UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material under Section 240.14a-12
DIGITAL RECORDERS, INC.
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(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
June 6, 2001
Dear Digital Recorders, Inc. Shareholder:
I cordially invite you to attend the annual meeting of the shareholders of
Digital Recorders, Inc. ("Digital") to be held at the Microelectronics Center of
North Carolina, 3021 Cornwallis Road, Research Triangle Park, North Carolina
27709, on Monday, June 25, 2001, at 10:00 a.m., local time. At the annual
meeting, you will be asked to vote on eight proposals, five of which relate to
the issuance of shares of common stock and convertible debentures in connection
with Digital's proposed acquisition of all of the outstanding stock of Mobitec
Holding AB ("Mobitec"), a Swedish company (the "Acquisition") The other
proposals relate to the annual election of directors, approval of the
independent accountants and amending the stock option plan. These matters are
described in more detail in the proxy statement that accompanies this letter.
The proposals related to the Mobitec acquisition involve issuing restricted
shares of Digital common stock provided to the sellers, issuing shares of common
stock underlying warrants provided to one of the sellers, issuing convertible
debentures to fund part of the purchase price, issuing shares of common stock
underlying the convertible debentures and issuing shares of common stock
underlying warrants provided to the convertible debenture holders.
In total, if all of the proposals related to the Mobitec acquisition are
approved, up to 2,230,000 new shares of Digital's common stock will be issued,
or reserved to be issued upon conversion of debentures or exercise of warrants.
If all of these shares are issued, this would amount to approximately 41% of
Digital's common stock after exercise and conversion of all the equity and debt
securities to be issued in connection with the acquisition.
You are not being asked to approve the Mobitec acquisition itself, but only
to approve the issuance of shares and convertible debentures to be issued in
connection with the acquisition. Your approval of these share issuances is
required by Nasdaq market rules. The proposals related to the Mobitec
acquisition are contained in Proposals I through V of the enclosed Notice of
Annual Meeting of Shareholders and Proxy Statement. If any of these proposals
are not approved, none of these proposals will be implemented and Digital will
not be able to proceed with the acquisition.
Digital's Board of Directors has carefully reviewed and considered the terms
of the Mobitec acquisition and has determined that the transactions contemplated
in the acquisition are in the best interests of Digital and its shareholders.
Accordingly, the Board has unanimously approved the acquisition and the
proposals related to the acquisition and recommends that you vote in favor of
these proposals at the annual meeting. The Board has also approved the other
proposals and recommends that you vote in favor of all the proposals.
At the annual meeting, in addition to the items of business, we will also
discuss our 2000 performance and answer any questions you may have about our
Company. Enclosed with the Proxy Statement are your voting card, a
postage-prepaid envelope to return your voting card, your admission ticket to
the annual meeting and our 2000 Annual Report. The Form 10-KSB that is included
within the 2000 Annual Report has been amended. The amended Form 10-KSB/A is
incorporated by reference into the proxy statement and can be viewed online at
WWW.SEC.GOV. The amended 10-KSB/A will be sent to any shareholder, without
exhibits, upon request. See "Documents Incorporated by Reference." To the extent
that there is a conflict between the information presented in the 10-KSB
included in the 2000 Annual Report and the amended Form 10-KSB/A, the later
controls.
Your participation in the annual meeting, in person or by proxy, is
especially important, because the items to be voted upon are very important to
Digital. Whether or not you plan to attend the annual meeting in person, on
behalf of Digital and your fellow shareholders, I urge you to complete, date,
sign and promptly return the enclosed proxy card in the enclosed prepaid
envelope to ensure that your shares will be represented at the annual meeting.
The Board of Directors and Management look forward to seeing you at the
annual meeting.
Very truly yours,
/s/ DAVID L. TURNEY
--------------------------------------
David L. Turney,
Chairman of the Board
DIGITAL RECORDERS, INC.
4018 Patriot Drive, One Park Center, Suite 100, Durham, North Carolina 27703
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of Shareholders of Digital Recorders, Inc. will be held
on June 25, 2001 at 10:00 a.m. at the Microelectronics Center of North Carolina
Auditorium, 3021 Cornwallis Road, Research Triangle Park, North Carolina 27709,
followed by lunch in Conference Rooms A and B at 12:00 p.m. The purposes of the
annual meeting are:
1. to approve the issuance of 430,000 shares of Digital's restricted common
stock, par value of $.10 per share, to be transferred to certain of the
Sellers as part of the purchase price of the Stock Purchase Agreement
(described in the attached Proxy Statement), pursuant to which Agreement DRI
Europa AB, a wholly-owned subsidiary of Digital Recorders, Inc., and/or
Digital will acquire 100% of the outstanding stock of Mobitec Holding AB;
2. to approve the issuance of 100,000 shares of Digital's common stock
underlying warrants granted to Bengt Bodin pursuant to the Bodin Warrant
Agreement as part of the purchase price of the Stock Purchase Agreement;
3. to approve the authorization of convertible debentures in the aggregate
amount of $3,000,000 that will be issued to certain investment funds in
connection with their investment of up to $3,000,000 in Digital, which funds
will be used in part to acquire Mobitec Holding AB;
4. to approve the issuance of up to 1,500,000 shares of Digital's common stock
underlying the convertible debentures;
5. to improve the issuance of 200,000 shares of Digital's common stock
underlying warrants granted to the convertible debenture holders;
6. to elect nine directors, each to serve staggered terms of one to three
years, and thereafter, three - year terms, or until their successors shall
have been duly elected and qualified;
7. to ratify the appointment of McGladrey & Pullen, LLP as independent
certified public accountants for Digital;
8. to consider and approve an amendment to Digital's incentive stock option
plan to permit the issuance of an additional 160,000 shares of common stock
pursuant to the plan; and
9. to consider and transact such other business as may properly come before the
meeting or any adjournment thereof.
THE BOARD OF DIGITAL RECORDERS, INC. HAS UNANIMOUSLY APPROVED EACH OF THE
PROPOSALS DESCRIBED ABOVE AND RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL AT THE
ANNUAL MEETING.
The Board of Directors has fixed the close of business on April 18, 2001, as
the record date for the determination of shareholders entitled to notice of and
to vote at this annual meeting or any adjournment thereof. A complete list of
the shareholders entitled to vote at the meeting will be available for
inspection at the annual meeting and for a period of ten days prior to the
annual meeting at Digital Recorders, Inc.'s corporate offices, 4018 Patriot
Drive, One Park Center, Suite 100, Durham, North Carolina 27703, during normal
business hours.
A Proxy Statement which describes the formal business to be conducted at the
annual meeting is attached to this Notice.
After reading the Proxy Statement, please promptly mark, sign, and return
the enclosed voting card in the postage-prepaid envelope to ensure that your
shares are represented at the annual meeting. Your shares cannot be voted unless
you date, sign, and return the enclosed voting card or attend the meeting in
person. Regardless of the number of shares you own, your vote is important. You
may revoke your proxy in the manner described in the Proxy Statement at any time
before the vote at the
Annual Meeting. Executed proxies with no instructions indicated thereon will be
voted "FOR" approval of each of the Proposals for which no vote is cast.
The Board of Directors and Management look forward to seeing you at the
meeting.
By Order of The Board of Directors,
/s/ David L. Turney
David L. Turney, Chairman of the Board
June 6, 2001
IMPORTANT
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
CANNOT ATTEND THE MEETING, PLEASE MARK, DATE, SIGN, NOTE ANY CHANGE OF ADDRESS
AND RETURN THE ENCLOSED PROXY CARD IMMEDIATELY IN THE ENCLOSED, SELF-ADDRESSED
ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES. IF YOU ATTEND
THE MEETING, WE WILL BE GLAD TO RETURN YOUR PROXY SO THAT YOU MAY VOTE IN PERSON
AT THE MEETING.
DIGITAL RECORDERS, INC.
4018 Patriot Drive, Suite 100
Durham, North Carolina 27703
PROXY STATEMENT
RELATING TO THE ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD JUNE 25, 2001
TABLE OF CONTENTS
Summary Term Sheet of the Mobitec Acquisition and Related
Transactions.............................................. 1
General Information......................................... 5
Information About the Annual Meeting...................... 5
Voting of Securities...................................... 5
No Appraisal or Preemptive Rights......................... 6
Regulatory Approvals...................................... 6
Annual Report............................................. 6
Forward-Looking Statements in this Proxy Statement........ 6
PROPOSAL I. -- TO APPROVE THE ISSUANCE OF THE RESTRICTED
SHARES IN CONNECTION WITH THE PURCHASE OF ALL OUTSTANDING
SHARES OF MOBITEC HOLDING AB.............................. 6
Introduction and Summary of Acquisition Transactions...... 7
The Acquisition......................................... 7
The Option Agreement.................................... 7
The Stock Purchase Agreement............................ 7
Purchase Price.......................................... 7
The Restricted Shares................................... 8
The Promissory Notes.................................... 8
Financing for Cash Portion of Purchase Price............ 8
The Convertible Debentures.............................. 8
The Bodin Warrant Agreement............................. 9
Percentage of Shares to Be Issued in Connection with the
Acquisition............................................ 9
Dilution to Current Shareholders........................ 9
Board Approval.......................................... 9
Shareholder Approval of Issuance of Stock............... 10
Fairness Opinion........................................ 10
Mobitec Employees and the Consulting Agreement.......... 10
The Company............................................... 11
Mobitec Holding AB........................................ 11
DRI Europa................................................ 11
Background and Reasons for the Acquisition................ 11
Factors Considered by the Board of Directors Regarding the
Acquisition............................................. 14
Fairness Opinion.......................................... 17
Summary of Materials Considered......................... 17
Assumptions and Limitations............................. 18
Summary of Valuation Analysis........................... 19
Selection of Investec Ernst............................. 23
Compensation and Material Relationships................. 23
Summary of Option Agreement, As Amended................... 24
Summary of Stock Purchase Agreement....................... 24
i
Purchase Price.......................................... 25
Conditions Precedent to the Purchaser's Obligations..... 25
Closing Conditions...................................... 25
Representations and Warranties of the Sellers........... 26
Representations and Warranties of the Bodin Sellers..... 26
Covenants............................................... 27
Registration of the Restricted Shares................... 29
Indemnification......................................... 29
Representations and Warranties of the Purchaser......... 29
Closing Date............................................ 29
General Provisions...................................... 29
Summary of Consulting Agreement........................... 30
Summary of Trademark License Agreement.................... 30
Certain Risks and Factors to Consider Regarding this
Proposal................................................ 30
Interest of Certain Persons in Proposed Acquisition....... 30
Board of Directors' Recommendation........................ 30
PROPOSAL II -- THE WARRANT SHARES ISSUANCE.................. 31
Summary of the Bodin Warrant Agreement.................... 31
Summary of the Registration Rights Agreement.............. 32
Interest of Certain Persons in Proposed Acquisition....... 32
Board of Directors' Recommendation........................ 33
PROPOSAL III -- THE CONVERTIBLE DEBENTURE AUTHORIZATION..... 33
Summary of the Renaissance Convertible Debenture
Preliminary Outline of Terms............................ 34
Interest of Certain Persons in Proposed Acquisition....... 35
Board of Directors' Recommendation........................ 35
PROPOSAL IV -- THE CONVERTIBLE DEBENTURE SHARES ISSUANCE.... 36
Interest of Certain Persons in Proposed Acquisition....... 36
Board of Directors' Recommendation........................ 36
PROPOSAL V -- ISSUANCE OF THE SHARES UNDERLYING THE
CONVERTIBLE DEBENURE HOLDER'S WARRANTS.................... 37
Interest of Certain Person in Proposed Acquisition........ 37
Board of Directors' Recommendation........................ 38
Certain Risks and Factors to Consider Regarding Proposals I,
II, III, IV and V......................................... 38
Dilution of Existing Shareholders......................... 38
Involvement of John Higgins, a Director of Digital, with
Fairness Opinion........................................ 39
Consequences if Share Issuances are not Approved.......... 39
Competition............................................... 39
Technology Advancements by Competitors.................... 39
Risks Regarding Financing of Cash Component of Purchase
Price................................................... 39
Market Recession.......................................... 40
Ability to Retain Key Mobitec Management Personnel........ 40
Liquidity of Mobitec in the Event of Business Failure..... 40
Accounting Treatment of Mobitec Acquisition................. 40
Tax Treatment of Mobitec Acquisition........................ 40
Description of Securities to Be Issued Pursuant to the
Acquisition............................................... 40
PROPOSAL VI -- ELECTION OF DIRECTORS........................ 41
Nominees Standing for Election as Directors at the Annual
Meeting................................................. 42
ii
Nominees for Election..................................... 42
Executive Officers........................................ 44
Significant Employee...................................... 45
Security Ownership of Certain Beneficial Owners and
Management.............................................. 46
Board Committees.......................................... 47
Audit Committee Report.................................... 48
Board and Committee Attendance............................ 48
Executive Compensation.................................... 48
Summary Compensation Table.............................. 49
Option/SAR Grants in Last Fiscal Year................... 50
Aggregate Option/SAR Exercises in Last Fiscal Year and
FY-End Option/SAR Values................................ 50
Board Compensation........................................ 50
401(k) Plan............................................... 51
Employment Contracts and Termination of Employment and
Change-In-Control Arrangements.......................... 51
PROPOSAL VII -- RATIFICATION OF APPOINTMENT OF INDEPENDENT
PUBLIC ACCOUNTANTS........................................ 52
PROPOSAL VIII -- PROPOSAL TO APPROVE AMENDMENT TO THE
INCENTIVE STOCK OPTION PLAN............................... 53
Summary of the Incentive Stock Option Plan................ 53
Federal Income Tax Effects of the Issuance and Exercise of
Options Under the Plan.................................. 54
Nonqualified Stock Options.............................. 54
Incentive Stock Options................................. 55
Incentive Stock Option Plan Benefits Table................ 55
Financial Information....................................... 56
Information About Digital................................... 57
Description of Business................................... 57
Description of Property................................... 57
Legal Proceedings......................................... 57
Market for Common Equity and Related Stockholder
Matters................................................. 57
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 57
Information About Mobitec................................... 57
Description of Business................................... 57
Market for Common Equity and Related Stockholder
Matters................................................. 58
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 58
Certain Relationships and Related Transactions of Digital... 61
Compliance with Section 16(a) of the Exchange Act........... 61
Shareholder Proposals....................................... 62
Other Matters............................................... 62
Documents Incorporated by Reference......................... 62
APPENDICES
Appendix A -- Proxy Card
Appendix I -- Stock Purchase Agreement
Appendix II -- Amended Option Agreement
Appendix III -- Bodin Warrant Agreement
Appendix IV -- Registration Rights Agreement
iii
Appendix V -- Trademark License Agreement
Appendix VI -- form of Promissory Note
Appendix VII -- Preliminary Outline of Terms, dated
November 28, 2000, and First Amendement to Preliminary
Outline of Terms
Appendix VIII -- Consulting Agreement
Appendix IX -- Fairness Opinion
Appendix X -- Mobitec Holding and Subsidiaries
Consolidated Financial Statements, December 31, 2000 and
1999 and as of and for the period ended March 31, 2001
and 2000.
Appendix XI -- Pro Forma Combined Condensed Balance Sheet
and Statement of Operations as of and for period ended
March 31, 2001 and for the year ended December 31, 2000.
Appendix XII -- Audit Committee Charter
Appendix XIII -- Amendments to Digital's Bylaws and
Articles of Incorporation.
Appendix XIV -- Employment Agreement -- David L. Turney
Appendix XV -- Employment Agreement -- Lawrence A.
Hagemann
Appendix XVI -- Employment Agreement -- Lawrence A. Taylor
iv
SUMMARY TERM SHEET OF THE MOBITEC ACQUISITION AND RELATED TRANSACTIONS
This summary term sheet highlights material information from this proxy
statement regarding the Mobitec acquisition and related transactions. You should
read carefully this entire proxy statement, the information incorporated by
reference and the appendices.
