ||||||
C. James Meese Jr. | Director | 2006 | ||||||
John K. Pirotte | Director | 2006 | ||||||
David L. Turney | Chairman, Chief Executive Officer and President, DRI, and Chairman and Managing Director, DRI-Europa AB | 2006 | ||||||
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. Following are biographies for each of the nominees for re-election as directors, including their recent employment, positions with the Company, other directorships and age as of the date of this Proxy Statement. C. James Meese Jr., age 61, has been a DRI director since 1991. He also was an independent sales representative for the Digital Recorders business unit from February 1993 through May 1995. Since 1989, 7 |
“The Corporation shall be authorized to issue an aggregate of Thirty Million (30,000,000) shares of capital stock. The authorized capital stock shall be divided into Common Stock and Preferred Stock. The Common Stock of the Corporation shall consist of Twenty-Five Million (25,000,000) shares of Common Stock, par value $.10 per share. The Preferred Stock of the Corporation shall consist of Five Million (5,000,000) shares of Preferred Stock, par value $.10 per share, and shall be divided into series or classes as set forth below. The Common Stock and Preferred Stock shall each have the powers, preferences, rights, qualifications, limitations and restrictions set forth below. The holders of shares of Common Stock and Preferred Stock shall not have the right to cumulate their votes in the election of directors.” |
The amendment will also change the first paragraph of Article IV, Part II of the Company’s Articles of Incorporation to read in its entirety as follows: |
“The Preferred Stock of the Corporation shall consist of (i) Seven Hundred Thousand (700,000) shares of Series A Convertible Preferred Stock, par value $.10 per share (“Series A Preferred Stock”), the powers, preferences, rights, qualification, limitations and restrictions of which are set forth below, (ii) Ten Thousand (10,000) shares of Series B Redeemable Nonvoting Preferred Stock, par value $.10 per share (“Series B Preferred Stock”), the powers, preferences, rights, qualifications, limitations and restrictions of which are set forth below, (iii) Seven Thousand Five Hundred (7,500) shares of Series C Redeemable Nonvoting Preferred Stock, par value $.10 per share (“Series C Preferred Stock”), the powers, preferences, rights, qualifications, limitations and restrictions of which are set forth below, (iv) Ten Thousand Twenty (10,020) shares of Series AA Redeemable Nonvoting Preferred Stock, par value $.10 per share (“Series AA Preferred Stock”), the powers, preferences, rights, qualifications, limitations and restrictions of which are set forth below, (v) Twenty Thousand (20,000) shares of Series AAA Redeemable Nonvoting Preferred Stock, par value $.10 per share (“Series AAA Preferred Stock”), the powers, preferences, rights, qualifications, limitations and restrictions of which are set forth below, (vi) Ten Thousand (10,000) shares of Series D Junior Participating Preferred Stock, par value $.10 per share (“Series D Preferred Stock”), the powers, preferences, rights, qualifications, limitations and restrictions of which are set forth in the Certificate of Designation creating the Series D Preferred Stock, and (vii) Five Million Two Hundred Forty-Two Thousand Four Hundred Eighty (5,242,480) shares of Preferred Stock, par value $.10 per share, for which the Board of Directors of the Corporation shall have the power to fix by resolution or resolutions the powers, preferences and rights and the qualifications, limitations or restrictions, including dividing the Preferred Stock into one or more classes or series having the same or different powers, preferences and rights and qualifications, limitations and restrictions as the Board of Directors shall fix by resolution or resolutions.” |
9 |
Subject to the provisions of the Company’s amendment to the certificate of incorporation and the limitations prescribed by law, the Board would be expressly authorized, at its discretion, to adopt resolutions to issue preferred shares, to fix the number of preferred shares and to change the number of preferred shares constituting any series and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other annual rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether the dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the preferred shares constituting any series of the Preferred Stock, in each case without any further action or vote by the Shareholders. The Board would be required to make any determination to issue shares of Preferred Stock based on its judgment as to the best interests of the Company and the Shareholders. The Board is seeking Shareholder approval of an amendment to the certificate of incorporation which would give the Board flexibility, without further Shareholder action, unless otherwise required by law, regulation or stock exchange rule, to issue Preferred Stock on such terms and conditions as the Board deems to be in the best interests of the Company and its Shareholders. Other than as described in Proposal Three with respect to a potential equity financing for which the terms have not been determined, the Company has no immediate definitive plans to issue any shares of Preferred Stock. Therefore, the terms, rights and features of a Preferred Stock subject to this proposal cannot be stated or predicted with certainty. It is not possible to state the effects of the proposed amendment upon the rights of holders of Common Stock until the Board determines the respective rights of the holders of one or more series of Preferred Stock. However, the issuance of shares of Preferred Stock pursuant to the Board’s authority described above may adversely affect the rights of the holders of Common Stock. Specifically, the effects of such issuances of Preferred Stock could include (i) reduction of the amount of cash otherwise available for payment of dividends on Common Stock, if any, (ii) restrictions on dividends on Common Stock, (iii) dilution of the voting power of Common Stock, and (iv) restrictions on the rights of holders of Common Stock to share in the Company’s assets on liquidation until satisfaction of any liquidation preference granted to the holders of such subsequently designated series of Preferred Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preferences or both, may have full or limited voting rights, and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock could decrease the amount of earnings and assets allocable to or available for distribution to holders of Common Stock and adversely affect the rights and powers, including voting rights of the Common Stock, and may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. Additionally, the issuance of Common Stock from the increased authorized shares if this Proposal is approved could cause dilution of the voting power of the existing Shareholders. 11 |
Name and Position | Number of Shares Under the 2003 Stock Option Plan | Corresponding Dollar Value | ||||
---|---|---|---|---|---|---|
David L. Turney, Chairman, Chief Executive Officer and President, DRI, and Chairman and Managing Director, | — | — | ||||
DRI-Europa AB | ||||||
Floyd J. Diaz, Vice President and General Manager, Digital Recorders Business Unit | 10,000 | $25,000 | ||||
Lawrence A. Hagemann, Executive Vice President, DRI, and | ||||||
Chief Operating Officer, North Carolina Operations | 10,000 | $25,000 | ||||
Gerald Sheehan, Vice President and General Manager, TwinVision na, Inc. | 10,000 | $25,000 | ||||
Lawrence A. Taylor, Secretary, Chief Financial Officer and Vice President, DRI, and Board of Directors, | ||||||
DRI-Europa AB | 10,000 | $25,000 | ||||
All Executive Officers as a Group | 40,000 | $100,000 | ||||
All Current Directors Who are Not Executive Officers as a Group | 6,000 | $15,000 | ||||
All Employees, Including All Current Officers Who are Not Executive Officers, as a Group | 10,000 | $25,000 | ||||
Awards granted under the Option Plan are to be determined from time to time by the Compensation Committee. It is impossible at this time to indicate the precise number, name or positions of persons who will hereafter receive Options under the Option Plan. 21 |
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||
---|---|---|---|---|---|---|---|
Incentive Stock Option Plan (an equity compensation plan approved by the Shareholders) | 980,000 | $2.70 | $ — | ||||
The purpose of the Option Plan is to promote the interests of the Company and its Shareholders and the Company’s success by providing a method whereby a variety of equity based incentives and other awards may be granted to Employees, Directors of the Company and to selected Consultants. The Option Plan shall become effective upon the affirmative vote of a majority of the votes cast by Shareholders of the Company’s Common Stock in person or by proxy at the Annual Meeting. Administration. The Compensation Committee of the Board will administer the Option Plan. The Compensation Committee will have the authority to construe and interpret the Option Plan; amend and rescind rules relating to the Option Plan; make all necessary determinations for the administration of the Option Plan; determine whether Options will be granted alone or in combination or in tandem with other Options; and determine whether cash will be paid or Options will be granted in replacement of, or as alternatives to, other incentives. Furthermore, the Compensation Committee may correct any defect or inconsistency in the Option Plan or in any Option and has the authority to take all other actions it deems necessary or advisable for the proper administration of the Option Plan. Eligibility. Any Employee in good standing is eligible to become a Participant in the Option Plan. A member of the Board of Directors of the Company or a Subsidiary who is not an Employee of the Company or a Subsidiary shall be eligible to receive Options. Any individual who acts as an independent contractor to the Company and who renders services directly for the Company or a Subsidiary who is not a Director of the Company shall be eligible to receive Options. As of March 13, 2003, approximately 150 employees, 10 members of the Board of Directors and zero consultants are eligible to participate in the Option Plan. Options. The maximum number of shares of Common Stock issuable on exercise of the Options granted under the Option Plan shall be approved by the Shareholders. Initially, a total of ________ shares of Common Stock shall be reserved for issuance under the Option Plan. No Option shall be granted pursuant to the Option Plan on or after the tenth anniversary date of such date, but Options granted prior to such tenth anniversary may extend beyond that date to the date(s) specified in the agreement(s) covering such Options. If an Option expires or is terminated, surrendered or cancelled without having been fully exercised, the unused shares covered by any such Option shall again be available for grant under the Option Plan. However, if the expiration of the termination date of an Option is beyond the term of the existence of the Option Plan, then any shares covered by unexercised or terminated Options shall not reactivate the existence of the Option Plan and therefore may not be available for additional grants under the Option Plan. The intent of the Option Plan is to qualify the Options granted to Employees as “incentive stock options” under the provisions of Section 422 of the Code. Options shall contain terms as may be necessary to qualify the Options granted therein as incentive stock options pursuant to Section 422 of the Code, or any successor statute, including that such incentive stock options shall be granted only to Employees, that such incentive stock options are non-transferable, and which shall conform to all other requirements of the Code. The exercise price of each incentive stock option shall not be less than 100 percent of the Fair Market Value of the underlying shares of Common Stock on the date of the grant. No incentive stock option shall be granted to any Employee who directly or indirectly owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, unless at the time of such grant the exercise price of the Option is at least 110 percent of the Fair Market Value of the underlying shares of Common Stock subject to the Option and such Option is not exercisable after the expiration of five years from the date of the grant. No incentive stock option shall be granted to a person in his capacity as an Employee of a Subsidiary if the Company has less than 50 percent ownership interest in such Subsidiary. 23 |