YOUR DECISION REGARDING THE MOBITEC ACQUISITION
- You are NOT being asked to approve the Mobitec acquisition. Digital's
Board of Directors has already approved the acquisition. You are being
asked to approve the issuance of shares of common stock related to the
Mobitec acquisition pursuant to Nasdaq rules. The shares that are proposed
to be issued by Digital are:
- The 430,000 restricted shares. See "Proposal I."
- The 100,000 shares of Digital's common stock that underlies the warrants
provided to the sellers. See "Proposal II."
- The up to 1,500,000 shares of Digital's common stock that underlies the
convertible debentures, if the debentures are converted. See "Proposals
III and IV."
- The 200,000 shares of Digital's common stock that underlies the warrants
granted to the convertible debenture holders. See Proposal V.
- If all of these shares were issued because all the warrants were exercised
and the convertible debentures were converted, an additional 2,230,000
shares of Digital's common stock would be issued, representing
approximately 41% of Digital's outstanding common stock after exercise and
conversion.
- If any one of the proposals for issuance of shares related to the Mobitec
acquisition are not approved, Digital will not be able to proceed with the
acquisition.
THE PARTIES TO THE MOBITEC ACQUISITION
- DIGITAL RECORDERS, INC.
Digital Recorders, Inc.
4018 Patriot Drive
One Park Center, Suite 100
Durham, North Carolina 27703
(919) 361-2155
Digital designs, manufacturers or contracts for the manufacture of, sells,
and services products to the transit and transportation market and the law
enforcement market. Digital creates and produces products and systems to
improve the flow and mobility of people through the transportation
infrastructure. Digital markets its products to customers located in North
America, Europe and Asia.
- MOBITEC HOLDING AB, a Swedish corporation
Bilgatan 7
442 40 Kungalv
Gotteburg, Sweden
Telephone: 46 513 22900
Mobitec Holding AB makes and supplies information systems for public
transport vehicles for the global market. Mobitec information systems
include signs for displaying route numbers, destination and next stop in
public transport vehicles, primarily buses.
1
- THE SELLERS
The sellers in the Mobitec acquisition transactions are the five
shareholders of Mobitec who jointly hold all of the outstanding shares of
Mobitec stock. The sellers are Bengt Bodin, Annacarin Bodin, Mattias Bodin,
Tobias Bodin and Bertil Lindqvist.
- DRI EUROPA AB
DRI Europa is a recently formed Swedish corporation and wholly-owned
subsidiary of Digital. It will, either by itself or jointly with Digital,
acquire the Mobitec shares. See "Summary of Option Agreement, as Amended."
DRI Europa will also act as the holding company for Transit-Media Gmbh,
another wholly-owned subsidiary of Digital based in Germany. After the
Mobitec Acquisition is completed, Digital anticipates that Mobitec and
Transit-Media will operate as separate entities, reporting to their common
parent corporation, DRI Europa, and indirectly reporting to Digital's
principal office.
MOBITEC ACQUISITION SUMMARY
- Digital and/or its wholly-owned subsidiary, DRI Europa, is proposing to
acquire Mobitec by purchasing all of Mobitec's stock, which is owned by
the five sellers. Mobitec will become a wholly owned subsidiary of Digital
after completion of the acquisition. The acquisition is subject to Digital
shareholder approval of the shares of Digital's common stock being issued
as described in Proposals I, II, III, IV and V. The principal terms of the
acquisition are set forth in the Stock Purchase Agreement. See "Summary of
Stock Purchase Agreement" and Appendix I.
- The purchase price for Mobitec's shares consists of:
- cash of $4,210,000, subject to the adjustment described below
- promissory notes totaling in the aggregate $2,000,000, subject to the
adjustment described below
- The amounts of cash and the promissory notes are subject to adjustment
by any discrepancy between the amount of net equity of Mobitec
exceeding SEK 100,000 reflected on the closing financial statement of
Mobitec for the period January 1, 2001 to March 31, 2001 and the net
equity of Mobitec reflected in its interim financial statement at March
31, 2000.
- 430,000 shares of Digital's common stock valued at $1.90 per share
- warrants to purchase 100,000 shares of Digital's common stock at an
exercise price of $4 per share for five years valued at $62,000. See
"Introduction and Summary of Acquisition Transactions."
- STOCK PURCHASE AGREEMENT
- The Stock Purchase Agreement sets forth the terms of the purchase of
Mobitec shares from the sellers. It sets forth, among other things, the
purchase price, as described above, the representations and covenants
of the parties and other general provisions. See "Summary of Stock
Purchase Agreement," and Appendix I.
- FINANCING RELATED TO THE MOBITEC ACQUISITION
- The cash portion of the purchase price is being provided by two
sources:
- Up to $3,000,000 from issuance of the convertible debentures to
certain investment funds associated with Renaissance Capital Group,
Inc. of Dallas, Texas
- A loan to DRI Europa from Svenska Handelsbanken AB of Goteborg,
Sweden in the amount of SEK 22,000,000 ($2,045,604). See "Summary
of the Renaissance Convertible Debenture Preliminary Outline of
Terms" and Proposals III and IV.
2
- THE CONVERTIBLE DEBENTURES
- The convertible debentures are convertible into Digital's common stock
at an initial conversion price equal to $2.00 per share. Accordingly,
the convertible debentures are initially convertible into 1,500,000
shares of Digital's common stock. However, the conversion price is
subject to an Automatic Adjustment if certain events occur. If
applicable, the conversion price will be reduced, but in no event will
the conversion price be less than $1.50 per share.
- As a result of the Automatic Adjustment, the shares convertible from
the convertible debentures could, but are not expected to, exceed
1,500,000, up to 2,000,000 shares. The shareholders are being asked to
approve the issuance of only 1,500,000 shares convertible from the
debentures. See, Proposals III and IV regarding authorizing the
convertible debentures and issuing the debenture shares. See also,
Appendix VII, the Preliminary Outline of Terms between Digital and
Renaissance Capital Group, as amended.
- If all or a substantial part of the debentures are converted, this
could significantly dilute the holdings of our current shareholders. In
addition, if such converted shares are all sold, this could have an
adverse effect on the common stock price.
- The debenture holders are being granted warrants to purchase 200,000
shares of Digital's common stock over 5 years at the closing price on
the trading day prior to the date that the Debentures are issued. See
Proposal V.
- THE BODIN WARRANT AGREEMENT
- The Bodin Warrant Agreement grants to Bengt Bodin warrants to purchase
100,0000 shares of Digital's common stock for five years at an exercise
price of $4.00 per share. These warrants will be issued to Mr. Bodin as
part of the purchase price of the Stock Purchase Agreement. See
"Summary of Bodin Warrant Agreement," Proposal II and Appendix III.
- THE REGISTRATION RIGHTS AGREEMENT
- Pursuant to the Registration Rights Agreement, Digital has agreed to
register, at its expense, the 430,000 restricted shares and the common
stock underlying the Bodin Warrants, as follows:
- 200,000 of the Restricted Shares and the shares underlying the
Bodin Warrants within one year of the date of the agreement and
- the remaining 230,000 shares on or before two years from the date
of the agreement.
- See "Summary of Registration Rights Agreement," below and Proposal II.
See also Appendix IV.
- THE PROMISSORY NOTES
- Part of the purchase price of the Mobitec acquisition consists of
promissory notes in the aggregate amount of $2,000,000 to be issued
collectively to the Bodin Sellers. The amounts of the notes are subject
to adjustment by any difference between the amount of net equity of
Mobitec exceeding SEK 100,000 ($9,298) reflected on the closing
financial statement of Mobitec and the net equity of Mobitec reflected
in its interim financial statement at March 31, 2000. The notes are due
36 months from the closing date and bear interest at the rate of 8%
from March 13, 2001 to the closing and 9% per annum thereafter, payable
on a quarterly basis. A form of the promissory notes is attached to
this Proxy Statement as Appendix VI.
3
FAIRNESS OPINION
- The Board of Directors has received a fairness opinion, both orally and in
writing, from Ivestec Ernst & Company, to the effect that the aggregate
consideration paid by Digital in connection with the Mobitec acquisition
is fair to the holders of Digital's common stock from a financial point of
view. The fairness opinion is based upon certain assumptions made and
limits of the matters considered, as more fully described in the fairness
opinion. The fairness opinion is attached as Appendix IX. See "Fairness
Opinion."
- John D. Higgins, a director of Digital, is an employee of Investec Ernst
and participated in conducting some of the due diligence conducted by
Investec Ernst upon which the fairness opinion relies. Investec Ernst is
to be paid a fee of $120,000 for delivering its fairness opinion.
BOARD RECOMMENDATION
- Digital's Board of Directors has unanimously approved the Mobitec
acquisition and the related agreements and transactions. The Board
recommends that all shareholders approve Proposals I, II, III, IV and V
related to the issuance of common stock in connection with the Mobitec
acquisition. See "Background and Reasons for the Acquisition."
RISKS AND OTHER FACTORS TO CONSIDER
- See "Certain Risks and Factors to Consider Regarding Proposals I, II, III,
IV and V, page 38.
ACCOUNTING AND TAX TREATMENT OF ACQUISITION
- Digital will account for the acquisition under the purchase method of
accounting in accordance with generally accepted accounting principles.
The assets acquired and liabilities assumed pursuant to the Stock Purchase
Agreement will be recorded in Digital's consolidated financial statements
at their estimated fair market value on the closing date.
- For United States Federal income tax purposes, no income, gain or loss
will be recognized by Digital or the Digital shareholders as a result of
the acquisition.
WHO TO CONTACT FOR FURTHER INFORMATION
- Digital Recorders, Inc.
4018 Patriot Drive
One Park Center, Suite 100
Durham, North Carolina 27703
(919) 361-2155
Larry A. Taylor, Chief Financial Officer and Secretary
4
GENERAL INFORMATION
INFORMATION ABOUT THE ANNUAL MEETING
THE ENCLOSED PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF DIGITAL
RECORDERS, INC. ("Digital") for use at the Annual Meeting of Shareholders. The
annual meeting will be held at the Microelectronics Center of North Carolina,
3021 Cornwallis Road, Research Triangle Park, North Carolina 27709, on Monday,
June 25, 2001, at 10:00 a.m., for the purposes set forth in the foregoing Notice
of Annual Meeting of Shareholders. This proxy statement and the form of proxy
will be mailed to shareholders on or about June 8, 2001.
VOTING OF SECURITIES
The record date with respect to this solicitation is April 18, 2001. All
holders of record of Common Stock of Digital as of the close of business on the
record date are entitled to vote at the annual meeting. As of that date, Digital
had 3,274,475 shares of common stock outstanding, which shares constitute the
only class of outstanding shares of Digital entitled to notice of, and to vote
at, the annual meeting. Each share of common stock is entitled to one vote.
A majority of the outstanding shares of common stock must be represented in
person or by proxy at the annual meeting in order to constitute a quorum for the
transaction of business. If a quorum exists, a proposal is approved if the votes
cast in person or by proxy favoring the proposal exceed the votes cast opposing
the proposal. Abstentions and broker non-votes are not counted in the
calculation of the vote. A proxy may be revoked by the shareholder at any time
prior to its being voted by giving notice to the Secretary of Digital, by
executing and delivering a proxy with a later date or by voting in person at the
annual meeting. Unless the proxy is revoked, or unless it is received in such
form as to render it invalid, the shares represented by it will be voted in
accordance with the instructions of the shareholder contained therein. If the
proxy is signed and returned without specifying choices, the shares will be
voted in accordance with the recommendations of the Board of Directors.
The cost of this solicitation will be borne by Digital, including expenses
incurred in connection with preparing and mailing this Proxy Statement. Such
expenses will include charges by brokers, banks or their nominees, other
custodians and fiduciaries for forwarding proxy material to the beneficial
owners of shares held in the name of a nominee. Proxies may be solicited
personally or by mail, facsimile, telephone or telegraph. Employees and
directors of Digital may solicit proxies but will not receive any additional
compensation for such solicitation.
As a matter of policy, proxies, ballots, and voting tabulations that
identify individual shareholders are held confidential by Digital. Such
documents are available for examination only by the inspectors of election that
are employees appointed to tabulate the votes. The identity of the vote of any
shareholder is not disclosed except as may be necessary to meet legal
requirements.
If you have additional questions about the proposals discussed in this Proxy
Statement you should contact:
DIGITAL RECORDERS, INC.
4018 Patriot Drive
One Park Center, Suite 100
Durham, North Carolina 27703
(919) 361-2155
Attn: Lawrence A. Taylor
5
If you would like additional copies of this Proxy Statement, or if you have
questions with respect to voting your shares, you should contact Digital's
transfer agent:
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004
NO APPRAISAL OR PREEMPTIVE RIGHTS
Holders of Digital's common stock are not entitled under North Carolina law
to seek appraisal of their shares in connection with the acquisition described
in the Notice of Annual Shareholders Meeting, including issuance of the
restricted shares, issuance of the warrant shares, issuance of the debenture
shares and issuance of the shares underlying the warrants granted to the
debenture holders. In addition, holders of Digital common stock are not entitled
to preemptive rights with respect to the issuance of restricted shares, the
issuance of warrant shares, the issuance of debenture shares and issuance of the
shares underlying the warrants granted to the debenture holders.
REGULATORY APPROVALS
Digital is not aware of any state or federal regulatory approvals regarding
the acquisition and related transactions that must be obtained.
ANNUAL REPORT
Digital's annual Report for the fiscal year ended December 31, 2000
including Digital's Form 10-KSB for the year ended December 31, 2000, is
enclosed with this Proxy Statement.
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT
This proxy statement contains certain forward-looking statements. When used
in this proxy statement, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," "believe" and similar expressions
are intended to identify forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 regarding events, conditions and financial trends
including, without limitation, business conditions and growth in the markets in
which Digital participates and the general economy; competitive factors, such as
the entry of new competitors into any of the markets in which Digital
participates; price pressures and increased competition in those markets;
inventory risks due to shifts in market demand and/or price erosion of purchased
components; changes in product mix; that Digital's working capital and existing
credit arrangement will be adequate to fund its operations; and the risks and
uncertainties listed from time to time in Digital's Securities and Exchange
Commission reports and filings. Such statements are based on management's
current expectations and are subject to risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the actual plan of operations, business
strategy, operating results and financial position could differ materially from
those expressed in, or implied by, such forward-looking statements.
PROPOSAL I.
TO APPROVE THE ISSUANCE OF THE RESTRICTED SHARES IN CONNECTION WITH THE
PURCHASE OF ALL OUTSTANDING SHARES OF MOBITEC HOLDING AB.
DIGITAL'S ACQUISITION, THROUGH ITSELF AND/OR ITS WHOLLY-OWNED SUBSIDIARY, OF
ALL THE OUTSTANDING STOCK OF MOBITEC HOLDING AB ("MOBITEC") (THE "ACQUISITION")
AND THE RELATED TRANSACTIONS INCLUDING THE ISSUANCE OF THE RESTRICTED SHARES,
ARE SUMMARIZED BELOW. SHAREHOLDERS ARE URGED TO READ THE STOCK PURCHASE
AGREEMENT, ATTACHED AS APPENDIX I; THE AMENDED OPTION AGREEMENT, ATTACHED AS
APPENDIX II; THE BODIN WARRANT
6
AGREEMENT, ATTACHED AS APPENDIX III; THE REGISTRATION RIGHTS AGREEMENT, ATTACHED
AS APPENDIX IV; THE TRADEMARK LICENSE AGREEMENT, BETWEEN MOBITEC AB AND MOBITEC
KLIMAT AB, ATTACHED AS APPENDIX V; THE FORM OF PROMISSORY NOTE, ATTACHED AS
APPENDIX VI; THE PRELIMINARY OUTLINE OF TERMS BETWEEN DIGITAL AND RENAISSANCE
CAPITAL GROUP, INC., DATED NOVEMBER 28, 2000, AND FIRST AMENDMENT TO PRELIMINARY
OUTLINE OF TERMS ATTACHED AS APPENDIX VII; AND THE CONSULTING AGREEMENT,
ATTACHED AS APPENDIX; EACH OF WHICH IS INCORPORATED BY REFERENCE.
INTRODUCTION AND SUMMARY OF ACQUISITION TRANSACTIONS
THE ACQUISITION
On March 13, 2001, Digital and its wholly-owned subsidiary, DRI Europa AB,
entered into an Amended Option Agreement, superseding an Option Agreement dated
December 7, 2000, with Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin
(collectively, the "Bodin Sellers") and Bertil Lindqvist. Pursuant to the Option
Agreement, the sellers granted to Digital and DRI Europa an irrevocable right of
option to purchase the sellers' shares of Mobitec Holding AB for the period from
March 13, 2001 to June 16, 2001, based upon the occurrence of certain events.
THE OPTION AGREEMENT
The Option Agreement provides for two alternative exercises of the option
right of Digital and DRI Europa: Option A, in which only DRI Europa purchases
the sellers' shares; or Option B, in which both Digital and DRI Europa purchase
the sellers' shares. Under either option, the purchase of the Sellers' shares
will be made pursuant to the Stock Purchase Agreement, described below. The
Stock Purchase Agreement as currently drafted conforms to Option A. If Option B
is exercised, the Stock Purchase Agreement will require certain modifications to
reflect that both Digital and DRI Europa would be deemed the purchasers. Whether
the Option Agreement will be exercised under Option A or B does not affect the
material terms of the Stock Purchase Agreement and depends primarily on the tax
treatment of the transaction to the sellers under Swedish law. See "Summary of
Option Agreement, As Amended," below.
THE STOCK PURCHASE AGREEMENT
The Stock Purchase Agreement, which will be executed by the parties after
one of the options is exercised pursuant to the Option Agreement, is between
Digital and DRI Europa, and the sellers. Under the terms of the Stock Purchase
Agreement, which is attached to this proxy statement as Appendix I, subject to
certain conditions, DRI Europa and/or Digital has agreed to purchase 100,000
shares of Mobitec Holding AB, a Swedish corporation ("Mobitec"), constituting
all of the outstanding stock of Mobitec, from the sellers.
PURCHASE PRICE
The purchase price consists of:
- 5,700,000 Swedish Krona (SEK) (at an assumed exchange rate of .092982 such
that SEK 5,700,000 is equal to US $530,000) to be paid to Lindqvist for
his shares of Mobitec;
- Subject to adjustment following the Closing Date, based upon a comparison
of Mobitec's net equity as set forth in the closing financial statement
for the period January 1, 2001 to March 31, 2001 and the net equity as of
March 31, 2000:
- $3,680,000 to be paid to the Bodin Sellers;
- promissory notes totaling in the aggregate $2 million to be issued to
the Bodin Sellers, collectively, on the closing date;
7
- 430,000 restricted shares of Digital (valued at $1.90 per share) to be
transferred to the Bodin Sellers on the closing date; and,
- Warrants to purchase in the aggregate 100,000 shares of Digital's common
stock at an exercise price of US $4.00 per share for a period of five
years issued to Bengt Bodin pursuant to the Bodin Warrant Agreement,
valued at a total of $62,000.
Interest on the cash portions of the consideration to be paid to the sellers
and on the promissory notes shall accrue at the rate of eight percent per annum
from March 16, 2001 up to the closing date of the Stock Purchase Agreement and
related agreements. The promissory notes bear interest at 9% per annum after
closing. In the event Digital elects not to proceed with the Mobitec acquisition
for reasons not attributable to the sellers and does not exercise one of the
options under the Option Agreement, interest shall be paid to the sellers for
the period from March 16, 2001 through June 16, 2001 at eight percent per annum.
THE RESTRICTED SHARES
The 430,000 restricted shares will be transferred to the Bodin Sellers on
the closing date, subject to all of the terms and conditions of the Registration
Rights Agreement, attached as Appendix IV. See "Summary of Registration Rights
Agreement," in Proposal II, below. Two hundred thousand shares of the 430,000
restricted shares to be transferred to the Bodin Sellers at closing are to be
registered by Digital within one year of the closing of the Stock Purchase
Agreement. The remaining 230,000 restricted shares are to be registered by
Digital within two years of the Closing.
THE PROMISSORY NOTES
The promissory notes to be issued to the Bodin Sellers at closing total in
the aggregate $2 million and will be issued collectively to the Bodin Sellers on
the closing date. The aggregate amount of the notes are subject to proportionate
adjustment, whether increase or decrease, by any difference between the amount
of net equity of Mobitec reflected on the closing financial Statement of Mobitec
and SEK 10,867,000 ($1,010,435), to the extent the difference exceeds
SEK 100,000 ($9,298). The notes are due 36 months from the closing date and bear
interest from March 13, 2001 through closing at 8% and at the rate of 9% per
annum thereafter, payable on a quarterly basis. The notes are unsecured. A form
of the promissory notes is attached to this Proxy Statement as Appendix VI.
FINANCING FOR CASH PORTION OF PURCHASE PRICE
The cash portion of the purchase price is being provided by two separate
sources: (1) the authorization and issuance of up to $3 million in convertible
debentures by Digital to certain investment funds associated with Renaissance
Capital Group, Inc. of Dallas, Texas; and, (2) a loan to DRI Europa from Svenska
Handelsbanken AB of Goteborg, Sweden in the amount of SEK 22,000,000
($2,045,604) (the "Acquisition Loan"). See "Summary of the Renaissance
Convertible Debenture Preliminary Outline of Terms."
THE CONVERTIBLE DEBENTURES
The convertible debentures are convertible into Digital's common stock at an
initial conversion price equal to $2.00 per share. Accordingly, the convertible
debentures are initially convertible into 1,500,000 shares of Digital's common
stock. However, the conversion price is subject to an automatic adjustment if
(i) Digital does not attain certain financial performance goals, to be agreed
upon, and (ii) the market price of Digital's common stock is below the
conversion price at the time of publication of Digital's financial results for
the period. If applicable, at the adjustment date, the conversion price will be
reduced to equal the volume-weighted average closing price for Digital's common
stock over a ten day trading period following Digital's public release of that
year's financial results, but in no event will the conversion price be less than
$1.50 per share. Therefore, as a result of the automatic
8
adjustment, the shares of Digital convertible from the convertible debentures
could, but are not expected to, exceed 1,500,000, up to a maximum of 2,000,000
shares. See, Proposal III and IV regarding the authorization of the convertible
debentures and the issuance of the debenture shares. As part of the debenture
financing, the debenture holders will be granted warrants to purchase 200,000
shares of Digital's common stock for 5 years at the closing price on the trading
day prior to the date that the debentures are issued. See Proposal V.
THE BODIN WARRANT AGREEMENT
The Bodin Warrant Agreement, which is attached as Appendix III, provides for
a grant by Digital to Bengt Bodin of warrants to purchase 100,000 shares of
Digital's common stock for a period of five years at an exercise price of $4.00
per share. The warrants can be exercised in cash or by the non-cash conversion
provision. Bodin can offset and reduce any part or all of the exercise price by
the sum of the unpaid principal balance on the promissory note, plus accrued and
unpaid interest. Pursuant to the Registration Rights Agreement, the common
shares underlying the warrants will be registered by Digital within one year
from the date of closing of the Stock Purchase Agreement. See "Summary of Bodin
Warrant Agreement," below in Proposal II. See Proposal II regarding the Warrant
Shares Issuance.
See "Description of Securities Issued Pursuant to the Acquisition."
PERCENTAGE OF SHARES TO BE ISSUED IN CONNECTION WITH THE ACQUISITION
The 430,000 restricted shares of Digital's common stock constitutes
approximately 13% of Digital's common stock outstanding on April 18, 2001. The
100,000 shares of common stock underlying the Bodin Warrants represent
approximately 3% of Digital's common stock on April 18, 2001 and would
constitute approximately 3% of the common stock after exercise. The 1,500,000
shares of common stock underlying the convertible debentures represent
approximately 46% of Digital's common stock on April 18, 2001 and would
constitute approximately 29% of the common stock after conversion. The 200,000
shares of common stock underlying the warrants granted to the debenture holders
represent approximately 6% of Digital's common stock as of April 18, 2001 and
approximately 6% after exercise. After closing of the Stock Purchase Agreement
and related transactions, the restricted shares, the shares underlying the Bodin
Warrants, the shares underlying the convertible debentures and the shares
underlying the warrants granted to the debenture holders, (collectively,
2,230,000 shares) would together constitute approximately 68% of Digital's
common stock outstanding on April 18, 2001 and would constitute approximately
41% of Digital's common stock after exercise and conversion.
DILUTION TO CURRENT SHAREHOLDERS
If all of the 2,230,000 shares of Digital's common stock in connection with
the Mobitec acquisition are issued, exercised and converted, the existing
shareholders' percentage share of Digital's outstanding common stock will be
significantly diluted. See "Certain Risks and Factors to Consider Regarding
Proposals I, II, III, IV and V--Dilution of Existing Shareholders." In addition,
if the Bodin Warrants and the shares underlying the warrants granted to the
debenture holders are exercised and the convertible debentures are converted,
Bengt Bodin and the investment funds associated with Renaissance Capital will
hold significant amounts of Digital's common stock. These new stockholders,
along with the Bodin Sellers, could have a material impact on Digital's decision
making when a shareholder vote is required and upon the control of the
corporation.
BOARD APPROVAL
The Board of Directors has unanimously approved the execution and delivery
of the Stock Purchase Agreement, the acquisition and the related transactions,
including the issuance of the Restricted Shares, the Warrant Shares, the
Debenture Shares and the shares underlying the warrants
9
granted to the debenture holders contained in Proposals I, II, IV and V, along
with the authorization of the convertible debentures in Proposal III. The Board
has also approved the Acquisition Loan.
SHAREHOLDER APPROVAL OF ISSUANCE OF STOCK
Because the Stock Purchase Agreement and related transactions may
collectively involve the issuance of common stock in excess of 20% of the
currently outstanding shares of Digital's common stock, the Nasdaq Stock
Market, Inc. ("Nasdaq") Marketplace Rules require that Digital obtain the
approval of the issuance of shares by the holders of a majority of the votes
present and voting at the annual meeting. Pursuant to the enclosed proxy, the
Board of Directors is submitting the issuance of the shares in connection with
the acquisition, set forth in Proposals I through V, to the shareholders for
approval. Shareholder approval is not required, and will not be requested, for
the acquisition itself or the related agreements.
Unless the required majority of the votes for approval of Proposals I, II,
III, IV and V is obtained, none of Proposals I, II, III, IV and V will be
implemented and the acquisition and the related transactions will not be
completed. As of the date of this Proxy Statement, the Board of Directors
anticipates completing the stock purchase as soon a practicable after the annual
meeting, assuming satisfaction or waiver of all conditions to closing. See
"Summary of Stock Purchase Agreement -- Closing Conditions."
FAIRNESS OPINION
Digital's board of directors has received a fairness opinion, both orally
and in writing, from Investec Ernst & Company, to the effect that the aggregate
consideration paid by Digital in connection with the Mobitec acquisition is fair
to the holders of Digital's common stock from a financial point of view. See
"Fairness Opinion." The written fairness opinion is attached to the proxy
statement as Appendix IX.
John D. Higgins, a director of Digital, is an employee of Investec Ernst and
participated in conducting some of the due diligence upon which the fairness
opinion relies. Investec Ernst is to be paid a fee of $120,000 for delivering
its fairness opinion. Mr. Higgins will not receive any portion of that fee. See
"Factors Considered by the Board of Directors Regarding the Acquisition,"
"Interest of Certain Persons in Proposed Acquisition" and "Certain Risks and
Factors to Consider Regarding Proposals I, II, III, IV and V--Involvement of
John Higgins, a Director of Digital, With Fairness Opinion."
MOBITEC EMPLOYEES AND THE CONSULTING AGREEMENT
In order to induce certain Key Employees of Mobitec to remain with the
company after the Acquisition, Digital has required, as part of the Stock
Purchase Agreement, that such key employees' employment contracts remain in full
force and effect. As further inducement for certain key employees to remain with
Mobitec, Digital may, within its sole discretion, grant certain warrants or
options to some or all Mobitec employees after the acquisition is completed.
Prior to the closing date, Mobitec has pledged that all existing options
held by Mobitec personnel, granted pursuant to Mobitec's Stock Option Program,
to purchase shares of Mobitec stock will have been extinguished or retired so
that there will be no outstanding options to purchase Mobitec's stock.
As a condition to the Stock Purchase Agreement, at or before the closing
date, Digital will enter into a Consulting Agreement with Bengt Bodin for a
period of three years. Further, Digital has agreed to continue the
administration of Bengt Bodin's pension arrangement. The Sellers have
represented in the Stock Purchase Agreement that Bengt Bodin's pension
arrangement will not have any negative impact on the financial position of
Mobitec or any subsidiary.
10
THE COMPANY
Digital Recorders, Inc.
4018 Patriot Drive
One Park Center, Suite 100
Durham, North Carolina 27703
(919) 361-2155
DRI designs, manufacturers or contracts for the manufacture of, sells, and
services products to the transit and transportation market and the law
enforcement market. Digital creates and produces products and systems to improve
the flow and mobility of people through the transportation infrastructure. DRI
markets its products to customers located in North America, Europe and Asia.
MOBITEC HOLDING AB
Bilgatan 7
442 40 Kungalv
Goteborg, Sweden
Telephone: 46 513 22900
Mobitec makes and supplies information systems for public transport vehicles
for the global market. Mobitec information systems include signs for displaying
route numbers, destination and next stop in public transport vehicles, primarily
buses. For further information about Mobitec, see "Information About Mobitec,"
below.
DRI EUROPA
DRI Europa is a recently formed Swedish corporation and wholly-owned
subsidiary of Digital which will act as a holding company for the Acquisition of
the Mobitec shares pursuant to the Stock Purchase Agreement if Option A of the
Option Agreement is exercised. If Option B of the Option Agreement is exercised,
DRI Europa and Digital will purchase the Mobitec shares. DRI Europa will also
act as the holding company for Transit-Media Gmbh ("Transit-Media"), another
wholly-owned subsidiary of Digital based in Germany.
After the acquisition is completed, Digital anticipates that Mobitec and
Transit-Media will operate as separate entities, reporting to their common
parent corporation, DRI Europa, and indirectly reporting to Digital's principal
office. Digital expects that the marketing of Mobitec products after the
acquisition will be to existing Mobitec customers and by existing means used by
Mobitec. Digital does not anticipate any integration with Mobitec's operational
or marketing functions. Digital expects that there will be some minor
integration with Mobitec at an administrative level, primarily related to the
integration of financial reporting. Digital expects that Digital and Mobitec
will share technology where appropriate. In general, Digital anticipates that
Mobitec will operate under the Digital umbrella in essentially the same fashion
it has operated prior to the acquisition.
BACKGROUND AND REASONS FOR THE ACQUISITION
Digital, as stated in its strategic business plans, as reviewed and approved
by Digital's Board of Directors, seeks to increase growth through acquisition of
profitable businesses operating in its core markets. Digital is seeking
acquisition candidates that will diversify its business in geographic coverage,
served markets and/or technological capability. Acquisition candidates must
possess strong operating management, capable of managing not only the acquired
business within Digital's management structure, but also of strengthening the
overall Digital operating structure.
Mobitec is a profitable company that meets Digital's profile for acquisition
candidates. Mobitec was founded in 1987 by Bengt Bodin and employs approximately
45 people. It has a principal operating
11
office in Herrljunga, Sweden, located about a one-hour drive East-Northeast of
Goteborg, Sweden. Access from Central Europe is typically by land/sea from
Denmark or via air through either the Goteborg or Stockholm International
Airports. Mobitec is thus situated in a strategically important segment of this
overall general niche market and is further positioned to serve the former
Eastern Block markets. Mobitec has one wholly-owned subsidiary, Mobitec AB,
which in turn owns 100% of Mobitec Gmbh, located in Weinstadt, Germany and
Mobitec Australia Pty Ltd., which is located in Sydney, Australia. In addition,
Mobitec AB owns 50% of a company operating in Caxias do Sul, Brazil known as
Mobitec Ltda. Two other subsidiaries of Mobitec, Hexair AB and Mobitec Klimat
AB, are not part of the Stock Purchase Agreement and are to be sold to Bengt
Bodin prior to the Closing Date.