Options granted to Participants who are Employees of the Company may be exercised upon the Participant’s termination of employment within the following periods, or such shorter periods as determined by the Compensation Committee at the time of the grant: |
o | If on account of death, Options may be exercised any time during their term; |
o | If on account of a Participant’s retirement in good standing, Options may be exercised any time during their term; |
o | If on account of resignation of the Participant from employment, no unexercised Option shall be exercisable to any extent after termination; |
o | If on account of taking of a leave of absence for the purpose of serving the government or country in which the principal place of employment of the Participant is located, either in a military or a civilian capacity, or for such other purpose or reason as the Compensation Committee may approve, a Participant shall not be deemed during the period of any such absence alone, to have terminated his service, except as the Compensation Committee may otherwise expressly provide; |
o | If on account of termination of employment by the Company for cause, no unexercised Option shall be exercisable to any extent after termination; |
o | If on account of certified disability, Options may be exercised any time during their term; |
o | In the case of general layoff or furlough of employees, the Compensation Committee shall have the sole discretion to decide the exercisability of Options; and |
o | If for any reason other than death, retirement, resignation, cause, or disability, Options may be exercised within three months of such termination. |
Options granted to non-employee Directors of the Company or a Subsidiary shall not be incentive stock options and shall have an exercise price equal to the Fair Market Value of the underlying shares of Common Stock on the date of the grant. The term of the Options shall be not more than ten years. Options granted to Consultants shall not be incentive stock options. Grants of non-qualified stock options to Consultants shall have an exercise price equal to the Fair Market Value of the underlying shares of Common Stock on the date of the grant. The term of the Options shall be not more than five years. Options granted and held by the non-employee Director or Consultant as of the date of cessation of service may be exercised by the non-employee Director or Consultant or his/her heirs or legal representatives until the expiration of the term. Restricted Stock. Options may be granted in the form of restricted stock. Grants of restricted stock will be awarded in exchange for consideration in an amount determined by the Compensation Committee. The price, if any, shall be paid in cash, or the Committee has the discretion to accept as consideration Common Stock already owned by the Participant for at least six months and valued at its Fair Market Value. The Compensation Committee can also choose to accept any combination of these methods as consideration. Restricted stock options shall be subject to such restrictions as the Compensation Committee may impose. Performance Units or Shares. Options may be granted in the form of Performance Units or Performance Shares. Such Options represent a commitment by the Company to make a distribution to the Participant or to his beneficiary depending, among other things, upon conditions set by the Compensation Committee. Settlement of Performance Units and Performance Shares may be in cash, in shares of Common Stock, or in any combination thereof. Stock Appreciation Rights. Options may be granted in the form of stock appreciation rights. The Compensation Committee may award Stock appreciation rights in tandem with a stock option, in addition to a stock option, or as freestanding. Settlement of stock appreciation rights may be in cash, in shares of Common Stock, or in any combination thereof. 24 |
Amendment of Option Plan. The Board of Directors, upon recommendation of the Compensation Committee, may amend or alter the Option Plan at any time and from time to time without the approval of Shareholders, unless Shareholder approval is required by federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. Rights and obligations under any Option granted before amendment of the Option Plan shall not be materially altered or impaired adversely by such amendment, except with consent of the person to whom the Option was granted. Assignability of Rights. The rights of a Participant under the Option Plan shall not be assignable by such Participant, by operation of law or otherwise. No Participant may create a lien on any funds, securities, rights or other property to which such Participant may have an interest under the Option Plan. Certain Federal Tax Consequences The following is only a summary of the current effect of federal income taxation upon the Participant and the Company with respect to the shares purchased under the Option Plan. Reference should be made to the applicable provisions of the Internal Revenue Code of 1986, as amended. In addition, the summary does not discuss the tax consequences of a Participant’s death or the income tax laws of any municipality, state or foreign country to which the Participant may be subject. Non-Qualified Stock Option. The grant of a non-qualified stock Option under the Option Plan will not result in any federal income tax consequences to the Participant or to the Company. Upon exercise of a non-qualified stock option, the Participant is subject to income taxes at the rate applicable to ordinary compensation income on the difference between the Option exercise price and the fair market value of the shares on the date of exercise. This income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the income recognized by the Participant. Any gain or loss on the Participant’s subsequent disposition of the shares of Common Stock will receive long or short-term capital gain or loss treatment, depending on whether the shares are held for more than one year following exercise. The Company does not receive a tax deduction for any such gain. The maximum marginal rate at which ordinary income is taxed to individuals is currently 39.6 percent. The maximum rate at which long-term capital gains for most types of property are taxed is 20 percent. Incentive Stock Option. The grant of an incentive stock option under the Option Plan will not result in any federal income tax consequences to the Participant or to the Company. A Participant recognizes no federal taxable income upon exercising an incentive stock option (“ISO”) (subject to the alternative minimum tax rules discussed below), and the Company receives no deduction at the time of exercise. In the event of a disposition of stock acquired upon exercise of an ISO, the tax consequences depend upon how long the Participant has held the shares of Common Stock. If the Participant does not dispose of the shares within two years after the ISO was granted, nor within one year after the ISO was exercised, the Participant will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price. The Company is not entitled to any deduction under these circumstances. If the Participant fails to satisfy either of the foregoing holding periods, he or she must recognize ordinary income in the year of the disposition (referred to as a “disqualifying disposition”). The amount of such ordinary income generally is the lesser of (i) the difference between the amount realized on the disposition and the exercise price, or (ii) the difference between the fair market value of the stock on the exercise date and the exercise price. Any gain in excess of the amount taxed as ordinary income will be treated as a long or short-term capital gain, depending on whether the stock was held for more than one year. The Company, in the year of the disqualifying disposition, is entitled to a deduction equal to the amount of ordinary income recognized by the Participant. The “spread” under an ISO, i.e., the difference between the fair market value of the shares at exercise and the exercise price, is classified as an item of adjustment in the year of exercise for purposes of the alternative minimum tax. 25 |
OTHER PERTINENT INFORMATION2002-2003 Board of DirectorsThe following are the members of the Company’s Board of Directors: |
Name | Position Within DRI | Position Outside DRI | ||||||
---|---|---|---|---|---|---|---|---|
David L. Turney | Chairman, Chief Executive Officer | — | ||||||
and President, DRI, and Chairman | ||||||||
and Managing Director, DRI-Europa AB | ||||||||
Russell C. Cleveland | Director | President and Chief Executive | ||||||
Officer, Renaissance Capital Group, | ||||||||
Inc., Dallas, Texas | ||||||||
John D. Higgins Sr. | Director | Retired Investment Banker, Glen | ||||||
Head, N.Y. | ||||||||
J. Phillips L. Johnston, J.D. | Director | President, Johnston Governance | ||||||
Institute, High Point, N.C. | ||||||||
C. James Meese Jr. | Director | President, Business Development | ||||||
Associates, and General Partner, | ||||||||
Passages Venture Fund, LP, | ||||||||
Raleigh, N.C. | ||||||||
Stephanie L. Pinson | Director | President and Chief Operating | ||||||
Officer, Gilbert Tweed Associates, | ||||||||
New York, N.Y. | ||||||||
John K. Pirotte | Director | Chairman and Chief Executive | ||||||
Officer, CORPEX Technologies Inc., | ||||||||
and President, Matrix Surface | ||||||||
Technologies Inc., Raleigh, N.C. | ||||||||
Joseph Tang | Director | Former President, Lite Vision | ||||||
Corporation, Taiwan, Republic of | ||||||||
China; currently private businessman. | ||||||||
Lawrence A. Taylor | Secretary, Chief Financial Officer | — | ||||||
and Vice President, DRI, and Board | ||||||||
of Directors, DRI-Europa AB | ||||||||
Juliann Tenney, J.D. | Director | Compliance Officer, Duke University | ||||||
School of Medicine, Durham, N.C. |
Certain information about the Board of Directors, other than those nominated for election, is furnished below. See Proposal One for information about the nominees. 29 |