The two subsidiaries of Mobitec not being acquired by Digital, Hexair and
Klimat, were sold on December 31, 2000 and January 1, 2001, respectively. The
combined sales of these two subsidiaries for fiscal years 2000 and 1999 was less
than 6% of the total Mobitec sales for these years. The net income for these two
subsidiaries was a net loss of SEK 1,314,000 ($143,000) for 2000 and a net
income of SEK 113,000 ($14,000) for 1999. Klimat and Hexair have product lines
not compatible with the electronic destination sign systems and voice
annunciation next stop systems of Digital. Klimat and Hexair manufacture climate
control devices and equipment such as blower heaters and control systems for the
European bus industry. Digital believes that the transfer of these two
businesses will have no material effect on Mobitec's business.
Discussions with Mobitec started at the American Public Transportation
Association ("APTA") annual meeting and exposition in Orlando in October 1999
where Bengt Bodin, majority shareholder of Mobitec, talked with David L. Turney,
CEO of Digital, after having heard, through industry circles, Digital was
planning to initiate growth through acquisition. Turney made clear Digital's
long-term plans and in response Bodin delivered initial brief financial
information. This contact had roots in many years of previous contact in the
industry between Bodin and Turney.
Mobitec generated net sales of approximately $12.4 million and a net loss of
$21,000 for its fiscal year ending December 31, 2000. The consolidated financial
statements of Mobitec Holding AB and Subsidiaries for the fiscal years ended
December 31, 2000 and 1999 and for the three months ended March 31, 2001 and
2000 are attached as Appendix X to this Proxy Statement.
Mobitec sells electronic destination sign systems primarily in the Nordic
market (consisting of Iceland, Greenland, Sweden, Norway, Denmark and Finland)
and in the Scandinavian market (Sweden, Norway, Denmark and Finland). Mobitec's
sign system technology is compatible with the Twin Vision-Registered Trademark-
technology of Digital, although Mobitec uses a technologically less advanced
flip-dot display with indirect illumination. Because the traditional flip-dot
system using indirect illumination employed by Mobitec is typically less
expensive than the Twin Vision technology, the acquisition of Mobitec positions
Digital to offer two-tier product pricing. Outside of Europe, Mobitec operates
in Australia and operates through a 50% owned joint venture in Brazil. Mobitec
has also established a sales office subsidiary in central Germany.
Mobitec company management includes a strong operational, marketing, and
technical team reporting to a Management Board chaired by Mobitec founder Bengt
Bodin. Digital believes that Mr. Bodin is respected in the transit markets as a
trustworthy customer-oriented businessman. Based upon Digital's observations,
Mobitec also enjoys this favorable image. Mr. Bodin wants to withdraw from
day-to-day Mobitec business to pursue other interests but intends to make sure
that the Mobitec business continues to thrive. Thus, Mr. Bodin is seeking a
special type of buyer; one which will grow the Mobitec business, protect what he
created, provide growth opportunities for the personnel, and at the same time,
provide liquidity to his Mobitec investment.
Approximately two years ago, Mr. Bodin started preparing to reduce his
direct involvement in Mobitec's business. He personally stepped-back from
day-to-day operating detail. A former marketing person in the company was
appointed Managing Director. A management Board was structured so the
12
company functions much like a USA public company. Quarterly meetings are held
for the Management Board to oversee business activities and plans as reported by
the Managing Director. Having operated in this manner for two years, Mobitec is
now ready to make a transition in ownership with minimal disruption.
While there is some minimal market overlap, Mobitec serves several markets
not currently served by Digital. Essentially, Mobitec brings added market
coverage that could coincide with that of Transit-Media. Based upon last year's
net sales, adding Mobitec's market presence would almost quintuple Digital's
international business sales volume. In addition, Digital expects that the
Mobitec acquisition will benefit Transit-Media and Twin Vision of North
America, Inc., Digital's destinations signs systems' supplier in the United
States, by allowing cost savings through increased volume component purchasing.
Finally, Mobitec may be in a position to assist in sales and marketing in Europe
of other products of Digital, such as its "Talking Bus" product.
From the initial meeting in Orlando, numerous meetings have been held,
together with many separate communications. These communications and discussions
established parameters of a possible deal structure potentially attractive to
both the buyer and seller. The initial discussions between the parties were
primarily between Bengt Bodin and Mr. Turney. As the discussions progressed,
Digital management, its Board, its Executive Committee, as well as Digital's
accountants and legal counsel became involved in the discussions. Digital
engaged Swedish public accountants and lawyers and its independent public
accounting firm and general counsel during the due diligence review in August
2000. These advisors have been involved since that time. Investec Ernst &
Company was retained in December 2000 to prepare and issue a fairness opinion.
In early 2000, it became clear discussions had reached a point that it would be
productive to enter more serious negotiations. At several meetings, including a
meeting in May 2000 at Digital's headquarters in Research Triangle Park, North
Carolina, the framework of an initial proposal from Digital was designed. This
framework also included detailed discussion about how Mobitec might fit with
Digital in market, technology, operational and corporate contexts.
In mid 2000, Digital management compiled a business case analysis and
proposal for the acquisition of Mobitec. On approximately June 17, 2000, this
analysis and proposal was considered by Digital's Executive Committee,
consisting of John Pirotte, James Meese, John Reeves and David Turney, and
recommended to the full Board of Directors for approval. Approval was granted in
a July 24, 2000 meeting and management prepared and issued to Mobitec a
non-binding letter of intent ("Letter of Intent"). The Letter of Intent was
presented to the Sellers in two meetings in late July 2000, including one in
Sweden accompanied by a visit to the Mobitec facilities and subsequently, a
second meeting at Digital's facilities. After minor adjustment at the request of
the sellers, the Letter of Intent was subsequently signed by Bodin, on or about
August 7, 2000 having voting control of Mobitec and acting with consent of all
owners and board members of Mobitec. The Letter of Intent outlined Digital's
non-binding offer to acquire Mobitec for a purchase price consisting of cash of
$4.25 million, 430,000 shares of restricted Digital common stock valued at $3
per share, a promissory note to the seller of $2 million and a consulting fee to
Bengt Bodin over three years, valued at $480,000, totaling approximately $8
million. The Letter of Intent further contemplated exchanging the options of
Mobitec employees and management for warrants to purchase Digital common stock.
The Letter of Intent was contingent upon, among other things, the parties'
agreeing to the terms of a definitive purchase agreement, Digital's securing
suitable financing, the parties' conducting appropriate due diligence and
Digital's and Mobitec's board and shareholders approving the transaction.
Management retained legal counsel in Sweden skilled in international
transactions to assist with the legal, tax, and structural issues associated
with this type transaction. At the advice of legal counsel, plans were made to
establish a holding company subsidiary in Sweden -- "DRI Europa" -- through
which the acquisition would be made. From this preliminary planning, the
acquisition process entered the detail investigation and work phase.
13
Due diligence, detail point negotiations and development of a definitive
Stock Purchase Agreement spanned the time from August through December 7, 2000,
at which time the acquisition was agreed in full subject to approval of the
Digital Board of Directors and Digital's exercise of the Option Agreement, as
amended. In parallel with this phase, Digital management pursued numerous
alternatives for funding of the acquisition, including sources developed prior
to the Letter of Intent. The Stock Purchase Agreement does not differ materially
from the principal terms of the Letter of Intent. Digital's board approved
management's recommendations to acquire Mobitec, including the material terms of
the Stock Purchase Agreement on October 9, 2000. The Board approved the Stock
Purchase Agreement and Option Agreement on December 18, 2000.
The acquisition was structured as a purchase option because cash
consideration was being given plus other consideration in the form of promissory
notes, stock and warrants. Under such circumstances, accounting for the
acquisition as a pooling of interests was not appropriate.
The original Option Agreement was signed on December 7, 2000 and was
superseded by the Amended Option Agreement, dated March 13, 2001. The original
Option Agreement required that the closing of the Stock Purchase Agreement occur
on or before February 28, 2001. Because approval by Digital's shareholders could
not be obtained prior to that date and the Digital and Mobitec financial
statements were required to be updated based upon applicable SEC rules, the
Amended Option Agreement was entered into, which, among other things, extended
the time for Digital and/or DRI Europa to close the Stock Purchase Agreement up
to June 16, 2001.
Funding for the cash component of the purchase price of the Stock Purchase
Agreement will consist of the Acquisition Loan and debt securities (the
convertible debentures) issued by Digital. The Acquisition Loan is being
provided by a Swedish Bank, Svenska Handelsbanken AB, and is in the amount of
SEK 22 Million ($2 million), to be repaid over five years in annual installments
of SEK 4,400,000 ($409,121) each. The loan is secured by all of the shares of
Mobitec Holding AB. In addition, Svenska Handelsbanken is loaning SEK
20 Million ($2 million) to Mobitec AB and 1 Million German Marks to
Transit-Media Gmbh for general working capital needs in a form similar to
revolving asset based lending. The convertible debentures issuance and
authorization is described more fully in Proposals III and IV, below.
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS REGARDING THE ACQUISITION
In considering the acquisition and related transactions, the Board of
Directors took into account a number of considerations, including
- the results of the due diligence review conducted on Mobitec's operations
by Digital management and legal counsel. In particular, Digital
management, Committees and Board received and reviewed Mobitec financial
statements presented in accordance with Swedish GAAP for the years ended
1999, 1998 and 1997, audited by Ernst & Young, Goteborg, Sweden that
clearly supported the positive net income of the consolidated company. The
due diligence results were in more detail and supported the actual
shipments to internal and external customers for 2000 and 1999. Further,
Digital prepared forecasts of Mobitec's financial results for the years
2000 through 2003 based upon Mobitec's historical financial statements,
information and estimates from Mobitec management and estimates and
projections of Mobitec's income statement prepared by Digital, both by
itself and as consolidated with Digital. The results of these projections
and analysis, along with the due diligence conducted, supported Digital's
conclusion, and Mobitec's representation, that Mobitec was profitable and
was believed to be profitable in future. See table based upon Digital
management's analysis during the fall 2000, "Mobitec Historical
(1997-1999) and Projected (2000-2003) Sales and Net Income," below.
- the Executive Committee's recommendation to the Board of Directors;
14
- the strategic and operational advantages that could result from the
Acquisition of Mobitec and the combination of its manufacturing contacts,
product line and management to Digital's business;
- the terms of the Stock Purchase Agreement and related documents, including
the purchase price to be paid in relation to the value to be received, the
parties' respective representations, warranties and covenants and the
conditions to their respective obligations; the purchase price was
calculated based upon a pro forma statement of Mobitec's anticipated net
income and cash flow, and was approximately five to six times earnings and
cash flow; and
- the fairness opinion of Investec Ernst & Company delivered orally to
management and delivered in writing to the Board of Directors, dated
May 8, 2001, stating in effect that the aggregate consideration paid by
Digital in connection with the Stock Purchase Agreement and the related
transactions is fair, from a financial point of view, to the holders of
Digital's common stock. See, "Fairness Opinion." Digital's board
considered that John Higgins, a director of Digital, is employed by
Investec Ernst and performed some of the due diligence with respect to the
fairness opinion. Mr. Higgins will not receive any financial benefit from
Investec Ernst's rendering the fairness opinion. Digital's board
considered Mr. Higgins' involvement in the fairness opinion not to
constitute a conflict of interest and believes that the input Mr. Higgins
had on the fairness opinion to be unbiased and objective. Mr. Higgins was
not involved in the analyses performed by Investec Ernst nor the rendering
of the fairness opinion. The board believed that Mr. Higgins' knowledge of
Digital's business, market, industry and management personnel would
improve the accuracy of the fairness opinion and outweighed any appearance
of conflicting interest.
- the Board of Directors' conclusion that the stock purchase and the
acquisition of Mobitec would bring substantial value to Digital.
- the fact that Mobitec manufactures and sells similar transit industry
products using similar and like technology;
- Mobitec is postured for continued growth. Mobitec has expanded its
operations through the formation of subsidiaries in Australia, Germany and
Brazil. These markets are believed by Digital management to be full of
potential for further growth, with resulting increases in net sales.
Digital management has met with the Mobitec management team in Sweden and
Brazil and is quite comfortable with the operations, markets and
management personnel.
- Mobitec and its subsidiaries have the management infrastructure in place
that will not increase the administrative and operations personnel burden
on Digital. This factor is important in considering the culture of
Mobitec, as Digital does not have the personnel to effectively manage the
day-to-day operations and oversee all the future marketing, operating and
administrative activity of Mobitec.
- The acquisition supports Digital's strategic business plan by improving
shareholder value by growth through acquisition. The anticipated increased
revenue base from the acquisition will better enable Digital to weather
changes in geographical sales fluctuations and other economic situations.
Digital also expects that the attendant increase in size and financial
health that the acquisition will bring will permit more favorable access
to both capital and financial markets than was previously available.
- Digital has a favorable commitment for the Acquisition Loan. Digital has a
commitment to enter into a term loan agreement with the largest Swedish
bank, Svenska Handelsbanken, at far more favorable interest rates than
were available in the United States. The Bank will also underwrite
revolving credit facilities in continental Europe for Germany and in
Sweden to cover all Scandinavian customers in Sweden, Finland, Denmark and
Norway. In addition to both term and
15
credit facilities, the Bank will also administer all cash and treasury
management services required.
The following table reflects some of the financial information and
projections made by Digital management in the fall of 2000. See Appendix X for
the actual results of Mobitec for 2000 and 1999.
MOBITEC HISTORICAL (1997-1999) AND PROJECTED (2000-2003) SALES AND NET INCOME
YEAR ENDED
DECEMBER 31 1997 1998 1999 2000 2001 2002 2003
- ----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
SEK:
SALES..................... 61,800,000 80,322,808 91,939,000 107,464,000 136,828,000 149,637,585 167,637,585
NET INCOME (LOSS)......... (1,613,495) 3,580,363 3,517,490 4,224,158 13,302,145 15,189,072 17,516,295
U.S. $
SALES..................... 5,994,000 7,790,000 8,917,000 10,422,000 13,270,000 14,513,000 16,258,000
NET INCOME (LOSS)
(after income taxes).... (156,000) 347,000 341,000 410,000 1,290,000 1,473,000 1,699,000
The Board also considered various countervailing factors in its
deliberations concerning the Transactions, including,
- whether Digital's growth plans could be fulfilled internally. However, the
Board determined that internal growth of the magnitude achieved by the
acquisition could not reasonably be met internally within a reasonable
time frame. In addition, the Board concluded that Digital would probably
not be successful in attempting to compete against Mobitec in its
established markets. Instead, Mobitec presented an opportunity to expand
into new markets with a successful company that manufactured compatible
products. The Board did not become aware of any similarly situated
companies that were seeking acquisition partners during this time period.
- The significant number of shares to be issued by Digital in connection
with the acquisition. Including the restricted shares to be transferred to
the Bodin Sellers, the Warrant Shares, the shares underlying the
convertible debentures and the shares underlying the warrants granted to
the debenture holders, a total of 2,230,000 additional shares of Digital's
common stock will or may be issued in connection with the acquisition. The
Board considered the substantial dilution that would occur to existing
shareholders if some or all of these additional shares were issued.
- The possibility that the acquisition, because it would significantly
increase Digital's market presence in the destination sign systems market,
particularly in Europe, might attract the attention of larger competitors.
This could lead to more competitive pricing by Mobitec's and
Transit-Media's competitors.
- The risks associated with the financing for the purchase price of the
acquisition. The Acquisition Loan through Svenska Handelsbanken AB, which
will provide part of the cash portion of the purchase price, is secured by
all of the Mobitec shares that Digital is purchasing in the acquisition.
If Digital were to default on the Acquisition Loan, Svenska Handelsbanken
AB could foreclose upon and take possession and ownership of the Digital's
shares of Mobitec. Part of the cash portion of the purchase price is being
funded by the issuance of the convertible debentures. The debentures are
secured by all assets of Digital and its subsidiaries, subordinated only
to senior and asset-backed lenders. If Digital were to default on its
obligation to repay the debentures in accordance with their terms, any of
the assets of Digital could be at risk in a foreclosure to satisfy the
unpaid principal and interest due.
- The possibility of the adverse effect of an economic downturn. The board
considered the adverse effects that could follow from an economic downturn
or recession upon Digital's business after the acquisition of Mobitec.
16
- The possibility that new technology might adversely effect Digital's
business. The board considered that new, unforeseen technological advances
by its competitors might adversely effect Digital's business after the
acquisition of Mobitec.
- The possibility that Digital might not be able to retain certain key
Mobitec employees. Part of Digital's reasons for the proposed acquisition
of Mobitec is the quality of its management and employees. The board
considered the adverse effect that losing certain management and key
employees would have on the continued business of Mobitec after the
acquisition. The effect of losing certain key management personnel might
make the transition and integration of Mobitec's business more difficult.
In addition, the loss of such key personnel could have an overall negative
effect on the productivity, moral and revenues of Mobitec's operations
after the acquisition.
- the risks described below (see "Certain Risks and Factors to Consider
Regarding Proposals I, II, III, IV and V", page 38);
FAIRNESS OPINION
In December 2000, Investec Ernst & Company ("Investec Ernst") confirmed to
the Board of Directors that it would consider delivering a fairness opinion to
Digital's Board concerning the aggregate consideration paid in connection with
the Mobitec acquisition transactions. The aggregate consideration paid in
connection with the Mobitec acquisition was initially determined by Digital
after negotiating with the sellers. Absent certain possible adjustments, the
purchase price is $7,089,000, consisting of (i) $4,210,000 in cash, (ii) seller
financed debt to the Bodin Sellers of $2,000,000, (iii) 430,000 restricted
shares of the Digital's common stock which are valued at $817,000, and
(iv) warrants to purchase in the aggregate of 100,000 shares of Digital's common
stock at an exercise price of $4.00 per share for a period of five years, which
are valued at $62,000. See "Note A--Acquisition--Notes to Pro Forma Combined
Condensed Financial Statements," page XI-5. In reaching its conclusion regarding
the fairness of the Mobitec acquisition, Investec Ernst used $7,500,000 as the
purchase price in its analysis. Investec Ernst did not recommend or determine
the amount of the purchase price. Nor did Investec Ernst provide any advice to
Digital or Mobitec regarding the purchase price.
Subsequently, after conducting due diligence and investigation, Investec
Ernst delivered an oral fairness opinion and, on May 8, 2001, a written fairness
opinion, to Digital management, to the effect that, as of that date, the
aggregate consideration paid by Digital in connection with the Mobitec
acquisition is fair, from a financial point of view, to the holders of Digital
common stock.
SUMMARY OF MATERIALS CONSIDERED In connection with the fairness opinion,
John D. Higgins, an employee of Investec Ernst, who also serves on the Company's
Board of Directors, visited Digital and Mobitec and interviewed the management
of both companies. In addition, Investec Ernst (including investment bankers
other than Mr. Higgins) conducted (i) a financial analysis (ii) operational
analysis and (iii) a limited comparables analysis assuming the complete accuracy
and completeness of all materials, written and verbal, provided by Digital's and
Mobitec's management. The fairness opinion addresses only the fairness to
Digital's common shareholders, from a financial point of view, of the aggregate
purchase price to be paid by Digital for the shares of Mobitec. A copy of the
fairness opinion is attached as Appendix IX to this proxy statement and should
be read in its entirety for a description of the procedures followed,
assumptions and qualifications made, matters considered and the limits of the
review undertaken by Investec Ernst. The written fairness opinion is based on
conditions as of its date and, although subsequent developments could have a
material effect on the opinion stated, the fairness opinion will not be updated.
17
In arriving at its fairness opinion and the basis therefor, Investec Ernst,
among other things, reviewed:
- the Stock Purchase Agreement;
- the Option Agreement, as amended;
- the Bodin Warrant Agreement;
- the form of promissory note;
- the Consulting Agreement;
- the Registration Rights Agreement;
- the consolidated financial statements of Mobitec and subsidiaries for the
fiscal years ended December 31, 2000 and 1999; and
- the pro forma combined financial statements of Mobitec Holding AB and
Digital at December 31, 2000.
In addition, Investec Ernst conducted such other investigations, financial
analyses and studies and reviewed such other information and factors as it
deemed appropriate for the purposes of its fairness opinion.
Investec Ernst concluded from its review that the each of the above
referenced documents was appropriately prepared and was complete, accurate and
valid. The financial information was complete and reflected all necessary
information that was required to perform a thorough valuation of Mobitec.
Furthermore, Investec Ernst reviewed pro forma analyses of the financial
impact of the acquisition. In conducting its analysis, Investec Ernst relied
upon certain assumptions described below and earnings estimates for Mobitec
(prepared by Mobitec management) and Digital (prepared by Digital management).
Investec Ernst compared the earnings per share of Digital common stock, on a
stand-alone (I.E., without giving effect to the acquisition) basis, to the
earnings per share of the common stock of the combined companies on a pro forma
basis. This analysis (assuming no transaction-related expenses) indicated that,
assuming the accuracy of the projections provided to Investec Ernst by Digital
and Mobitec, the proposed transaction would be accretive to Digital's
stockholders on an earnings, and an earnings per share basis (but not on a fully
diluted basis) in fiscal year 2001. The results of the pro forma acquisition
analysis are not necessarily indicative of future results or financial position.
ASSUMPTIONS AND LIMITATIONS. In arriving at its opinion, Investec Ernst
assumed and relied upon the accuracy and completeness of all of the financial
and other information that was publicly available or provided to it by or on
behalf of Digital and Mobitec, and was not engaged to, nor did it, independently
verify any such information. Investec Ernst assumed, with Digital's consent,
that (i) all material assets and liabilities (contingent or otherwise, known or
unknown) of Digital and Mobitec are as set forth in their respective financial
statements, and the pro forma adjustments thereto set forth in the draft proxy
statement available on the date of such opinion will not be materially altered;
and (ii) the acquisition will be accounted for as a purchase transaction.
Investec Ernst also assumed that the financial forecasts of Digital and Mobitec
examined by Investec Ernst were reasonably prepared on a basis reflecting the
best available estimates and good faith judgments of Digital's senior management
as to future performance of Digital, and Mobitec's senior management as to
future performance of Mobitec. In conducting its review, Investec Ernst did not
undertake nor obtain an independent evaluation or appraisal of any of the assets
or liabilities (contingent or otherwise) of Digital or Mobitec. Investec Ernst's
opinion necessarily is based upon economic, monetary, exchange rate, market and
other conditions as they existed and could be evaluated on the date of the
opinion, and does not predict or take into account any changes which may have
occurred, or information which may have become available, after the date of such
opinion. Investec Ernst's opinion does not constitute an opinion as to any price
at which Digital common stock will actually trade at any time.
18
SUMMARY OF VALUATION ANALYSIS. Investec Ernst's determination on the
fairness of the purchase price from a financial point of view was based upon
average and weighted averages of the following valuation techniques:
- DISCOUNTING EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION) AND FUTURE CASH FLOWS. This valuation technique attempts to
value the benefits that accrue to the investors from the future cash flows
and EBITDA generated by a business. It implies that the valuation of any
business reflects the sum of the present value of the future cash flows
for the period that such cash flows can be reliably determined and the
present value of the EBITDA that the business will generate in perpetuity.
To determine the value of a business under this model, EBITDA, cash flows,
an earnings multiple and discount rates must be determined.
Investec Ernst discounted the cash flows of Mobitec for 2001 to 2004 using
a discount rate of 12%. Investec Ernst applied a multiple to earnings of 3
for the year 2005 EBITDA, then discounted this amount to May 1, 2001 using
a 35% discount rate. These discount rates reflect Investec Ernst's
assessment of the risks of the business and were further based on its
assessments of the returns of bonds having similar risk and terms.
The earnings multiple of 3 was selected subjectively, based on Investec
Ernst's belief that the business should be assessed and evaluated in terms
of profitability. The multiple used is low relative to comparable
profitable companies and is therefore conservative. The sum of these two
calculations yielded a valuation under this valuation model of $9,647,439,
which substantially exceeds the purchase price of Mobitec.
- MULTIPLE OF REVENUE OF SIMILAR LISTED COMPANIES. The second valuation
technique used by Investec Ernst attempts to value a business by obtaining
a multiple of revenue to market capitalization of similar companies and
applying this multiple to the revenue of the company being valued.
Investec Ernst computed the average multiple of revenue to market
capitalization of Digital and Trans-Industries, Inc., an independent
comparable company. The computed multiple was then applied to the average
annual projected revenue of Mobitec over the next three years to compute a
comparable valuation. This technique produced a valuation of $3,560,247,
which is substantially below the Mobitec purchase price. Investec Ernst
believes that the results of this valuation technique should be discounted
as the technique ignores the qualitative factors involved in the Mobitec
acquisition, such as Mobitec's ability to generate future cash flows and
the synergy effect that Mobitec may have on Digital, and because of the
small number of independent comparable companies (one) considered.
For comparison purposes, Investec Ernst sought to identify companies that:
- share similar characteristics and are in a similar industry to Mobitec
- have similar market capitalizations to the anticipated purchase price
of Mobitec
- are similar in size to Mobitec
- are in a similar line of business as Mobitec
- were independent of Mobitec and Digital
While Investec Ernst was able to identify companies that shared at least
one of the foregoing characteristics with Mobitec, none, in Investec
Ernst's opinion, other than Trans-Industries, Inc., shared more than
three similar characteristics.
- MULTIPLE OF SHARE PRICE TO BOOK VALUE OF SIMILAR LISTED COMPANIES. This
valuation model involved computing a multiple or ratio by applying the
current share price and the average share price over the past two years to
the book value per share of Digital and Trans-Industries, Inc. This
multiple was then applied to the book value of Mobitec to obtain a
valuation. This
19
approach assumes that the value of a business is determined by the sum of
the monetary amounts that the assets of a business are valued in the
records.
The valuation based upon the current share price and the past two year
share price to book value is $1,704,310 and $2,120,630, respectively.
These valuations are substantially below the Mobitec purchase price.
Investec Ernst believes that this approach is the least meaningful
indicator of value since the value obtained does not represent the value
that the business could bring on the open market. In addition, this model
does not reflect the rationale for the Mobitec acquisition - asset value
was not a critical consideration. Further, this approach does not reflect
the qualitative factors involved in the Mobitec acquisition nor the
ability of Mobitec to generate future cash flows.
- MULTIPLE OF REVENUE OF SIMILAR LISTED COMPANIES HAVING SIMILAR REVENUES
AND GROSS PROFITS TO MOBITEC. In this revenue valuation model, Investec
Ernst selected 15 listed communication technology companies with revenues
ranging from $10 million to $100 million and gross profits ranging from 0%
to 10%. The selected companies and their sales and profit margin ratios
are set forth in Note 2 to the table below. An average multiple of revenue
to market capitalization was calculated (i) using the data from all 15
companies and (ii) excluding the data from the two largest and two
smallest of the 15 companies. These average multiples were then applied to
the projected 2001 Mobitec revenues to obtain a valuation. The valuation
obtained was $35,607,413 when all 15 companies were considered and
$18,856,401 when the outliers were excluded. These valuations far exceed
the Mobitec purchase price. Investec Ernst believes that this valuation
technique is particularly meaningful given the statistically larger
available sampling.
- SHARE PRICE TO BOOK VALUE BASED UPON MULTIPLE OF PRICE TO BOOK VALUE OF
SIMILAR LISTED COMPANIES. Based upon the sample of 15 similar listed
companies used in the preceding valuation, Investec Ernst computed an
average multiple of price to book value and then applied the multiple to
the book value of Mobitec: (i) using the data from all 15 companies, and;
(ii) excluding the data from the two largest and two smallest of the
15 companies. The 15 similar companies, along with their price to book
value and price to sales ratios are set forth in Note 2 to the table
below. The valuation obtained from this model was $2,863,935, when all 15
were considered, and $2,339,435 when outliers were excluded, which is
substantially below the Mobitec purchase price. Investec Ernst believes
that this valuation should be discounted because it ignores the
qualitative factors involved in the Mobitec acquisition and the ability of
Mobitec to generate future cash flows.
The results obtained from the above valuation analyses indicated the
purchase price was fair in connection with the acquisition of Mobitec. Other
factors that were used to indicate the fairness of the consideration paid
included, an analysis of the earnings per share, selective legal and business
due diligence and other qualitative and quantitative factors.
20
The following table summarizes the valuation techniques or metrics utilized,
the analysis and conclusions reached by Investec Ernst and how each relates to
the fairness of the consideration paid for the acquisition of Mobitec.
HOW RESULTS RELATE TO
THE FAIRNESS OF THE
VALUATION TECHNIQUE ANALYSIS RESULTS VALUATION
1. Discounting EBITDA(1) The future cash flows of $9,647,439 The valuation exceeds
and future cash flows. Mobitec were discounted the purchase price of
to May 1, 2001 for the Mobitec.
years 2001 to 2004. A
multiple was then
applied to the EBITDA in
2005 and this amount was
discounted to May 1,
2001. The sum of both
amounts was used for the
valuation.
2. Valuation based upon The average multiple of $3,560,247 The valuation computed
a multiple of revenue revenue to market is well below the
of similar listed capitalization of Mobitec purchase price.
companies. Digital and Investec Ernst believes
Trans-Industries, Inc. that this valuation
was computed. This technique must be
multiple was then discounted because it
applied to the average ignores the qualitative
revenue of Mobitec over factors of the
the next 3 years to acquisition and because
compute a comparable of the small available
valuation. sampling.
3. Valuation based upon A multiple was obtained The valuation based upon This model indicates a
a multiple derived by applying the current the current share price lower valuation of
from assessing the share price and the and the past 2 year Mobitec compared to the
ratio of the current average share price over average share price to purchase price. Investec
share price and the past 2 years to the book value is $1,704,310 Ernst believes this
average share price book value per share of and $2,120,630 valuation technique
over the past 2 years Digital and Trans- respectively. should be discounted
to the book value of Industries, Inc. This because of the
similar listed multiple was then qualitative factors
companies. applied to the book involved in the Mobitec
value of Mobitec to acquisition and
obtain a valuation. Mobitec's ability to
generate future cash
flows. Investec Ernst
believes that the
valuation based upon
book value is the least
meaningful indicator of
value.
21
HOW RESULTS RELATE TO
THE FAIRNESS OF THE
VALUATION TECHNIQUE ANALYSIS RESULTS VALUATION
4. A revenue valuation 15 listed communication $35,607,413, when all 15 The valuation computed
model based upon a technology companies companies were used and far exceeds the purchase
multiple of revenue of with similar revenues $18,856,401 when the price of Mobitec.
a sample of listed and gross profit to outliers were excluded. Moreover, Investec Ernst
Companies in the Mobitec were selected believes this is a
similar industry and an average multiple particularly meaningful
having similar of revenue to market metric given the
revenues and gross capitalization was statistically larger
profit percentages to calculated. These available sampling.
Mobitec. multiples were then
applied to the projected
2001 Mobitec revenues to
obtain a valuation. (See
Note 2 below for the
data used for the
purpose of this
comparison).