Russell C. Cleveland, age 64, was appointed a director by the DRI Board of Directors in August 2001 pursuant to a position established by the Board under the Convertible Subordinated Debenture for the Mobitec Holding AB acquisition. He was the principal founder of Renaissance Capital Group, Inc., in Dallas, Texas in 1973 and is its majority shareholder. Renaissance Capital provides capital to emerging publicly owned companies. Mr. Cleveland is a Chartered Financial Analyst who has specialized in investing in emerging growth companies for more than 40 years. Mr. Cleveland is a graduate of the University of Pennsylvania, Wharton School of Finance and Commerce. He has served as President of the Dallas Association of Investment Analysts and his background includes executive positions with major southwest regional brokerage firms. For more than 10 years, he was a contributing editor ofTexas Business Magazine, for which he analyzed investment trends. Mr. Cleveland currently serves as President and Director of Renaissance Capital Growth & Income Fund III, Inc. (NASDAQ: RENN). He also is Director and Manager of Renaissance U.S. Growth and Income Trust PLC, which is traded on the London Exchange, and U.S. Portfolio manager of BFS U.S. Special Opportunities Trust PLC (London based). Mr. Cleveland currently serves on the following public company Boards of Directors: Tutogen Medical, Inc., Integrated Securities Systems, Inc., and Cover-All Technologies, Inc. Over the years, Mr. Cleveland has served on the Boards of many publicly traded emerging growth companies. John D. Higgins Sr., age 69, has been a DRI director since February 1998. He also serves as a director of Sparrow Systems, Inc., a developer and marketer of specialized software for use in managing physician practices. From 1990 and through November 1999, Mr. Higgins was Senior Vice President of Corporate Finance for Royce Investment Group, Inc., certain assets of which were subsequently acquired by Investec Ernst & Company, an international investment and merchant banking firm. Currently retired from Investec Ernst and pursuing personal business interests, Mr. Higgins holds B.B.A. and M.B.A. degrees from Hofstra University. J. Phillips L. Johnston, J.D., age 63, has been a DRI director since April 1990. He currently is President of the Johnston Governance Institute. From September 1999 to June 2002, he was a Director, Chief Executive Officer and President of ID Technologies, a public company. From September 1998 to September 1999, he was Chief Executive Officer of Pilot Therapeutic Holdings, Inc., a public company. From April 1998 to May 1998, Mr. Johnston was President and Special Programs Administrator of Digital Recorders. From May 1998 to December 1998, he served as Digital Recorders’ Special Programs Administrator. From April 1990 to May 1998, Mr. Johnston served as DRI’s Chairman of the Board, President and Chief Executive Officer. From September 1987 to April 1990, he served as Administrator of the North Carolina Credit Unions. 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., all of which were privately held companies. From 1971 through 1979, he was President and Chief Executive Officer of Currier Piano Company. He was founding Chairman of the North Carolina Information and Electronics Trade Association, now the largest trade association in that state. He was the Council for Entrepreneurial DevelopmentEntrepreneur of the Year in 1997. Mr. Johnston is a director at several privately held companies. The author of two books, he is a Babcock Entrepreneurial Fellow at Wake Forest University. Mr. Johnston received his A.B. degree in economics from Duke University, attended the Stern Graduate Business School at New York University and received his law degree from the University of North Carolina. 30 |
DIGITAL RECORDERS, INC. SUMMARY OF THE COMMITTEES ON WHICH DIRECTORS SERVE | |||||||||
---|---|---|---|---|---|---|---|---|---|
Name | Compensation | Audit | Nominating | Executive | |||||
David L. Turney | *** | X* | |||||||
Russell C. Cleveland | X | ||||||||
John D. Higgins Sr. | X | X* | |||||||
J. Philips L. Johnston, J.D | X | X | |||||||
C. James Meese Jr. | X* | X | |||||||
Stephanie L. Pinson | X | X** | |||||||
John K. Pirotte | X | X | |||||||
Joseph Tang | X | ||||||||
Lawrence A. Taylor | |||||||||
Juliann Tenney, J.D. | X* | ||||||||
* | Committee Chairperson |
** | Member during approximately last half of 2002 only |
*** | Member during approximately first half of 2002 only |
TheAudit Committee currently is composed of three non-employee directors, Mr. Meese (Chairperson), Mr. Pirotte and Mr. Higgins. The Audit Committee held nine meetings in fiscal year 2002. The members of the Audit Committee are independent within the meaning of Rule 4200(a) (14) of the NASD Marketplace Rules. Furthermore, the members of the Audit Committee are able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement. The Board of Directors has determined that at least one member of the Audit Committee has past employment experience in finance or accounting or any other comparable experience. The Company’s Board of Directors has adopted a written charter for the Audit Committee, and on an annual basis the Audit Committee will review and reassess the adequacy of the formal written charter. A copy of the charter is attached to this Proxy Statement as Appendix B. The function of the Audit Committee is to appoint, retain, compensate and oversee the work of any registered public accounting firm employed by the Company (including resolution of disagreements between the Company’s management and the accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or other attest services to the Company. Any such registered public accounting firm is selected by and reports directly to the Audit Committee. The Audit Committee monitors the independence of the registered accounting firm. The Audit Committee has the ultimate authority and responsibility to evaluate and, where appropriate, replace the registered public accounting firm. The Audit Committee also has the primary responsibility for monitoring the integrity of the financial statements of the Company; the financial reporting process, the audit process, and the Company’s process for monitoring compliance with laws and regulations; and the compliance by the Company with legal, regulatory and stock exchange or listing requirements. Pursuant to the Audit Committee Charter the Audit Committee has the authority to meet from time to time and to request and receive such information from the Company’s officers and employees as it shall deem appropriate to the performance of its duties. The Audit Committee also has the authority to retain special legal, accounting or other consultants to advise the Committee to the extent necessary to the performance of its duties as it shall deem appropriate under the circumstances. The Audit Committee may require any officer or employee of the Company, or request the Company’s outside counsel or independent auditor, to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee 32 |
While not a regulation to which the Company is presently subject, the Company believes that at least two members of the Audit Committee (Mr. Pirotte and Mr. Meese) may meet the qualifications defined for being designated “Audit Committee Financial Expert.” The Company intends to complete its consideration of this matter and make a final designation on this matter on or before the required date. See “Audit Committee Report” below and Audit Committee Charter attached as Appendix B. TheCompensation Committee currently is composed of three non-employee directors, Ms. Tenney (Chairperson), Mr. Johnston, and Ms. Pinson. The Compensation Committee held six meetings in fiscal year 2002. The function of the Compensation Committee is to consider, evaluate, advise, and recommend, in consultation with Company executive management, policy related to compensation, benefits, and perquisites for all Company employees and Directors. The Compensation Committee also evaluates performance and considers and recommends appropriate actions on all matters of direct and indirect compensation, employment agreements, benefits, and perquisites of the Company CEO/Chair including a succession plan. The Compensation Committee considers the recommended compensation of the CFO and, if found to be acceptable, approves the same. The Compensation Committee also provides general compliance oversight in areas related to employees, including the requirement that Company management has procedures and policies in place which are in compliance with applicable state, federal, local employee and employee regulations, requirements, and practices. See “Compensation Committee Report” below. TheExecutive Committee currently is composed of Mr. Turney (Chairman), Mr. Cleveland, Mr. Pirotte and Mr. Johnston. The Executive Committee held five meetings in fiscal year 2002. The Executive Committee advises and monitors actions related to financing, mergers and acquisitions, as well as engages in other details where the Board of Directors may so request. TheNominating Committee currently is composed of four non-employee directors, Mr. Higgins (Chairperson), Mr. Meese, Mr. Tang and Ms. Pinson. Ms. Pinson served in this capacity in the last half of 2002 at that time replacing Mr. Turney who had voluntarily stepped aside in concurrence with emerging new corporate governance best practices. The Nominating Committee held four meetings in fiscal year 2002. The Nominating Committee makes advisory recommendations to the Board of Directors about appropriate composition and membership on the Board of Directors and its committees. The Nominating Committee joins together with the Company Chairman/CEO to identify, screen, recruit, interview, and recommend individuals deemed to be appropriate to serve on the Board of Directors. The Nominating Committee also serves as an advisory committee to the Company CEO/Chairman and Board related to filling Committees of the Board (such subsequently to be voted by the Board of Directors). The Nominating Committee provides a review and monitoring function related to performance of the Board of Directors and its Committees. See “Nominating Committee Report” below. Shareholders wishing to propose nominees for directors for next year’s Annual Meeting should submit such proposed nominees to the Company by the date that Shareholder Proposals in next year’s Proxy Statement must be received. See “Shareholder Proposals for 2004 Annual Meeting” elsewhere in this Proxy Statement. All nominees proposed by Shareholders will be considered by the Nominating Committee in making its nominations for Directors but will not necessarily be accepted. 33 |
During the last half of fiscal year 2002, the Company’s Board of Directors initiated a change in the Nominating Committee, to become effective at the earliest practicable time, to create a new committee replacing the Nominating Committee. The new committee will be known as theCorporate Governance and Nominating Committee. It is to operate under a Charter designed to comply with the spirit and intent of emerging regulation being proposed by the National Association of Securities Dealers (NASD), the Securities and Exchange Commission (SEC), all pursuant to the authority granted the SEC under the Sarbanes-Oxley Act of 2002. This new committee Charter is expected to evolve to fully conform to applicable law and regulations as those regulations become available and effective. However, at this point, the Corporate Governance Committee, which is comprised of non-employee directors (Mr. Higgins (Chairperson), Mr. Meese, Mr. Tang and Ms. Pinson), has responsibilities such as, but not limited to, the following: |
o | Code of Conduct and Ethics and monitoring compliance with same; |
o | facilitating regular meetings of the non-executive directors using a "lead director" concept; |
o | facilitating evaluation of director performance; |
o | structure, talent and composition of the Board of Directors and all of its committees; |
o | liaison between the Chairman of the Board of Directors (who also is the Company's CEO) and the non-executive directors; |
o | documenting the duty, authority and responsibility of members of the Board of Directors; and |
o | all prior responsibilities of the former Nominating Committee as stated previously. |
The foregoing Audit Committee Report has been furnished by the following members of the Board of Directors of the Company who comprised the Audit Committee: |
C. James Meese Jr. (Chairman) John D. Higgins Sr. John K. Pirotte March 21, 2003 |
Additionally, as a special component of the established EIC Plan, the Compensation Committee includes, for the CEO and CFO only, a discretionary incentive compensation consideration. That discretionary incentive compensation consideration is based on factors such as: |