5. A share price to book Based upon the sample of 2,863,935, when all 15 Investec Ernst believes
value valuation model similar listed companies companies were used, that this technique is a
based upon a multiple discussed in point 4 $2,339,435, when less meaningful
of price to book above, Investec Ernst outliers were excluded indicator of value
values of a sample of computed an average because it ignores the
listed companies in multiple of price to qualitative factors in
the similar industry book value and then the Mobitec acquisition
having similar applied the multiple to and Mobitec's ability to
revenues and gross the book value of generate future cash
profit percentages to Mobitec. (See Note 2 for flows, and has been
Mobitec. data used for this given minimal weighting.
comparison).
1-- EBITDA means the earnings before interest, taxes, depreciation and
amortization.
2-- The following table shows the similar listed companies used in the analysis
of valuation techniques 4 and 5 above.
PRICE TO
PROFIT BOOK PRICE TO
SYMBOL COMPANY INDUSTRY SALES MARGIN VALUE SALES
BDR Blonder Tongue Laboratories Inc Communications Equipment $70.20M 5.10% 0.63 0.35
DTSI Datron Systems Inc Communications Equipment $62.55M 5.70% 0.77 0.45
DAVX Davox Corp Communications Equipment $92.57M 1.50% 1.81 1.53
DVID Digital Video Systems Inc Communications Equipment $85.58M 1.30% 4.28 0.32
IDCC InterDigital Communications Corp Communications Equipment $57.72M 3.10% 8.05 10.66
LIFE Lifeline Systems Inc Communications Equipment $84.37M 4.00% 2.5 1.32
MRM Merrimac Industries Inc Communications Equipment $23.04M 1.40% 1.57 1.33
PCTI PC-Tel Inc Communications Equipment $89.51M 1.70% 1.1 2.06
ANTP Phazar Corp Communications Equipment $15.07M 1.50% 0.94 0.26
RVSN RADVision Ltd Communications Equipment $45.91M 0.50% 1.4 2.99
RITT RIT Technologies Ltd Communications Equipment $42.66M 7.60% 2.68 1.27
SNWL SonicWALL Inc Communications Equipment $80.61M 1.80% 2.26 11.58
WRLS Telular Corp Communications Equipment $75.15M 8.50% 4.1 1.97
TRUE TrueTime Inc Communications Equipment $20.49M 2.70% 0.65 0.74
VTEK Vodavi Technology Corp Communications Equipment $47.70M 0.90% 0.28 0.07
22
The above information describes the valuation techniques Investec Ernst used
in its financial analysis and the assumptions that were made in each technique.
The preparation of an opinion, from a financial point of view, is a complex
process and the different valuation techniques should not be read individually
as each metric on its own is not a good indicator of value and may be
misleading. The metrics should be analyzed as a whole and qualitative factors,
including sample size, need to be considered.
Investec Ernst's conclusion on the fairness, from a financial point of view,
of the consideration paid to Mobitec was based upon computing four averages of
the results obtained from the valuation techniques and computing eight weighted
average variations. Each average and weighted average variation indicated that
the consideration paid to Mobitec was fair from a financial point of view. The
range of weighted averages and weighted average variations calculated was from
$7,153,170 to $12,109,733, with an average of all of the variations of
$9,602,411.
Investec Ernst believes that these averages should be relied on as they take
all the analyses into account which reflect the relevance of all the factors it
considered, the judgments it made, the processes it performed and the
assumptions it considered in assessing the fairness of the consideration paid
for Mobitec, from a financial point of view.
SELECTION OF INVESTEC ERNST. Investec Ernst & Company, a registered broker
dealer and a member of the New York Stock Exchange and the NASD, is a full
service securities firm and investment bank. Through its acquisition of Royce
Investment Group in 1999, Investec is familiar with Digital: Royce acted as a
financial advisor to Digital in connection with an earlier acquisition by the
Company, provided certain other investment banking services to the Company from
time to time and acted as lead manager of its initial public offering. In
addition, Investec has been and continues to be an active market maker on the
Nasdaq market in the shares of Digital. Investec Ernst was selected by Digital
to provide the fairness opinion because of Digital's familiarity with Investec
Ernst/Royce Investment Group, its knowledge of the industry and ability to act
expeditiously and efficiently. No material relationship exists or has ever
existed between Investec Ernst and Mobitec or any of its subsidiaries. Investec
Ernst did not receive any instructions from Mobitec or its affiliates concerning
the fairness opinion and there were no limitations imposed by Mobitec or its
affiliates on the scope of Investec Ernst's investigation.
COMPENSATION AND MATERIAL RELATIONSHIPS. As compensation for rendering its
fairness opinion to Digital, Investec Ernst will receive a fee of $120,000, plus
reimbursement of reasonable out of pocket expenses. John D. Higgins, an employee
of Investec Ernst, serves on the Company's Board of Directors. With the
Company's permission he assisted in the due diligence of the fairness opinion.
Mr. Higgins will not receive any portion of the fee paid to Investec Ernst for
rendering the fairness opinion.
THE FULL TEXT OF THE PROPOSED FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS ON AND
THE SCOPE OF THE REVIEW IN RENDERING SUCH OPINION, IS ATTACHED TO THIS PROXY
STATEMENT AS APPENDIX IX AND IS INCORPORATED BY REFERENCE HEREIN. THE FAIRNESS
OPINION IS ADDRESSED TO DIGITAL'S BOARD OF DIRECTORS AND ADDRESSES THE FAIRNESS
TO DIGITAL'S COMMON SHAREHOLDERS OF THE AGGREGATE PURCHASE PRICE PAID BY DIGITAL
FOR THE SHARES OF MOBITEC FROM A FINANCIAL POINT OF VIEW AND IT DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF DIGITAL'S COMMON STOCK AS TO HOW TO
VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. HOLDERS OF COMMON STOCK ARE ENCOURAGED TO CAREFULLY READ THE
FAIRNESS OPINION IN ITS ENTIRETY.
23
SUMMARY OF OPTION AGREEMENT, AS AMENDED
On March 13, 2001, DRI Europa and Digital entered into an Amended Option
Agreement (the "Option Agreement") with the sellers, which amended and
superseded an Option Agreement between the same parties dated December 7, 2000.
Pursuant to the Option Agreement, the sellers granted to Digital and DRI Europa
an irrevocable option to purchase the sellers' shares of Mobitec Holding AB for
the period from March 13, 2001 to June 16, 2001, based upon the occurrence of
certain events.
The Option Agreement provides for two alternative exercises of the option
right of Digital and DRI Europa: Option A, in which only DRI Europa will
purchase the sellers' shares; or Option B, in which both Digital and DRI Europa
will purchase the sellers' shares. If either option is exercised, the purchase
of the sellers' shares will be made pursuant to the terms of the Stock Purchase
Agreement, described below. The Stock Purchase Agreement as currently drafted
conforms to Option A. If Option B is exercised, the Stock Purchase Agreement
will require certain modifications to reflect that both Digital and DRI Europa
would be deemed the purchasers. The terms of the Stock Purchase Agreement are
not materially different under either option. Whether Option A or B will be
exercised depends primarily on the tax treatment of the transaction to the
sellers under Swedish law.
The amended Option Agreement amended certain provisions of the Stock
Purchase Agreement, including changing the date of the closing financial
statement, by which certain potential adjustments to the final purchase price
are measured and providing that a dividend of SEK 500,000 paid by Mobitec to its
shareholders will be accounted for in adjusting the final purchase price.
The Option Agreement provides that interest on the cash portions of the
consideration to be paid to the Sellers under the Stock Purchase Agreement and
on the promissory notes shall accrue at the rate of eight percent per annum from
March 16, 2001 up to the closing date of the Stock Purchase Agreement and
related agreements. In the event Digital elects not to proceed with the Mobitec
acquisition for reasons not attributable to the sellers and does not exercise
one of the options under the Option Agreement, interest shall be paid to the
sellers for the period from March 16, 2001 through June 16, 2001.
The Option Agreement also provides that Mobitec shall pay Bengt Bodin a
monthly salary of SEK 54,075 ($5,028) from January 1, 2001 through the closing
date. Such salary is to be taken into account in adjusting the final purchase
price under the Stock Purchase Agreement.
SUMMARY OF STOCK PURCHASE AGREEMENT
The following summary of certain material terms of the Stock Purchase
Agreement is qualified in its entirety by reference to the provisions of the
Stock Purchase Agreement, which is incorporated by reference herein and attached
hereto as Appendix I to this Proxy Statement. Capitalized terms have the
meanings set forth in the Stock Purchase Agreement or the appendices thereto.
The Stock Purchase Agreement attached as Appendix I is drafted in accordance
with the exercise of Option A under the Option Agreement -- I.E., DRI Europa is
the purchaser of the Mobitec Shares. However, if Option B is exercised, both
Digital and DRI Europa will constitute the purchaser under the Stock Purchase
Agreement. The terms of the Stock Purchase Agreement will not otherwise change
if Option B is exercised. In addition, certain provisions of the Stock Purchase
Agreement have been amended in the Amended Option Agreement (the "Option
Agreement"), which is attached to this Proxy Statement as Appendix II and
incorporated herein. See "Summary of Option Agreement, As Amended," above.
24
PURCHASE PRICE
Digital and/or DRI Europa has agreed to purchase 100,000 shares of Mobitec,
constituting all of the outstanding stock of Mobitec, from the sellers for a
purchase price consisting of:
(i) $530,000 to be paid to Lindqvist for his shares of Mobitec;
(ii) subject to adjustment following the closing date, based upon a
comparison of Mobitec's net equity at the time of the closing as set forth
in the closing financial statement and as of March 31, 2000:
(a) $3,680,000 to be paid to the Bodin Sellers;
(b) promissory notes totaling approximately $2 million to be issued to
the Bodin Sellers on the closing date;
(iii) 430,000 restricted shares of Digital to be transferred to the Bodin
Sellers on the closing date; and,
(iv) warrants to purchase in the aggregate 100,000 shares of Digital's
common stock at a price of $4.00 per share for a period of five years issued
to the Bodin Sellers pursuant to the Bodin Warrant Agreement.
The Stock Purchase Agreement provides for a preliminary purchase price,
which, after any adjustments made pursuant to (ii) (a) and (b), becomes the
final purchase price. The cash portion of the purchase price and the promissory
notes shall accrue interest at the rate of eight percent per annum from
March 16, 2001 until the date of closing. If the closing does not occur for
reasons attributable to Digital, such interest will still be due and payable to
the sellers on June 16, 2001.
CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS
DRI Europa and/or Digital's obligation to close the Agreement is subject to
certain conditions, including: all the representations, warranties and covenants
of the Bodin Sellers are true and accurate; no litigation which would prevent or
make unlawful the carrying out of the Stock Purchase Agreement shall be
threatened or pending against the Sellers, DRI Europa, Digital or Mobitec.
CLOSING CONDITIONS
At the Closing, the following are to occur:
- the sellers, after receiving the purchase price, shall deliver their
shares to DRI Europa;
- the Bodin Sellers shall present to DRI Europa the share ledger of Mobitec
evidencing that DRI Europa has been registered as the owner of the shares;
- the Bodin Sellers shall present to DRI Europa the original share
certificates and certified copies of the share ledger with regard to each
subsidiary, demonstrating that all the shares of each subsidiary are as
reflected in the Stock Purchase Agreement;
- DRI Europa shall deliver to the Bodin Sellers a legal opinion;
- Digital shall deliver the restricted shares to the Bodin Sellers,
containing a restrictive legend and,
- the Bodin Warrant Agreement, the Registration Rights Agreement and the
Bodin Consulting Agreement shall be executed.
25
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The sellers represent and warrant to Digital & DRI Europa, certain matters
related to Mobitec and its subsidiaries, including:
- entering into the Stock Purchase Agreement will not breach any agreement
to which any of the sellers is a party or the Articles of Mobitec or any
subsidiary; and,
- the shares sold to DRI Europa constitute the entire issued capital stock
of Mobitec, are legally issued and fully paid and each seller owns the
number of shares shown in the Agreement free of any encumbrances.
REPRESENTATIONS AND WARRANTIES OF THE BODIN SELLERS
In the following summary of the representations and warranties, Mobitec
includes, where applicable, its subsidiaries.
The Bodin Sellers represent and warrant to Digital and DRI Europa, among
other things:
- except for the subsidiaries, Mobitec does not own any interest in any
corporation or partnership and does not have any branch offices;
- the consolidated financial statements of Mobitec give a true and fair
picture of the financial position and results of operations of Mobitec and
were prepared in accordance with U.S. GAAP and all applicable laws;
- the net equity appearing in the consolidated balance sheet of Mobitec
contained in the interim financial statement dated March 31, 2000 is not
less than SEK 10,867,000 ($1,010,435) in accordance with U.S. GAAP and all
applicable laws;
- Mobitec has not pledged any assets and has no commitments or contingent
liabilities and Mobitec has full and exclusive title, with no
encumbrances, to all assets reflected on the balance sheet;
- the operations and activities of Mobitec have been conducted in the
ordinary course of business and since January 1, 2000 and there has been
no, among other things:
- material adverse change in financial condition or operations;
- obligations, commitments or liabilities, except those which are not
material;
- amendment or termination of any agreement to amend or terminate any
material agreement;
- extraordinary event or loss or any waiver of any debts, claims or
rights under a material agreement in excess of SEK 100,000 ($9,298);
- damage, destruction, or loss affecting their respective properties to
the extent not covered by insurance in excess of SEK 100,000 ($9,298);
- disposal of any individual asset with a value in excess of SEK 300,000
($27,895); or,
- other transaction other than in the ordinary course of business;
- all assets, properties and rights belonging to Mobitec have been included
in the transfer to DRI Europa;
- Mobitec does not have any liability or obligation as a result of any
purchase or sale of shares, business operations or individual assets;
26
- certain environmental matters, including that Mobitec has complied with
and obtained all necessary environmental approvals, permits and consents,
which are in full force and effect;
- Mobitec has performed all obligations and is not in default of any
Material Agreement; and the execution of the Stock Purchase Agreement will
not result in the breach or constitute a default under any material
agreement;
- certain intellectual property and know-how matters, including that all
intellectual property and know-how, as defined in the Stock Purchase
Agreement, used by Mobitec is duly owned or licensed without restriction
as to current use; and there is no infringement by any third party of any
intellectual property or know-how;
- certain matters related to the business of Mobitec, including that no
listed customer of Mobitec has ceased to buy products from Mobitec; no
supplier will cease to sell products or components or will increase their
prices; Mobitec maintains the disclosed insurance;
- certain matters related to employees of Mobitec;
- certain matters related to the sellers, including that none of the sellers
or any related person own any interest in any entity in competition with
Mobitec; except for the Consulting Agreement and pension arrangement with
Bengt Bodin, there are no contractual relations of any kind between
Mobitec on one hand and any of the sellers or related person on the other
hand; Bengt Bodin's pension arrangement will not have a negative impact on
the financial position of Mobitec;
- except as disclosed by Mobitec, there are no law suits or other legal
proceedings pending or threatened against Mobitec; the amount of SEK
500,000 ($46,491) shall be reserved and deducted from the balance sheet
contained in the closing financial statement for one of the disclosed
disputes;
- certain matters related to taxes and other charges, including that all
taxes, social charges and duties assessed or due by Mobitec have been
fully paid and all necessary returns and reports have been filed;
- no representation or warranty in the Stock Purchase Agreement or document
provided to DRI Europa by the Sellers contains any materially untrue
statement or fails to state a material fact or fact necessary to make the
statements made not misleading; and,
- the Bodin Sellers acknowledge that there ownership of the restricted
shares is subject to a substantial risk of loss.
COVENANTS
Each seller covenants, among other things, that for a period of three years
from the closing date not to carry on or in engage in any business competing
with the businesses of Mobitec or any subsidiary in any part of the world. The
period is limited to two years with respect to countries which are members of
the European Economic Area. In case of any breach, the sellers are liable to DRI
Europa for actual damages suffered for each breach but not less than SEK
8,000,000 ($743,860) for each breach. For a period of three years after the
closing date, each seller agrees to refrain from employing, offering to employ
or negotiating employment with any key employee of Mobitec or any subsidiary
without DRI Europa's prior written consent.