o | Public equity market management actions and effectiveness |
o | Strategic planning and execution |
o | Organizational, people, and operating infrastructure considerations |
o | Evidence of effective management of relationships with third party DRI partners such as service providers, |
o | Effective and appropriate management of the growth of DRI earnings over the longer term through both |
Juliann Tenney, J.D. (Chair) J. Phillips L. Johnston, J.D. Stephanie L. Pinson February 14, 2003 |
o | Clarify the duties and responsibilities of the Board of Directors and the Corporate Governance and Nominating Committee; |
o | Evaluate Board structure and composition, including maintaining a substantial majority of independent directors with independent directors filling all seats on the Audit, Compensation, and Corporate Governance and Nominating Committees; |
o | Monitor policies and practices of the board inclusive of a Code of Conduct and Ethics; |
o | Join together with the Company Chairman/CEO to identify, screen, recruit, interview, recommend, and (when so elected or appointed) orient individuals deemed to be appropriate to serve on the Board of Directors; |
o | Act as an advisory committee to the Company CEO/Chairman and Board related to filling Committees of the Board of (such subsequently to be voted upon by the Board of Directors); |
o | Act as a review and monitoring function related to structure and performance of Board of Directors members and committees of the Board of Directors; |
o | Facilitate and lead, through a lead independent director, regular closed meetings of non-executive directors; and |
o | Serve as the Nominating Committee having duty and responsibilities as previously described within “Committees.” |
The foregoing report has been furnished by the following members of the Board of Directors of the Company who comprised the Corporate Governance and Nominating Committee: |
John D Higgins (Chair) Stephanie L Pinson C. James Meese Joe Tang February 14, 2003 |
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DIGITAL RECORDERS, INC. BOARD COMPENSATION AS OF JUNE 2002 | |||
---|---|---|---|
Board Meetings | |||
In Person (Local) | $2,000 | ||
In Person (Overnight Stay Required) | $2,500 | ||
Telephonic | $1,000 | ||
Committee Meetings | |||
All | $1,500 | ||
Additional for Chairperson | $1,000 | ||
DIGITAL RECORDERS, INC. STOCK OPTIONS AWARDED TO NON-EMPLOYEE DIRECTORS DURING FISCAL YEAR 2002 (1) | |||||||||
---|---|---|---|---|---|---|---|---|---|
Individual Grants | |||||||||
Name | Number of Securities Underlying Options/SARs Granted (#) | % of Total Options/SARs Granted to Non-Employee Directors in Fiscal Year 2002 | Exercise Base Price ($/Share) | Expiration Date | |||||
Russell C. Cleveland | — | — | — | — | |||||
John D. Higgins Sr. | — | — | — | — | |||||
J. Phillips L. Johnston, J.D. | — | — | — | — | |||||
C. James Meese Jr. | 2,000(2) | 33.3% | $2.50 | June 23, 2007 | |||||
Stephanie L. Pinson | — | — | — | — | |||||
John K. Pirotte | 2,000(2) | 33.3% | $2.50 | June 23, 2007 | |||||
Joseph Tang | — | — | — | — | |||||
Juliann Tenney, J.D. | 2,000(2) | 33.3% | $2.50 | June 23, 2007 | |||||
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Notes |
1. | No stock options were exercised by the non-employee or non-consultant directors in the fiscal year ended December 31, 2002. |
2. | These options were issued to replace an equivalent number of options that expired in the fiscal year ended December 31, 2002. |
EXECUTIVE OFFICERS AND KEY MANAGEMENTThe following individuals currently serve as the Company’s executive officers and key management: |
Name | Position | |
David L. Turney | Chairman, Chief Executive Officer and President, DRI, and Chairman and Managing Director, DRI-Europa AB | |
Floyd J. Diaz | Vice President and General Manager, Digital Recorders Business Unit | |
Lawrence A. Hagemann | Executive Vice President, DRI, and Chief Operating Officer, North Carolina Operations | |
Gerald Sheehan | Vice President and General Manager, TwinVision na, Inc. Business Unit | |
Lawrence A. Taylor |
| |
Following are biographical summaries for the Company’s executive officers and key management who are not directors. Floyd J. Diaz, age 42, has 12 years’ transit-industry experience. He has been the Vice President and General Manager of the Company’s transit-industry business unit, Digital Recorders (DR), since May 2002. He joined the Company as DR’s Vice President and Sales and Marketing Manager in 1999. From 1993 to 1999, Mr. Diaz was Vice President of Sales & Marketing at ERG Transit Systems in Toronto, Ontario. From 1986 to 1992, Mr. Diaz held various positions with the Houston-based Schlumberger Oil and Gas Exploration Division. A 1984 graduate of Queen’s University in Kingston, Ontario, Mr. Diaz has a B.Sc. in Geological Engineering. In 1992, he received an M.B.A. from Houston Baptist University. Lawrence A. Hagemann, age 59, has 13 years’ transit-industry experience, including extensive experience in advanced software and micro-processor systems. In 2000, he was appointed chief operating officer of DRI’s North Carolina Operations. Since February 1998, he has served as DRI’s executive vice president and TwinVision na, Inc.’s president and general manager. From July 1996 to February 1998, he was TwinVision’s vice president and general manager. In addition, Mr. Hagemann currently serves as a director of Transtel Communications Ltd., a developer of news media software based in London, England. He has held this position since October 1993. From July 1995 to July 1996, Mr. Hagemann was vice president of ADDAX Sound Company, a privately held company in Illinois. From April 1991 to December 1993, he served as assistant to the president of Vapor-Mark IV in Illinois. From 1973 to 1990, he was vice president of Sales and Marketing for Extel Corporation in Illinois, as well as a director of Excom Communications Limited in Slough, England, and Extel Overseas Limited in Hong Kong. A 1967 graduate of the University of Detroit, Mr. Hagemann earned a bachelor’s degree in Electrical Engineering. In 1972, he earned an M.B.A. from Loyola University in Chicago. 40 |
DIGITAL RECORDERS, INC. COMPENSATION SUMMARY FOR KEY MANAGEMENT | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position | Year | Annual Compensation | Notes | Long-Term Compensation Awards (1) | |||||||||
Salary ($) | Bonus ($) | Other | Securities Underlying Options/SARs | ||||||||||
David L. Turney, Chairman, Chief Executive Officer and President, DRI, and Chairman and Managing Director, DRI-Europa AB | 2002 | 219,375 | 32,500 | 10,288 | 2 | — | |||||||
2001 | 215,000 | 37,500 | 9,722 | 2 | — | ||||||||
2000 | 185,000 | 30,000 | 3,426 | 2 | — | ||||||||
Floyd J. Diaz, Vice President and General Manager of the Digital Recorders Business Unit | 2002 | 123,850 | 45,650 | — | 3 | 10,000 | |||||||
2001 | 110,000 | 32,640 | — | 3,000 | |||||||||
2000 | 95,000 | 5,962 | — | 7,000 | |||||||||
Lawrence A. Hagemann, Executive Vice President, DRI, and Chief Operating Officer, North Carolina Operations | 2002 | 157,083 | — | 9,535 | 2 | 10,000 | |||||||
2001 | 151,667 | — | 8,769 | 2 | 25,000 | ||||||||
2000 | 140,000 | 77,000 | — | 25,000 | |||||||||
Gerald Sheehan, Vice President and General Manager of the TwinVision na, Inc. Business Unit | 2002 | 135,000 | — | — | 10,000 | ||||||||
2001 | 119,840 | — | — | 10,000 | |||||||||
2000 | 107,000 | 42,800 | — | 15,000 | |||||||||
Lawrence A. Taylor, Secretary, Chief Financial Officer and Vice President, DRI, and Board of Directors, DRI- Europa AB | 2002 | 163,000 | 20,000 | — | 10,000 | ||||||||
2001 | 151,667 | 25,000 | — | 25,000 | |||||||||
2000 | 136,677 | 20,000 | — | 25,000 | |||||||||
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Notes |
1. | Such options were granted pursuant to the Company’s Incentive Stock Option Plan. |
2. | Represents use of Company-leased automobile and accident insurance. |
3. | Floyd J. Diaz was promoted to Vice President and General Manager of the Digital Recorders business unit on May 20, 2002. |
DIGITAL RECORDERS, INC. SUMMARY OF STOCK OPTIONS AWARDED TO NAMED EXECUTIVE OFFICERS IN 2002 * | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Individual Grants | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ** | |||||||||||||
Name | Number of Securities Underlying Options Granted in 2002 | % of Total Options Granted to Employees in 2002 | Exercise or Base Price ($/Share) | Expiration Date | 5% ($) | 10% ($) | ||||||||
David L. Turney | — | — | — | — | — | — | ||||||||
Floyd J. Diaz | 10,000 | 20.0 | % | $2.50 | April 30, 2003 | — | — | |||||||
Lawrence A. Hagemann | 10,000 | 20.0 | % | $2.50 | April 30, 2003 | — | — | |||||||
Gerald Sheehan | 10,000 | 20.0 | % | $2.50 | April 30, 2003 | — | — | |||||||
Lawrence A. Taylor | 10,000 | 20.0 | % | $2.50 | April 30, 2003 | — | — | |||||||
Note* No stock options were exercised by employees in the fiscal year ended December 31, 2002. ** No stock options were in the money. 42 |
DIGITAL RECORDERS, INC. AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR 2002 AND FISCAL YEAR-END OPTION/SAR VALUES FOR THE NAMED EXECUTIVE OFFICERS | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Shares Acquired on Exercise | Value Realized | Number of Securities Underlying Unexercised Options/SARs at Fiscal Year-End (#) | Value of Unexercised, In-the-Money (1) Options/SARs At Fiscal Year-End ($2.40) | ||||||||||
Exercisable | Unexercisable | Exercisable | Unexercisable (2) | |||||||||||
David L. Turney | -- | -- | 250,000 | -- | $34,400 | -- | ||||||||
Floyd J. Diaz | -- | -- | 26,000 | 1,000 | $ 5,570 | -- | ||||||||
Lawrence A. Hagemann | -- | -- | 91,667 | 8,333 | $16,177 | -- | ||||||||
Gerald Sheehan | -- | -- | 40,667 | 3,333 | $ 7,840 | -- | ||||||||
Lawrence A. Taylor | -- | -- | 81,667 | 8,333 | $14,600 | -- | ||||||||
Executive Group | -- | -- | 490,001 | 20,999 | $78,578 | |||||||||
Notes |
1. | Options or free-standing SARs are in-the-money if the fair market value of the underlying securities exceeds the exercise or base price of the option or SAR. The closing market price of the Common Stock on December 31, 2001 was $2.40. |
2. | All non-exercisable stock options NOT in-the-money. |
401(k) Plan In January of 1996, the Company implemented a defined contribution 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 has not made any matching contributions to the savings plan. All participants’ 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. 43 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND KEY MANAGEMENT (1) As of March 24, 2003 | |||||||||
---|---|---|---|---|---|---|---|---|---|
Beneficial Owners | Common Shares Owned | Warrants and Exercisable Options | Beneficial Shares Held (1) | % of 3,804,475 Base Shares | |||||
5% SHAREHOLDERS | |||||||||
BFS U.S. Special Opportunities Trust PLC (2) | — | 1,137,500 | 1,137,500 | 23 | .0% | ||||
Renaissance U.S. Growth and Income Trust PLC (2) | — | 1,137,500 | 1,137,500 | 23 | .0% | ||||
Lite Vision Corporation (3) | 500,000 | — | 500,000 | 13 | .1% | ||||
NAMED EXECUTIVE OFFICERS AND DIRECTORS | |||||||||
David L. Turney | 135,950 | 250,000 | 385,950 | 9 | .5% | ||||
Floyd J. Diaz (4) | — | 26,000 | 26,000 | 0 | .7% | ||||
Lawrence A. Hagemann | 11,000 | 91,667 | 102,667 | 2 | .6% | ||||
Gerald Sheehan | 500 | 40,667 | 41,167 | 1 | .1% | ||||
Lawrence A. Taylor | 44,300 | 81,667 | 125,967 | 3 | .2% | ||||
Executive Group | 191,750 | 490,000 | 681,750 | 15 | .9% | ||||
Russell C. Cleveland (4) | — | 7,000 | 7,000 | 0 | .2% | ||||
John D. Higgins Sr. (5) | 119,611 | 150,000 | 269,611 | 6 | .8% | ||||
J. Phillips L. Johnston, J.D. | 37,282 | 75,000 | 122,282 | 2 | .9% | ||||
C. James Meese Jr. | 1,000 | 36,987 | 37,987 | 1 | .0% | ||||
Stephanie L. Pinson (4) | 2,000 | 7,000 | 9,000 | 0 | .2% | ||||
John K. Pirotte | 49,695 | 27,000 | 76,695 | 2 | .0% | ||||