The sellers covenant that Mobitec and any subsidiary will make their best
efforts to fulfill the obligations under the Mobitec Stock option program prior
to the closing date. The Bodin Sellers agree that Mobitec AB is the full and
unrestricted owner of the trademark and business name, "Mobitec,"
27
and no Seller or any related person has any right to the name Mobitec, except as
set forth in the Trademark Licence Agreement.
DRI Europa shall discharge all directors of Mobitec from personal liability
for the period of January 1, 2000 to the closing date on the next annual
shareholders' meeting of Mobitec. DRI Europa is entitled to all dividends of
Mobitec and the subsidiaries derived from the financial year 2000.
The Bodin Sellers will make sure that Mobitec has transferred and sold its
shares of its Klimat and Hexair subsidiaries prior to the closing date and that
all liabilities of such subsidiaries shall have been transferred to the
purchasers. The sale of these subsidiaries shall be completed under such terms
that will have no negative impact on Mobitec's or any subsidiary's financial
position. At the closing date, Mobitec and its subsidiaries will have no
financial or contractual relation with the Klimat and Hexair subsidiaries except
the Trademark License Agreement between Mobitec AB and Klimat. The Bodin Sellers
shall indemnify Mobitec, any subsidiary and DRI Europa regarding the sale and
transfer of the Klimat and Hexair subsidiary shares.
The pending or threatened disputes involving Mobitec and/or any subsidiary
are described in an Appendix to the Stock Purchase Agreement.
Lindqvist is liable only as to certain provisions of the Stock Purchase
Agreement, including:
- the definitions;
- the section regarding purchase and sale of the Mobitec shares;
- the provision regarding payment to Lindqvist for his shares for $530,000;
- the conditions precedent to the purchaser's obligations;
- the delivery of his shares to the purchaser at closing;
- the representations and warranties of the sellers;
- the covenants concerning:
- conduct of Mobitec's business pending closing;
- non-competition;
- interfering with the continued employment of the key employees;
- publicity regarding the transaction;
- discharge of director liability;
- the purchaser's entitlement to Mobitec dividends for the 2000 fiscal
year;
- the indemnity provisions related to Lindqvist;
- the closing date;
- appointment of power of attorney provisions;
- provisions regarding where notices should be sent;
- confidentiality; and
- various miscellaneous provisions.
28
REGISTRATION OF THE RESTRICTED SHARES
Digital agrees to register the restricted shares pursuant to the terms and
conditions of the Registration Rights Agreement: 200,000 shares within one year
of closing, the remaining 230,000 shares within two years.
INDEMNIFICATION
The Bodin Sellers, except as set forth in the Stock Purchase Agreement with
respect to Lindqvist, shall be jointly severally liable to and shall indemnify
DRI Europa from any loss arising out of any misrepresentation, breach of
warranty or failure to perform a covenant or other obligation or any breach of
the Stock Purchase Agreement.
Lindqvist is liable and shall indemnify DRI Europa from any loss arising out
of any misrepresentation, breach of warranty or failure to perform those limited
covenants or other obligations or any breach of the Stock Purchase Agreement as
set forth above.
The liability of the Bodin Sellers and Lindqvist with regard to losses
sustained as a result of any misrepresentation or breach of any representation
or warranty as to certain provisions shall remain valid for 18 months from the
closing date and, as to other provisions, shall remain valid for a period of
five years from the closing date, and as to taxes, social charges and duties,
shall remain valid for three months from the closing date. The indemnification
provision is applicable for the full amount of aggregate losses equaling or
exceeding SEK 500,0000 ($46,491). The aggregate liability of the Bodin Sellers
shall not exceed SEK 33,000,000 ($3,068,906) and shall not exceed the purchase
price of the Lindqvist shares as to Lindqvist.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
DRI Europa and Digital are duly organized, validly existing and in good
standing and have full authority to enter into the Stock Purchase Agreement and
the contemplated transactions. The execution of the Stock Purchase Agreement,
the consummation of the transactions, and performing the terms of the Agreement
will not result in a breach of any agreement to which DRI Europa or Digital is a
party nor the articles of association of DRI Europa. The restricted shares are
credited as fully paid and are free of any encumbrances and Digital has the
absolute right, power and capacity to transfer the restricted shares to the
Bodin Sellers.
CLOSING DATE
The Closing Date shall occur five business days from the date all parties
sign the Agreement.
GENERAL PROVISIONS
Digital and Bengt Bodin will enter into a separate Consulting Agreement to
become effective on the closing date.
Bengt Bodin, Mattias Bodin and Tobias Bodin undertake for a period of
36 months from the closing date to consult with Digital prior to any sale of
their Digital shares.
The Agreement shall be governed by and construed in accordance with the laws
of Sweden.
Any dispute arising out of or in connection with the Stock Purchase
Agreement shall be settled by arbitration in accordance with the Rules of the
Arbitration Institute of the Stockholm Chamber of Commerce and shall be
conducted in Gothenburg, Sweden. The arbitration proceedings shall be conducted
in English.
29
SUMMARY OF CONSULTING AGREEMENT
In connection with, and to be consummated as a condition to closing of the,
Stock Purchase Agreement, Bengt Bodin entered into a Consulting Agreement with
Digital, to be executed concurrently with the closing of the Stock Purchase
Agreement (the "Consulting Agreement"), which is attached as Appendix VIII.
Under the Consulting Agreement, Bengt Bodin agrees, for a period of three years,
to furnish to Mobitec and its subsidiaries after the acquisition advisory or
consulting services with respect to their business and affairs and, if
requested, to meet and consult with customers in order to maintain the
contractual relationships of Mobitec and its subsidiaries with their customers.
For his services, Bodin is to be paid $120,000 the first year, $160,000 the
second year and $200,000 the third year, payable quarterly.
The Consulting Agreement contains provisions prohibiting Bengt Bodin from
soliciting employees of Digital to work for competitors for a period of two
years after the Agreement's termination. The Agreement also contains provisions
protecting the Confidential Information of Digital, including customer names.
The Consulting Agreement prohibits Bodin from engaging in competing business
during the term of the Agreement.
SUMMARY OF TRADEMARK LICENSE AGREEMENT
Mobitec AB, a wholly-owned subsidiary of Mobitec, entered into a Trademark
License Agreement with Mobitec Klimat AB ("Klimat"), to be executed concurrently
with the closing of the Stock Purchase Agreement. As set forth in the Stock
Purchase Agreement, Klimat is a subsidiary of Mobitec that has been sold prior
to the closing of the Stock Purchase Agreement. Pursuant to the Trademark
License Agreement, which is attached as Appendix V, Mobitec AB, which holds full
and unrestricted ownership of all rights to the trademark and business name,
"Mobitec," grants a royalty-free, non-exclusive license to Klimat to use the
Mobitec trademark with respect to its products and in its business. Klimat
agrees not to use the Mobitec trademark in its company name after twelve months
from signing the Agreement. The Agreement remains in force for five years,
subject to successive three year terms unless terminated.
CERTAIN RISKS AND FACTORS TO CONSIDER REGARDING THIS PROPOSAL
Certain risks and other factors relevant to your vote regarding Proposals I
through V related to the Acquisition are set forth below, following Proposal V.
See, "Certain Risks and Factors to Consider Regarding Proposals I, II, III, IV
and V."
INTEREST OF CERTAIN PERSONS IN PROPOSED ACQUISITION
John D. Higgins, a director of Digital, is an employee of Investec
Ernst & Company, a full service securities firm and investment bank that is
providing a fairness opinion from a financial point of view with respect to the
proposed acquisition and related transactions. See "Fairness Opinion." Investec
Ernst & Company will receive a fee of $120,000, plus reasonable actual expenses,
for furnishing the fairness opinion.
In addition, Mr. Higgins will receive a fee upon successful completion of
the Renaissance Capital Group, Inc. convertible debenture financing. See
Proposal III and IV. Such fee payable is based upon a percentage of the amount
of financing. The fee will be $17,500, assuming the full $3 million of
convertible debenture financing is provided by Renaissance Capital Group, Inc.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms and conditions
of the issuance of the restricted shares and believes that the issuance of
restricted shares is fair to, and is advisable and in
30
the best interests of, Digital and its shareholders and has unanimously approved
the issuance of the restricted shares and unanimously recommends that
shareholders vote "for" approval of the issuance of the restricted shares.
PROPOSAL II.
THE WARRANT SHARES ISSUANCE
The Bodin Warrant Agreement, which is attached as Appendix III, provides for
a grant by Digital to Bengt Bodin, one of the sellers, of warrants to purchase
100,000 shares of Digital's common stock for a period of five years at an
exercise price of $4.00 per share. The warrants are valued at a total of
$62,000. Pursuant to the Registration Rights Agreement, the common shares
underlying the warrants will be registered by Digital within one year from the
date of closing of the Stock Purchase Agreement. See "Summary of Bodin Warrant
Agreement," below. While the warrant shares will be issued to Bengt Bodin only
upon his exercise of all or part of the warrants, this proposal seeks
shareholder approval for the issuance of such shares underlying the warrants in
the event that the Bodin Warrants are exercised. If Mr. Bodin does exercise the
warrants on a cash basis, the gross proceeds of $400,000 will be used by Digital
for general working capital.
The issuance of the warrant shares is necessary to issue the 100,000 shares
of Digital's common stock underlying the Bodin Warrants in the event they are
exercised by Bengt Bodin within the five year period that the warrants are
effective. The Bodin warrants are a material component of the purchase price
given to the sellers for the acquisition and a required condition to close the
Stock Purchase Agreement. The Bodin warrants are to be issued to Bodin in
connection with the promissory note. The Board of Directors has already
unanimously approved the Bodin Warrant Agreement and the issuance of the warrant
shares. Digital's shareholders are required to approve the issuance of the
warrant shares pursuant to Nasdaq Marketplace Rules as, in conjunction with the
issuance of the restricted shares (Proposal I), the issuance of the debenture
shares (Proposal IV) and the issuance of shares underlying warrants issued to
the debenture holders (Proposal V), the amount of shares issued in connection
with the acquisition exceeds 20% of Digital's current outstanding common shares.
If the shareholders do not approve the issuance of the warrant shares,
regardless of whether any of the other Proposals related to the acquisition are
approved, the Stock Purchase Agreement will not close and the acquisition will
not occur. Further, if any of Proposals I, II, III, IV or V are not approved,
none will be implemented, and the acquisition will not occur.
The background and reasons for the acquisition and related transactions, is
described above in Proposal I. See Proposal I, particularly, Introduction and
Summary of Acquisition Transactions and Background and Reasons for the
Acquisition. The reasons given for the Stock Purchase Agreement, the acquisition
and related transactions apply also to the issuance of the warrant shares. In
addition, certain risks and other factors relevant to your vote regarding
Proposals I, II, III, IV and V are set forth below, following Proposal V. See
"Certain Risks and Factors to Consider Regarding Proposals I, II, III, IV and
V."
SUMMARY OF THE BODIN WARRANT AGREEMENT
The following summary of certain material terms of the Bodin Warrant
Agreement is qualified in its entirety by reference to the provisions of the
Bodin Warrant Agreement, which is incorporated by reference herein and attached
hereto as Appendix III to this Proxy Statement.
The Bodin Warrant Agreement, to be executed concurrently with the closing of
the Stock Purchase Agreement, is an agreement between Bengt Bodin, one of the
sellers, and Digital. It grants to Bodin warrants to purchase up to 100,000
shares of Digital's common stock at an exercise price of $4.00 per share for a
period of five years from the date of the Agreement. Bodin is under no
obligation to exercise the warrants, but if he does so, he is required to
exercise at a minimum as to 25,000 shares of
31
common stock for each partial exercise. The Bodin Warrant Agreement is subject
to all the terms and conditions of the Registration Rights Agreement, summarized
below. The warrants can be exercised in cash or by the non-cash conversion
provision. Bodin can offset and reduce any part or all of the exercise price by
the sum of the unpaid principal balance on the promissory note, plus accrued and
unpaid interest. The non-cash conversion exercise allows Bodin to convert all or
a portion of the warrants into the number of shares equal to the quotient of
(i) the current market value of the warrant shares subject to the portion of the
warrants being exercised, divided by (ii) the current or closing market price,
as defined, of one share of common stock immediately prior to the exercise of
the conversion right.
Any of the warrant shares issued to Bodin after exercise will bear a
restrictive legend and are not registered under the Securities Act of 1933, as
amended. However, the warrant shares, if exercised, may be registered pursuant
to the Registration Rights Agreement.
The Bodin Warrant Agreement may be assigned to certain permitted assignees,
or to any other party with Digital's prior written consent. Permitted assignees
are defined as any descendant or ancestor of Mr. Bodin; trust, or beneficiary of
any trust, for the benefit of Mr. Bodin, any descendant or ancestor; trust or
entity in which Mr. Bodin or any beneficiary, descendant or ancestor of Mr.
Bodin or beneficiary, trust or other entity has any interest; any of the
foregoing or any entity in which any of the foregoing or Mr. Bodin holds at
least 50% of the aggregate voting power; and, any immediate relative or spouse
of any of the foregoing including Mr. Bodin. During the time that the Bodin
Warrants are in effect, Digital will reserve and keep available out of its
authorized common stock, for issuance upon the exercise of the warrants, the
number of shares that may be issued upon exercise of the warrants. Prior to
exercise of any or all of the warrants, and issuance of the corresponding number
of warrant shares exercised, Bodin is not granted any rights of a shareholder of
Digital pursuant to the Bodin Warrant Agreement.
SUMMARY OF THE REGISTRATION RIGHTS AGREEMENT
The following summary of certain material terms of the Registration Rights
Agreement is qualified in its entirety by reference to the provisions of the
Registration Rights Agreement, which is incorporated by reference herein and
attached as Appendix IV to this Proxy Statement.
Pursuant to the Registration Rights Agreement, Digital has agreed with to
register, on a continued or delayed basis pursuant to Rule 415 of the Securities
Act of 1933, at its expense, the restricted shares and the common stock
underlying the Bodin Warrants, as follows: 200,000 of the restricted shares and
the shares underlying the Bodin warrants within one year of the date of the
agreement and the remaining 230,000 shares on or before two years from the date
of the agreement. The registration rights provided for in the agreement will
terminate on the earliest date at which the registerable securities may be sold,
within a three month period pursuant to Rule 144, or pursuant to Rule 144(k)
promulgated under the Securities Act of 1933. Digital agrees to indemnify the
holders of the registerable securities from any loss, liability or claim arising
out of any untrue statement of a material fact contained in the registration
statement, any material omission.
INTEREST OF CERTAIN PERSONS IN PROPOSED ACQUISITION
John D. Higgins, a director of Digital, is an employee of Investec
Ernst & Company, a full service securities firm and investment bank that is
providing a fairness opinion from a financial point of view with respect to the
proposed acquisition and related transactions. See "Fairness Opinion." Investec
Ernst & Company will receive a fee of $120,000, plus reasonable actual expenses,
for furnishing the fairness opinion.
In addition, Mr. Higgins will receive a fee upon successful completion of
the Renaissance Capital Group, Inc. convertible debenture financing. See
Proposal III, IV and V. Such fee payable is based
32
upon a percentage of the amount of financing. The fee will be $17,500, assuming
the full $3 million of convertible debenture financing is provided by
Renaissance Capital Group, Inc.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms and conditions
of the issuance of the warrant shares and believes that the issuance of the
warrant shares is fair to, and is advisable and in the best interests of,
Digital and its shareholders and has unanimously approved the issuance of the
warrant shares and unanimously recommends that shareholders vote "for" approval
of the issuance of the warrant shares. In addition to the "Factors Considered by
the Board of Directors Regarding the Acquisition," which apply to this Proposal,
the "Background and Reasons for the Acquisition," and "Certain Risks and Factors
to Consider Regarding Proposals I, II, III, IV and V" the Board of Directors
considered the fact that the Bodin warrants are exercisable over five years at a
price well over the current market price of Digital's common stock. Thus, the
likelihood of any immediate exercise is considered remote. However, if Digital's
stock price does reach or exceed $4 per share, there is considerable likelihood
that the warrants will be exercised. The Board also considered the fact that the
shares underlying the warrants would not be registered in total for two years.