Joseph Tang (3) | 500,000 | 25,000 | 525,000 | 13 | .7% | ||||
Juliann Tenney, J.D. | 17,982 | 27,000 | 44,982 | 1 | .2% | ||||
Non-Executive Director Group | 727,570 | 354,987 | 1,082,557 | 26 | .0% | ||||
TOTAL | 1,419,320 | 3,119,987 | 4,539,307 | 65 | .6% | ||||
Notes |
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 at April 1, 2003 plus shares which a person or group has the right to acquire within 60 days. Except as noted otherwise, the address for all persons listed is: Digital Recorders, Inc.; Corporate Administration; 5949 Sherry Lane, Suite 1050; Dallas, Texas 75225. |
2. | Includes 100,000 shares that may be received upon the exercise of warrants and 1,037,000 shares that may be received upon the conversion of Convertible Subordinated debentures of which 287,500 of those shares underlying the debentures are subject to Shareholder approval of Proposal Four. Address: 8080 North Central Expressway, Suite 210-LB59, Dallas, Texas 75206. |
3. | According to Amendment No. 1 to the Schedule 13D filed on behalf of Lite Vision Corporation and Mr. Joseph Tang, Lite Vsion Corporation and Mr. Tang share voting and dispositive power over 500,000 shares of Common Stock. Address: 736 Chung-Cheng Road, 18th Floor, Chung Fo City, Taipei Halen, Taiwan, R.O.C. |
4. | Less than 1 percent. |
5. | Includes 25,000 shares that may be reveived upon the exercie of warranrs and options and 125,000 shares that may be received upon the conversion of a Convertible Subordinated debenture, which shares underlying the debenture are subject to Shareholder approval of Proposal Four. |
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(a) | Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; |
(b) | Item 7A. Quantitative and Qualitative Disclosures About Market Risk; |
(c) | Item 8. Financial Statements and Supplementary Data; and |
(d) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
You should rely only on the information contained in or incorporated by reference in this proxy statement to vote on the matters proposed herein. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. You should not assume that the information contained in the proxy statement is accurate as of any date other than the date hereof, and the mailing of this proxy statement to our stockholders shall not create any implication to the contrary. |
By Order of the Board of Directors, /s/ DAVID L. TURNEY Chairman, Chief Executive Officer and President __________, 2003 |
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Appendix ADIGITAL RECORDERS, INC. |
1. | Purpose |
The purpose of this Plan is to promote the interest of the Corporation and its stockholders and the Corporation’s success by providing a method whereby a variety of equity-based incentives and other Options may be granted to Employees and Directors of the Corporation and its Subsidiaries and to selected Consultants. |
2. | Definitions |
A. | “Option” means any form of stock option granted under the Plan. |
B. | “Option Notice” means any written notice from the Corporation to a Participant or agreement between the Corporation and a Participant that establishes the terms applicable to an Option. |
C. | “Board of Directors” means the Board of Directors of the Corporation. |
D. | “Code” means the Internal Revenue Code of 1986, as amended. Any reference to the Code includes the regulations promulgated pursuant to the Code. |
E. | “Committee” means the Compensation Committee of the Board of Directors, or such other committee designated by the Board of Directors, which is authorized to administer the Plan under Section 2 hereof. The number of persons who shall serve on the Committee shall be specified from time to time by the Board of Directors; however, in no event shall there be fewer than two members of the Committee and all members shall be independent outside directors as defined in the Audit Committee charter of the Corporation. |
F. | “Common Stock” means Common Stock of the Corporation, $.10 par value per share. |
G. | “Consultant” means any individual who acts as an independent contractor to the Corporation and who renders services directly for the Corporation or a Subsidiary as defined and designated from time to time by the Committee. |
H. | “Corporation” means Digital Recorders, Inc., a North Carolina corporation. |
I. | “Director” means a member of the Board of Directors of the Corporation or a Subsidiary thereof. |
J. | “Employee” means any employee of the Corporation or Subsidiary and also includes non-employees to whom an offer of employment has been extended. |
K. | “Exchange Act” means the Securities Exchange Act of 1934, as amended. |
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L. | “Fair Market Value” means, on any given date (i) if the Common Stock is traded in the over-the-counter market, the per share closing bid prices of the Common Stock as reported in a generally accepted reporting service, (ii) if the Common Stock is traded on a national securities exchange, the per share closing price of the Common Stock on which it is so listed, (iii) if trading in the Common Stock is not reported by a national securities exchange, the lowest per share bid price of the Common Stock as reported in the “pink sheets”published by National Quotation Bureau, Incorporated, (iv) if no such reported price is reported for such date pursuant to (i), (ii) or (iii) above, then the bid, closing sale or bid price, respectively, on the first preceding day on which so reported, or (v) if the Common Stock is not so traded and/or reported for a 30-day period immediately preceding the date for determining Fair Market Value, the Committee shall, in good faith and in conformity with the requirements of Section 422 of the Code, establish a method for determining the Fair Market Value. |
M. | “Participant” means any individual to whom an Option is granted under the Plan. |
N. | “Plan” means this Plan, which shall be known as Digital Recorders, Inc. 2003 Stock Option Plan. |
O. | “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, or any successor rule. |
P. | “Subsidiary” means a corporation or other business entity (i) of which the Corporation directly or indirectly has an ownership interest of 50% or more, or (ii) of which it has a right to elect or appoint 50% or more of the board of directors or other governing body. A Subsidiary shall include both currently owned Subsidiaries as well as any Subsidiary hereafter acquired. |
Q. | “Unit” means a bookkeeping entry used by the Corporation to record the grant of an Option until such time as the Option is paid, canceled, forfeited or terminated. |
R. | “Vesting” means the period of time that the Committee sets for the Participant to accrue rights in the Option, but generally shall be a three (3) year period with vesting occurring on each annual date, unless otherwise decided by the Committee. |
3. | Administration |
A. | The Plan shall be administered by the Committee. The Committee shall have the authority to: |
(1) | construe and interpret the Plan; |
(2) | promulgate, amend and rescind rules relating to the implementation of the Plan; |
(3) | make all determinations necessary or advisable for the administration of the Plan, including but not limited to the selection of Employees, Consultants and affiliated individuals who shall be granted Options, the number of shares of Common Stock or Units to be subject to each Option, the Option price, the Vesting or duration of Options, the time permitted for proper exercise of an Option and sale of the underlying shares under existing corporate governance provisions or applicable law and regulations, and the designation of Options as incentive stock options or non-qualified stock options; |
(4) | determine whether Options will be granted alone or in combination or in tandem with other Options; |
(5) | determine whether cash will be paid or Options will be granted in replacement of, or as alternatives to, other grants under the Plan or any other incentive or compensation plan of the Corporation, a Subsidiary or an acquired business unit. |
51 |
B. | Subject to the requirements of applicable law, the Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Option, or any Option Notice; take any and all other actions it deems necessary or advisable for the proper administration of the Plan; designate persons other than members of the Committee to carry out its responsibilities; and prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of, or the granting of Options to, persons to whom grants would otherwise be prohibited by the Exchange Act. Any determination, decision, or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all persons validly claiming under or through persons participating in the Plan. |
C. | The Committee may at any time, and from time to time, amend or cancel any outstanding Option, but only with the consent of the Participant to whom the Option was granted. Any Option granted may be converted, modified, forfeited or canceled, prospectively or retroactively, in whole or in part, by the Committee in its sole discretion. However, no such action may impair the rights of any Participant to whom the Option was granted without his or her consent. The Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Option. |
4. | Eligibility |
A. | Any Employee in good standing is eligible to become a Participant in the Plan in accordance with Section 7. |
B. | Directors who are not Employees of the Corporation or a Subsidiary shall be eligible to receive Options in accordance with Section 8. |
C. | Consultants who are not Directors of the Corporation shall be eligible to receive Options in accordance with Section 9. |
5. | Shares Available |
Subject to Section 16 of the Plan, the maximum number of shares of Common Stock issuable on exercise of options (or other Options) granted under the Plan (including incentive stock options) shall be that approved by the shareholders at each annual or special meeting thereof, accumulated along with any prior approvals by the shareholders. If an Option expires or is terminated, surrendered or canceled without having been fully exercised, the unused shares covered by any such Option shall again be available for grant under the Plan; however, if the expiration of the termination date of an option is beyond the term of the existence of the Plan, then any shares covered by unexercised or terminated Options shall not reactivate the existence of this Plan and therefore may not be available for additional grants under the Plan. |
6. | Term |
The Plan shall become effective upon a vote of the shareholders of the Corporation at their next annual or special meeting. No Option shall be granted pursuant to the Plan on or after the tenth anniversary date of such date, but Options granted prior to such tenth anniversary may extend beyond that date to the date(s) specified in the agreement(s) covering such Options |
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7. | Stock Options —Employees |
A. | Grants may be in the form of Options. Options may be incentive stock options within the meaning of Section 422 of the Code or non-qualified stock options (i.e., stock options which are not incentive stock options). |
B. | Subject to Section 7.C. relating to incentive stock options, Options shall be in such form and contain such terms as the Committee deems appropriate. While the terms of Options need not be identical, each Option shall be subject to the following terms: |
(1) | The exercise price shall be the price set by the Committee but may not be less than one hundred percent of the Fair Market Value of the underlying shares of Common Stock on the date of the grant. |
(2) | The exercise price shall be paid in cash (including check, bank draft, or money order), or at the sole discretion of the Committee, all or part of the purchase price may be paid by delivery of Common Stock already owned by the Participant for at least six (6) months and valued at its Fair Market Value, by the surrender of all or part of an Option (including the Option being exercised), in other property, rights and credits, deemed acceptable by the Committee including, but not limited to, written notice of non-cash exercise if permitted under the applicable statutes, rules and regulations, as may be provided in the grant, to the Corporation at the principal office of the Corporation or any combination of the foregoing methods of payment. |
(3) | Promissory notes may not be given as payment of the exercise price. |
(4) | The term of an Option may not be greater than ten (10) years from the date of the grant. |
(5) | Neither a person to whom an Option is granted nor such person’s legal representative, heir, legatee or distributee shall be deemed to be the holder of, or to have any of the rights of a holder or owner with respect to, any shares of Common Stock subject to such Option unless and until such person has exercised the Option. |
C. | The following special terms shall apply to grants of incentive stock options: |
(1) | Subject to Section 7.C.(2) of the Plan, the exercise price of each incentive stock option shall not be less than 600 of the Fair Market Value of the underlying shares of Common Stock on the date of the grant. |
(2) | No incentive stock option shall be granted to any Employee who directly or indirectly owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless at the time of such grant the exercise price of the Option is at least 110% of the Fair Market Value of the underlying shares of Common Stock subject to the Option and such Option is not exercisable after the expiration of five (5) years from the date of the grant. |
(3) | No incentive stock option shall be granted to a person in his capacity as an Employee of a Subsidiary if the Corporation has less than a 50% ownership interest in such Subsidiary. |
(4) | Options shall contain such other terms as may be necessary to qualify the Options granted therein as incentive stock options pursuant to Section 422 of the Code, or any successor statute, including that such incentive stock options shall be granted only to Employees, that such incentive stock options are non-transferable, and which shall conform to all other requirements of the Code. |
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8. | Options to Non-Employee Directors |
Options granted to Directors who are not Employees of the Corporation or a Subsidiary shall not be incentive stock options and shall be subject to the following terms: |
A. | The exercise price shall be the Fair Market Value of the underlying Shares of Common Stock on the date of the grant, payable in accordance with the alternatives stated in Section 7.B.(2) of the Plan; |
B. | The term of the options shall be not more than ten (10) years; |
C. | The Options shall be subject to Section 14 of the Plan. |
9. | Options to Consultants |
Consultants shall receive Options in accordance with the following terms: |
A. | No grants of incentive stock options shall be made to Consultants. |
B. | Grants of non-qualified stock options to such Consultants shall be subject to the following terms: |
(1) | The exercise price shall be the Fair Market Value of the underlying shares of Common Stock on the date of the grant, payable in accordance with the alternatives stated in Sections 7.B.(2) of the Plan; |
(2) | The term of the options shall be not more than five (5) years; the Options shall be subject to Section 14 of the Plan. |
10. | Restricted Stock |
A. | Options may be granted in the form of restricted stock. |
B. | Grants of restricted stock shall be awarded in exchange for consideration in an amount determined by the Committee. The price, if any, of such restricted stock shall be paid in cash, or at the discretion of the Committee, all or part of the purchase price may be paid by delivery of Common Stock already owned by the Participant for at least six (6) months and valued at its Fair Market Value, or any combination of the foregoing methods of payment, provided no less than the par value of the stock is paid in cash, and the Participant has rendered no less than three (3) months prior service to the Corporation. |
C. | Restricted stock Options shall be subject to such restrictions as the Committee may impose and may include, if the Committee shall so determine, restrictions on transferability and restrictions relating to continued employment. |
D. | The Committee shall have the discretion to grant to a Participant receiving restricted shares all or any of the rights of a stockholder while such shares continue to be subject to restrictions. |
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11. | Performance Units and Performance Shares |
A. | Options may be granted in the form of Performance Units or Performance Shares. Options of Performance Units and Performance Shares shall refer to a commitment by the Corporation to make a distribution to the Participant or to his beneficiary depending on (i) the attainment of the performance objective(s) and other conditions established by the Committee and (ii) the base value of the Performance Unit or Performance Shares, respectively, as established by the Committee. |
B. | Settlement of Performance Units and Performance Shares may be in cash, in shares of Common Stock, or a combination thereof. The Committee may designate a method of converting Performance Units into Common Stock, including, but not limited to, a method based on the Fair Market Value of Common Stock over a series of consecutive trading days. |
C. | Participants shall not be entitled to exercise any voting rights with respect to Performance Units or Performance Shares, but the Committee in its sole discretion may attach dividend equivalents to such Options. |
12. | Stock Appreciation Rights |
A. | Options may be granted in the form of stock appreciation rights. Stock appreciation rights may be awarded in tandem with a stock option, in addition to a stock option, or may be freestanding and unrelated to a stock option. |
B. | A stock appreciation right entitles the Participant to receive from the Corporation an amount equal to the positive difference between (i) the Fair Market Value of Common Stock on the date of exercise of the stock appreciation right and (ii) the grant price or some other amount as the Committee may determine at the time of grant (but not less than the Fair Market Value of Common Stock on the date of grant). |
C. | With respect to persons subject to Section 16 of the Exchange Act, a stock appreciation right may only be exercised during a period which (i) begins on the third business day following a date when the Corporation’s quarterly summary statement of sales and earnings is released to the public through a governmental filing and (ii) ends on the 12th business day following such date. This Section 12.C. shall not apply if the exercise occurs automatically on the date when a related stock option expires. |
D. | Settlement of stock appreciation rights may be in cash, in shares of Common Stock, or a combination thereof, as determined by the Committee. |
13. | Deferral of Options |
At the discretion of the Committee, payment of an Option, dividend equivalent, or any portion thereof may be deferred until a time established by the Committee. Deferrals shall be made in accordance with guidelines established by the Committee to ensure that such deferrals comply with applicable requirements of the Code and its regulations. Deferrals shall be initiated by the delivery of a written, irrevocable election by the participant to the Committee or its nominee. Such election shall be made prior to the date specified by the Committee. The Committee may also (A) credit interest equivalents on cash payments that are deferred and set the rates of such interest equivalents and (B) credit dividends equivalents on deferred payments denominated in the form of shares of Common Stock. |
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14. | Exercise of Stock Options or Options Upon Termination of Employment or Services |
A. (1) | Employees. Unless otherwise provided herein, Options granted to Participants who are employees of the Corporation hereunder may permit the exercise of Options upon the Participant’s termination of employment within the following periods, or such shorter periods as determined by the Committee at the time of grant: |
(a) | If on account of death, Options may be exercised any time during their term by the person or persons to whom the Participant’s rights pass by will or the laws of descent or distribution. |
(b) | If on account of a Participant’s retirement in good standing (as defined from time to time by Corporation policy), Options may be exercised any time during their term. |
(c) | If on account of resignation of the Participant from employment, no unexercised Option shall be exercisable to any extent after termination. |
(d) | If termination of employment by the Corporation for cause (as defined from time to time by Corporation policy), no unexercised Option shall be exercisable to any extent after termination. |
(e) | If on account of the taking of a leave of absence for the purpose of serving the government or the country in which the principal place of employment of the Participant is located, either in a military or a civilian capacity, or for such other purpose or reason as the Committee may approve, a Participant shall not be deemed during the period of any such absence alone, to have terminated his service, except as the Committee may otherwise expressly provide. |
(f) | If on account of certified disability, Options may be exercised any time during their terms. |
(g) | In the case of a general layoff or furlough of employees, the Committee shall have the sole discretion to decide the exercisability of Options. |
(h) | If for any reason other than death, retirement, resignation, cause, or disability, Options may be exercised within three (3) months of such termination. |
(2) | Directors and Consultants. Upon cessation of service in good standing as a Non-Employee Director or Consultant, any and all Options issuable to such persons for services rendered, but which have not been granted and delivered as of the date of cessation of service, for services rendered by the Non-Employee Director or Consultant since the grant date immediately preceding the date of cessation of service, shall be promptly granted and delivered and shall remain exercisable until the expiration of the term of the Option. In addition, all Options granted and held by the Non-Employee Director or Consultant as of the date of cessation of service may be exercised by the Non-Employee Director, or Consultant or his/her heirs or legal representatives until the expiration of the term. |
B. | An unexercised Option shall be exercisable only to the extent that such Option was exercisable on the date the Participant’s employment or service terminated. Notwithstanding the foregoing, and except as provided above, terms relating to the exercisability of Options may be amended by the Committee before or after such termination. |
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C. | In no case may an unexercised Option be exercised to any extent by anyone after expiration of its term. |
15. | Assignability |
The rights of a Participant under the Plan shall not be assignable by such Participant, by operation of law or otherwise, including, but not limited to, as a result of Participant’s divorce or dissolution of marriage. No Participant may create a lien on any funds, securities, rights or other property to which such Participant may have an interest under the Plan, including, but not limited to, any obligation that may arise from an action of equitable dissolution of marital assets, or which is held by the Corporation for the account of the Participant under the Plan. |
16. | Adjustment of Shares Available |
The Committee shall make appropriate and equitable adjustments in the shares of Common Stock available for future Options and the number of shares of Common Stock covered by unexercised, unvested or unpaid Options upon the subdivision of the outstanding shares of Common Stock; the declaration of a dividend payable in Common Stock; the declaration of a dividend payable in a form other than Common Stock in an amount that has a material effect on the price of the shares of Common Stock; the combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a lesser number of shares of Common Stock; a recapitalization; or a similar event. |
17. | Payment of Withholding Taxes |
As a condition to receiving or exercising an Option, as the case may be, the Participant shall pay to the Corporation or the employer Subsidiary the amount of all applicable Federal, state, local and foreign taxes required by law to be paid or withheld relating to receipt or exercise of the Option. Alternatively, the Corporation may withhold shares of Common Stock with an aggregate Fair Market Value equal to such withholding taxes, from any Option in shares of Common Stock, to the extent the withholding is required by law. The Corporation may also accept delivery of Common Stock already owned by the Participant for at least six (6) months and valued at its Fair Market Value. The Corporation also may deduct such withholding taxes from any Option paid in cash. |
18. | Amendments |
The Board of Directors, upon recommendation of the Compensation Committee, may amend the Plan at any time and from time to time, subject to the receipt of stockholder approval where required by Rule 16b-3, by the Code, or any exchange regulations or by state corporation law. Rights and obligations under any Option granted before amendment of the Plan shall not be materially altered or impaired adversely by such amendment, except with consent of the person to whom the Option was granted. If the Board of Directors and the Compensation Committee differ as to any decision, the decision of the Board of Directors controls. |
19. | Regulatory Approvals and Listings |
Notwithstanding any other provision in the Plan, the Corporation shall have no obligation to issue or deliver certificates for shares of Common Stock under the Plan prior to (A) obtaining approval from any governmental agency which the Corporation determines is necessary or advisable, (B) admission of such shares to listing on the stock exchange on which the Common Stock may be listed, and (C) completion of any registration or other qualification of such shares under any state or Federal law or ruling of any governmental body which the Corporation determines to be necessary or advisable. |
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20. | No Right to Continued Employment or Grants |
Participation in the Plan shall not give any Employee any right to remain in the employ of the Corporation or any Subsidiary. Further, the adoption of this Plan shall not be deemed to give any Employee or other individual the right to be selected as a Participant or to be granted an Option. |
21. | No Right, Title, or Interest in Corporation Assets |
No Participant shall have any rights as a stockholder of the Corporation until Participant acquires an unconditional right under an Option to have shares of Common Stock issued to such Participant. In the case of a recipient of a stock option, the unconditional right to have shares of Common Stock issued to such Participant shall be defined as the date upon which the Participant has exercised the stock option and tendered valid consideration to the Corporation for the exercise thereof. To the extent any person acquires a right to receive payments from the Corporation under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Corporation. |
22. | Special Provision Pertaining to Persons Subject to Section 16 of Exchange Act |
Notwithstanding any other item of this Plan, the following shall apply to persons subject to Section 16 of the Exchange Act, except in the case of death or disability or unless Section 16 shall be amended to provide otherwise than as described below, in which event this Plan shall be amended to conform to Section 16, as amended: |
Restricted stock or other equity securities (within the meaning used in Rule 16b-3 of the Exchange Act or any successor rule) offered pursuant to this Plan must be held for at least six (6) months from the date of grant. |
23. | Indemnification |
In addition to such other rights of indemnification as they may have as Directors, the members of the Board of Directors or the Committee administering the Plan shall be indemnified by the Corporation against reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. |
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24. | Merger, Reorganization, Exchange or Sale of Assets |
In the event the Corporation enters into an agreement providing for the merger of the Corporation into another corporation, an exchange of shares with another corporation, the reorganization of the Corporation (in each case, other than a mere reincorporation transaction or one in which the holders of capital stock of the company immediately prior to such merger, share exchange or reorganization continue to hold at least a majority of the voting power of the surviving corporation) or the sale of substantially all of the Corporation’s assets, any Options shall become immediately vested and exercisable as of the date of such merger agreement, exchange agreement, reorganization or sale agreement unless the Board of Directors, in its sole and absolute discretion, determines that any or all Options granted pursuant to the Plan shall not become exercisable on an accelerated basis, if the Corporation or the surviving or acquiring corporation, as the case may be, shall have taken such action, including but not limited to the assumption of options granted under the Plan or the grant of substitute options or Options, as in the opinion of the Board of Directors, is equitable or appropriate to protect the rights and interests of Participants under the Plan. Upon consummation of the merger, exchange, reorganization or sale of assets, each vested Option, Performance Unit, Performance Share and stock appreciation right shall either be assumed by the successor corporation or, if not so assumed, the successor corporation shall substitute a vested Option, Performance Unit, Performance Share or stock appreciation right for each outstanding vested Option, Performance Unit, Performance Share and stock appreciation right on substantially identical terms to the terms of outstanding Options in this form. However and specifically in the case of a successful hostile takeover not approved by the Board of Directors, all Options shall immediately vest and the Acquiror in this specific circumstance shall immediately cash out all Participants in this Digital Recorders, Inc. 2003 Stock Option Plan. |
25. | Governing Law |
The Plan shall be governed by and construed in accordance with the laws of the State of North Carolina. |
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o | The Audit Committee will be composed of not less than three members of the Board of Directors. |
o | The Board of Directors, upon recommendation of the Nominating Committee of the company Board of Directors, will appoint Committee members annually for a term of one year, subject to the appointment of their respective successors or the abolishment of the Committee. |
o | The Audit Committee shall, from time to time, appoint a chairperson from among its members. |
o | Each Committee member shall be financially literate as required by the pronouncements of NASDAQ, possess accounting or equivalent financial expertise, and maintain up-to-date knowledge related to the duties herein. |
o | Each Committee member shall be a current shareholder of the Company. |
o | Each Committee member shall have attended at least 75% of all meetings of the Board of Directors in the preceding year unless the Board of Directors in its discretion, with adequate reason, elects to waive this requirement. |
o | Each Committee member shall reasonably believe that he or she will be able to attend not less than 75% of the Committee’s meetings during the year of such person’s service. |
o | The Audit Committee shall be comprised solely of directors independent of management and free from any relationship that, in the opinion of the Board of Directors or the Director in question, could reasonably be expected to interfere with the exercise of independent judgment as a Committee member. The CFO and CEO of the Company may attend Audit Committee meetings as “ex-officio” or non-voting attendees subject to closed executive sessions as determined from time to time by the Committee Chairman. |
o | A majority of the Committee’s members will constitute a quorum for Audit Committee meetings and the Committee shall be entitled to act by a majority vote of its members present at a meeting. |
o | The Committee will meet at least four times a year, upon notice properly given, or more frequently as required, and at such times, means, and places as it deems advisable. The Committee may meet telephonically or by video conference. |
o | Any member of the Audit Committee shall be entitled to call a meeting of the Audit Committee upon ten days written notice of time, date, location, and agenda with copy to all Board of Directors members and executive management. |
o | The Committee will maintain minutes and the Committee Chair will report to the Board of Directors after each meeting of the committee. |
o | The independent auditors and counsel to the Company will have the right to appear before and be heard by the Audit Committee, subject to the Committee’s right to meet in executive session. |
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Roles and ResponsibilitiesInternal Controls The Audit Committee will: |
o | Evaluate whether management is appropriately communicating the importance of internal controls. |
o | Evaluate the extent to which the independent auditors examine computer systems and applications, the security of such systems and contingency plans for processing financial information in the event of a systems breakdown. |
o | Evaluate whether internal control recommendations made by the independent auditors are addressed by management in a timely and effective fashion. |
o | Ensure that the independent auditors and counsel to the Company have unimpeded access to the Audit Committee with regard to issues of fraud, deficiencies in internal controls and related matters. |
o | Review the results of annual audits of expense reimbursements, compensation, and perquisites of and to directors and officers including their use of corporate assets together with any required or appropriate reporting of same for tax or public company disclosure purposes. |
o | Periodically assess, in conjunction with management, whether the establishment of an internal audit department would benefit the Company. |
Financial Reporting The Audit Committee will: General |
o | Review, under SAS 71, all financial information and accompanying text (annual, quarterly, and all other) to be filed with the Securities and Exchange Commission (the “SEC”), (excluding public and shareholder relations news releases not a part of quarterly or annual SEC reporting of the Company) together with pertinent related communication with the independent auditors of the Company, |
o | Review significant accounting and reporting issues, including recent professional and regulatory pronouncements, and understand their impact upon the Company’s financial statements. |
o | Discuss with management and the independent auditors significant risks and exposures and the Company’s plans to minimize such risks. |
Annual Financial Statements |
o | Consider the annual financial statements and determine whether they are consistent with the information known to committee members. This would include an analysis of the effect of alternative Generally Accepted Accounting Principle methods on the Company’s financial statements and a description of any transactions as to which management obtained Statement on Auditing Standards No. 50 letters. |
o | Discuss judgmental areas such as those involving valuation of assets and liabilities, including, for example, the accounting for and disclosure of revenue recognition and reserves. |
o | Review with management and the independent auditor the effect of regulatory and accounting initiatives on the Company’s financial statements. |
o | Meet with management and the independent auditors together and separately to discuss the financial statements and the results of the audit. |
o | Discuss with the independent auditors accounting and reporting issues on which it consulted its national office including matters of audit quality and consistency. If deemed appropriate, discuss these issues with the national office directly. |
o | Review the annual report before its release and consider whether the information contained therein is consistent with members’ knowledge about the Company and its operations. |
o | Obligate the independent auditors to communicate any required or appropriate matters to the committee. |
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Interim Financial Statements |
o | Be briefed on how management develops and summarizes quarterly financial information, and the extent to which the independent auditors have reviewed quarterly financial information. |
o | Review the quarterly financial report before its release and consider whether the information contained therein is consistent with members’ knowledge about the Company and its operations. |
o | Discuss judgmental areas such as those involving valuation of assets and liabilities, including, for example, the accounting for and disclosure of revenue recognition and reserves. |
o | Meet with management and with the independent auditors, either telephonically or in person, to discuss the interim financial statements and the results of the review. |
Compliance with Laws and Regulations The Audit Committee will: |
o | Review the effectiveness of the system for monitoring compliance with laws and regulations and the results of management’s investigation and follow-up (including disciplinary action) on any fraudulent acts or accounting irregularities. |
o | Periodically obtain updates from management to verify compliance. |
o | Review the findings of any examinations by regulatory agencies such as the Securities and Exchange Commission, NASDAQ, and other such entities. |
o | Review with management and the independent auditor any correspondence with regulators or governmental agencies and any employee complaints or published reports which raise material issues regarding the Company’s financial statements or accounting policies. |
External Audit The Audit Committee will: |
o | Instruct the independent auditors that the Board of Directors and the Audit Committee, as the shareholders’ representative, is the independent auditors’ client. |
o | Review the independent auditors’ proposed audit scope, approach and staff. This shall be an Exclusive Power. |
o | Subject only to consultation with the Board from time to time regarding such matters, periodically review the performance of the independent auditors and appoint, retain and discharge the independent auditors as the Committee shall deem appropriate and in the best interests of the Company. This forgoing grant shall be and Exclusive Power and shall include the right to review of the experience and qualifications of the senior members of the independent auditor team and the quality control procedures of the independent auditor. The Audit may adopt a policy of rotating independent auditors on a regular basis. |
o | Obtain from the independent auditors a formal written statement delineating all relationships between the independent auditors and the Company, consistent with Independence Standard No. 1, and actively engage in a dialogue with the independent auditors with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditors. |
o | Discuss with the independent auditors items required to be communicated to audit committees in accordance with SAS 61. |
o | Review with the independent auditor any problems or difficulties the auditor may have encountered and any management letter provided by the auditor and the Company’s response to that letter. Such review should include: |
a) | Any difficulties encountered in the courses of the audit work, including any restrictions on the auditor’s scope of activities or access to required information, and any material disagreements with management. |
b) | Any changes required in the planned scope of the independent audit. |
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Other ResponsibilitiesThe Audit Committee will: |
o | Meet with the independent auditors and management in separate executive sessions to discuss any matters that the Committee or these groups believe should be discussed privately. |
o | Evaluate and approve any proposed retention of the independent auditor or its affiliates for any non-audit service and review and approve the fee and other contractual arrangements for any such service. The foregoing shall be an Exclusive Power. |
o | Take such steps as shall be necessary and consistent with its authority to ensure that significant findings and recommendations made by the independent auditors are addressed by the Company’s management in a timely fashion, or provide a report to the Board to the extent that it is unable to do so. |
o | Review with Company counsel any legal matters that the Committee believes could reasonably be expected to have a material impact on the Company’s results of operations, financial condition or the presentation of the Company’s financial results. |
o | Review any information submitted to the Audit Committee pursuant to Section 10A of the Private Securities Litigation Reform Act of 1995. |
o | Establish with management guidelines for the Company to follow with respect to any proposed financial activities by the Company in securities. |
o | If necessary and consistent with its duties under this Charter, and following consultation with the Board, the Committee may institute special investigations and, if appropriate, retain special counsel or experts to assist therein. |
o | Perform other oversight functions as requested by the Board of Directors including a review of the annual strategic plan and annual financial plan (budget) prepared by management which, once revised as deemed appropriate in discussion with management, shall be referred, with the Committee’s recommendation, to the full Board of Directors for consideration. |
o | Review and update the charter of the Committee annually and receive approval of changes from the Board of Directors. |
o | Annually prepare a report to shareholders, as required by the Securities and Exchange Commission, to be included in the Company’s annual proxy statement. The foregoing shall be an Exclusive Power. |
o | Periodically solicit assessment by the Board of Directors and perform self-assessment of Audit Committee performance. |
o | Perform any other relevant tasks delegated to the Committee by the Board of Directors. |
o | Regularly update the Board of Directors about Committee activities and recommendations. |
o | Consider and arrange for such continuing education and other instruction for members of the Committee as shall be appropriate under applicable law or the circumstances. |
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DIGITAL RECORDERS, INC.PROXY FOR ANNUAL MEETING OF SHAREHOLDERSThis Proxy Is Solicited on Behalf of the Board of DirectorsAs the undersigned shareholder: |
o | I hereby appoint David L. Turney to serve as my proxy and attorney-in-fact. I grant Mr. Turney full power to: (1) designate a substitute representative, (2) represent me, and (3) vote all of the shares in Digital Recorders, Inc. that I am entitled to vote at the Company's Annual Meeting of the Shareholders. |
o | I understand that I am both eligible and invited to attend the Company's Annual Meeting of Shareholders, which will be held at 10 a.m. (Eastern) on ____________, 2003, at the Radisson Governor's Inn in Durham, N.C. |
o | I understand that I am both eligible and invited to attend any adjournment of the Annual Meeting of Shareholders as stated in the proposals listed below and, more particularly, in the Proxy Statement of the Company dated __________, 2003. |
o | I acknowledge the receipt of the Proxy Statement and the Annual Report on Form 10-K and this ballot, both of which were mailed to me on or about ____________, 2003. |
The shares represented hereby, when this proxy is properly executed and timely returned, will be voted as specified herein by the shareholder. If no direction is made, this proxy will be voted for all nominees as directors and for the approval of the remaining proposals. |
Instructions: Please mark your vote as in this example: /X/ |
I. | To elect three class two directors to serve until the Annual Meeting in the year 2006: / / For election of all nominees listed below / / To withhold authority to vote for all nominees listed below |
Instructions: To vote for, abstain or withhold authority to vote for any individual nominee, so indicate by marking the appropriate box below: |
For | Against | Withhold | |||||
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a. C. James Meese Jr. | |_| | |_| | |_| | ||||
b. John K. Pirotte | |_| | |_| | |_| | ||||
c. David L. Turney | |_| | |_| | |_| |
II. | To amend the Articles of Incorporation to increase the number of authorized shares of common stock from 10 million shares to 25 million shares and the authorized preferred stock from 1 million shares to 5 million shares: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
III. | To authorize the Company to issue an undetermined number of shares of a new series of preferred stock and warrants that could convert into an aggregate of up to 2,000,000 shares of common stock in connection with a potential equity financing: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
IV. | To ratify conversion rights granted in connection with the issuance of convertible subordinated debentures: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
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V. | To approve the 2003 stock option plan: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
VI. | To ratify the selection of independent auditors for the year 2003: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
VII. | To transact such other business as may be properly brought before the meeting and any adjournment or postponement thereof: |
For | Against | Abstain | |||||
---|---|---|---|---|---|---|---|
|_| | |_| | |_| | |||||
|_| | |_| | |_| | |||||
|_| | |_| | |_| |
Signature(s) - ----------------------------------------- ------------------------------------------- Date ----------------------------------------- ------------------------------------------- Notes |
1. | Please sign name exactly as your name appears on the Stock Certificate and/or your brokerage account.When signing as attorney, executor, administrator, trustee or guardian, please give the full title. If morethan one trustee, all should sign. All joint owners must sign. |
2. | It is important that your shares be represented at this meeting regardless of the number of shares youhold. Please sign, date, and return the proxy promptly in the enclosed self addressed stamped envelope. |
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