PROPOSAL III.
THE CONVERTIBLE DEBENTURE AUTHORIZATION
Part of the cash portion of the purchase price for the Stock Purchase
Agreement is to be furnished by an investment of certain investment funds
associated with Renaissance Capital Group, Inc. ("Renaissance Capital") of up to
$3,000,000 in Digital's convertible debentures. This Proposal seeks shareholder
approval for the authorization of up to $3 million of convertible debentures
which are convertible into 1,500,000 shares of Digital's common stock. The
debenture shares will be issued to the investment funds only if the debentures
are converted. Under certain circumstances, the conversion price of the
convertible debentures could be adjusted downward (the "Automatic Adjustment")
such that the total number of shares that could be converted to Digital's common
stock could, but is not expected to, exceed 1,500,000, up to a maximum of
2,000,000 shares. See "Summary of the Renaissance Convertible Debenture
Preliminary Outline of Terms," below.
If all or a substantial part of the debentures are converted, this could
significantly dilute the holdings of our current shareholders. In addition, if
such converted shares are all sold, this could have an adverse effect on the
common stock price. If the maximum 1,500,000 shares of common stock were
converted, this would constitute approximately 46% of Digital's common stock as
of April 18, 2001 and would represent approximately 29% of the outstanding
common stock after conversion. If the Automatic Adjustment were to come into
effect and cause a conversion price of less than $2.00, the convertible shares
exceeding 1,500,000, up to a maximum of an additional 500,000 shares, would have
to be approved. In the event that such additional converted shares were
approved, that would cause further dilution of the existing shareholders'
relative holdings, and, if such converted shares were sold, could cause an
additional adverse effect on the common stock price.
If the Automatic Adjustment occurs, the conversion price of the debentures
could be substantially below the market price of the common stock on the date of
conversion. Since the Automatic Adjustment, if it comes into effect, would cause
the conversion price to be reset based upon the volume-weighted average closing
price for Digital's common stock over a ten day trading period, the lower the
price of the common stock is during this ten day period, the more shares can be
converted.
33
The following table shows the number of shares into which the debentures would
be convertible based upon a range of prices.
STOCK PRICE NUMBER OF SHARES
- --------------------- ----------------
1.50 2,000,000
1.75 1,714,286
2.00 1,500,000
The convertible debenture investment is a material component of the purchase
price to be paid to the Sellers under the Stock Purchase Agreement. The Board of
Directors has already unanimously approved the authorization of the convertible
debentures. Digital's shareholders are required to authorize the convertible
debenture shares and the issuance of the shares underlying the warrants granted
to the debenture holders pursuant to NASD rules as, the convertible debentures
involve the issuance of the debenture shares which, in conjunction with the
issuance of the restricted shares (Proposal I) , the issuance of the warrant
shares (Proposal II), and the issuance of the shares underlying the warrants
granted to the debenture holders (Proposal V), the amount of shares issued in
connection with the acquisition exceeds 20% of Digital's current outstanding
common shares. If the shareholders do not approve the authorization of the
convertible debentures, regardless of whether any of the other Proposals related
to the acquisition are approved, the Stock Purchase Agreement will not close and
the acquisition will not occur. Further, if any of Proposals I, II, III, IV or V
are not approved, none will be implemented, and the acquisition will not occur.
The background and reasons for the acquisition and related transactions, is
described above in Proposal I. See Proposal I, particularly, Introduction and
Summary of Acquisition Transactions and Background and Reasons for the
Acquisition. The reasons given for the Stock Purchase Agreement, the acquisition
and related transactions apply also to the authorization of the convertible
debentures. In addition, certain risks and other factors relevant to your vote
regarding Proposals I, II, III, IV and V are set forth below, following Proposal
V. See "Certain Risks and Factors to Consider Regarding Proposals I, II, III, IV
and V."
SUMMARY OF THE RENAISSANCE CONVERTIBLE DEBENTURE PRELIMINARY OUTLINE OF TERMS
The following summary of certain material terms of the Renaissance
Convertible Debenture Preliminary Outline of Terms, as amended, is qualified in
its entirety by reference to the provisions of the Renaissance Convertible
Debenture Preliminary Outline of Terms, as amended, which is incorporated by
reference herein and attached as Appendix VII to this Proxy Statement.
Convertible debentures in the aggregate amount of up to $3,000,000 are to be
authorized and issued to certain investment funds associated with Renaissance
Capital Group, Inc. of Dallas, Texas. The convertible debentures may be
converted into Digital's unregistered common stock at any time before maturity.
The debentures will yield interest of 8.00% per annum, payable monthly and will
mature in seven years.
The convertible debentures are convertible, at any time before maturity,
into Digital's common stock at an initial conversion price of $2.00 per share.
Accordingly, the debentures are initially convertible into 1,500,000 shares of
Digital's common stock. For a period of time to be defined, the investment funds
will be entitled to a downward adjustment (the "Automatic Adjustment") to the
conversion price if (i) Digital does not attain certain financial performance
targets, to be agreed upon, based upon earnings before interest, taxes,
depreciation and amortization for Digital's fiscal 2001 year and (ii) the market
price of Digital's common stock is below the conversion price at the of
publication of Digital's results for the period. At the adjustment date, the
conversion price will be reduced to equal the volume-weighted average closing
price for Digital's common stock over a ten day trading period following
Digital's public release of that year's results, but not below $1.50 per share.
Therefore, as a
34
result of the Automatic Adjustment, the number of shares of Digital's common
stock convertible from the convertible debentures could, but is not expected to,
exceed 1,500,000, up to a maximum of 2,000,000 shares.
The debentures will be secured by all assets, tangible and intangible, of
Digital and its subsidiaries and will be subordinated only to senior and
asset-backed loans. Digital will have the right to call the debentures at 101%
of face value if certain conditions are met. The debenture holders will have the
right to require redemption of the debentures under specific conditions to be
defined in the Convertible Debenture Agreement and Loan Agreement.
After the debentures shares are converted, the debenture holders will have
certain registration rights, including "piggy-back" registration rights at their
expense; a shelf registration at Digital's expense and demand registration
rights at the debenture holders' expense. The debenture shares have the same
voting, preemptive and dividend rights as other shares of Digital's common
stock.
Certain covenants will be required, including, but not limited to, requiring
Digital to provide annual audited financial statements and quarterly unaudited
financial statements; furnish monthly financial statements and budgets; stay
current with all required SEC filings; make timely interest payments on the
convertible debentures; and, maintain certain financial standards to be agreed
upon.
The investment funds will designate Russell Cleveland to serve as a member
of Digital's Board of Directors. Digital will reimburse the investment funds for
all reasonable expenses incurred in connection with Mr. Cleveland's board
representation.
As part of the convertible debenture financing, Digital will grant to the
debenture holders warrants to purchase 200,0000 shares of its common stock for
five years at an exercise price equal to the closing price of the common stock
on the trading day prior to the date that the convertible debentures are issued.
If the warrants are exercised, Digital expects to use the proceeds for general
working capital.
INTEREST OF CERTAIN PERSONS IN PROPOSED ACQUISITION
John D. Higgins, a director of the Company, is an employee of Investec Ernst
& Company, a full service securities firm and investment bank that is providing
a fairness opinion from a financial point of view with respect to the proposed
acquisition and related transactions. See "Fairness Opinion." Investec Ernst &
Company will receive a fee of $120,000, plus reasonable actual expenses, for
furnishing the fairness opinion.
In addition, Mr. Higgins will receive a fee upon successful completion of
the Renaissance Capital Group, Inc. convertible debenture financing. See
Proposal III, IV and V. Such fee payable is based upon a percentage of the
amount of financing. The fee will be $17,500, assuming the full $3 million of
convertible debenture financing is provided by Renaissance Capital Group, Inc.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms and conditions
of the convertible debenture authorization and believes that the convertible
debenture authorization is fair to, and is advisable and in the best interests
of, Digital and its shareholders and has unanimously approved the authorization
of the convertible debentures and unanimously recommends that shareholders vote
"for" approval of the authorization of the convertible debentures. In addition
to the "Factors Considered by the Board of Directors Regarding the Acquisition,"
which apply to this Proposal, the "Background and Reasons for the Acquisition,"
and "Certain Risks and Factors to Consider Regarding Proposals I, II, III, IV
and V," the Board of Directors considered the availability of like financing
from other sources and concluded that the arrangements with Renaissance Capital
were more favorable.
35
PROPOSAL IV.
THE CONVERTIBLE DEBENTURE SHARES ISSUANCE
This Proposal seeks shareholder approval for the issuance of 1,500,000
shares of the Company's common stock underlying the convertible debentures
pursuant to the convertible debenture conversion terms. The debenture shares
will be issued to certain investment funds associated with Renaissance Capital
only if the debentures are converted. Under certain circumstances, the
conversion price of the convertible debentures could be adjusted downward (the
"Automatic Adjustment") such that the total number of shares that could be
converted to Digital's common stock could, but is not expected to, exceed
1,500,000, up to a maximum of 2,000,000 shares. See "Summary of the Renaissance
Convertible Debenture Preliminary Outline of Terms," above. See Appendix VII.
The convertible debenture investment and the issuance of the debenture
shares is a material component of the purchase price to be paid to the Sellers
under the Stock Purchase Agreement. The Board of Directors has already
unanimously approved the authorization of the convertible debentures and the
issuance of the debenture shares. Digital's shareholders are required to approve
the issuance of the Debenture Shares pursuant to NASD rules as, in conjunction
with the issuance of the restricted shares (Proposal I), the issuance of the
warrant shares (Proposal II) and the issuance of the shares underlying the
warrants granted to the debenture holders (Proposal V), the amount of shares
issued in connection with the acquisition exceeds 20% of Digital's current
outstanding common shares. If the shareholders do not approve the issuance of
the debenture shares, regardless of whether any of the other Proposals related
to the acquisition are approved, the Stock Purchase Agreement will not close and
the acquisition will not occur. Further, if any of Proposals I, II, III, IV or V
are not approved, none will be implemented, and the Acquisition will not occur.
The background and reasons for the acquisition and related transactions, is
described above in Proposal I. See Proposal I, particularly, Introduction and
Summary of Acquisition Transactions and Background and Reasons for the
Acquisition. The reasons given for the Stock Purchase Agreement, the acquisition
and related transactions apply also to the issuance of the debenture shares. See
also Proposal III, regarding the authorization of the convertible debentures,
the Summary of the Renaissance Convertible Debenture Preliminary Outline of
Terms, above and Proposal V, regarding the issuance of the shares underlying the
warrants granted to the debenture holders. In addition, certain risks and other
factors relevant to your vote regarding Proposals I, II, III, IV and V are set
forth below, following this Proposal V. See "Certain Risks and Factors to
Consider Regarding Proposals I, II, III, IV and V."
INTEREST OF CERTAIN PERSONS IN PROPOSED ACQUISITION
John D. Higgins, a director of Digital, is an employee of Investec Ernst &
Company, a full service securities firm and investment bank that is providing a
fairness opinion from a financial point of view with respect to the proposed
acquisition and related transactions. See "Fairness Opinion." Investec Ernst &
Company will receive a fee of $120,000, plus reasonable actual expenses, for
furnishing the fairness opinion.
In addition, Mr. Higgins will receive a fee upon successful completion of
the Renaissance Capital Group, Inc. convertible debenture financing. See
Proposal III, IV and V. Such fee payable is based upon a percentage of the
amount of financing. The fee will be $17,500, assuming the full $3 million of
convertible debenture financing is provided by Renaissance Capital Group, Inc.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms and conditions
of the issuance of the debenture shares and believes that the issuance of the
debenture shares is fair to, and is advisable
36
and in the best interests of, Digital and its shareholders and has unanimously
approved the issuance of the debenture shares and unanimously recommends that
shareholders vote "for" approval of the issuance of the debenture shares.
In addition to the "Factors Considered by the Board of Directors Regarding
the Acquisition," which apply to this Proposal, the "Background and Reasons for
the Acquisition," and "Certain Risks and Factors to Consider Regarding Proposals
I, II, III, IV and V," the Board of Directors considered the availability of
like financing from other sources and concluded that the arrangements with
Renaissance Capital were more favorable.
PROPOSAL V.
ISSUANCE OF THE SHARES UNDERLYING THE CONVERTIBLE DEBENTURE
HOLDERS' WARRANTS
This Proposal seeks shareholder approval for the issuance of 200,000 shares
of Digital's common stock underlying the warrants granted to the convertible
debenture holders in connection with the convertible debenture financing
outlined above in Proposal I and III. The debenture warrant shares will be
issued to the debenture holders, consisting of certain investment funds
associated with Renaissance Capital, only if the warrants granted to the
debenture holders are exercised. The warrants may be exercised for a period of
five years at an exercise price equal to the closing price of Digital's common
stock on the trading day prior to the date that the convertible debentures are
issued.
The convertible debenture investment and the issuance of the debenture
warrant shares is a material component of the convertible debenture financing,
which supplies a material part of the purchase price to be paid to the Sellers
under the Stock Purchase Agreement. The Board of Directors has already
unanimously approved the authorization of the convertible debentures, the
issuance of the debenture shares and the issuance of the debenture warrant
shares. Digital's shareholders are required to approve the issuance of the
debenture warrant shares pursuant to NASD rules as, in conjunction with the
issuance of the restricted shares (Proposal I), the issuance of the warrant
shares (Proposal II) and the issuance of the shares underlying the convertible
debentures (Proposal IV), the amount of shares issued in connection with the
acquisition exceeds 20% of Digital's current outstanding common shares. If the
shareholders do not approve the issuance of the shares underlying the debenture
holders' warrants, regardless of whether any of the other Proposals related to
the acquisition are approved, the Stock Purchase Agreement will not close and
the acquisition will not occur. Further, if any of Proposals I, II, III, IV or V
are not approved, none will be implemented, and the acquisition will not occur.
The background and reasons for the acquisition and related transactions, is
described above in Proposal I. See Proposal I, particularly, Introduction and
Summary of Acquisition Transactions and Background and Reasons for the
Acquisition. The reasons given for the Stock Purchase Agreement, the acquisition
and related transactions apply also to the issuance of the debenture warrant
shares. See also Proposal III, regarding the authorization of the convertible
debentures, the Summary of the Renaissance Convertible Debenture Preliminary
Outline of Terms, above, and Proposal IV, regarding the issuance of shares
underlying the convertible debentures. In addition, certain risks and other
factors relevant to your vote regarding Proposals I, II, III, IV and V are set
forth below, following this Proposal V. See "Certain Risks and Factors to
Consider Regarding Proposals I, II, III, IV and V."
INTEREST OF CERTAIN PERSONS IN PROPOSED ACQUISITION
John D. Higgins, a director of Digital, is an employee of Investec Ernst &
Company, a full service securities firm and investment bank that is providing a
fairness opinion from a financial point of view with respect to the proposed
acquisition and related transactions. See "Fairness Opinion." Investec Ernst &
Company will receive a fee of $120,000, plus reasonable actual expenses, for
furnishing the fairness opinion.
37
In addition, Mr. Higgins will receive a fee upon successful completion of
the Renaissance Capital Group, Inc. convertible debenture financing. See
Proposal III, IV and V. Such fee payable is based upon a percentage of the
amount of financing. The fee will be $17,500, assuming the full $3 million of
convertible debenture financing is provided by Renaissance Capital Group, Inc.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms and conditions
of the issuance of the debenture warrant shares and believes that the issuance
of such shares is fair to, and is advisable and in the best interests of,
Digital and its shareholders and has unanimously approved the issuance of the
debenture warrant shares and unanimously recommends that shareholders vote "for"
approval of the issuance of the debenture warrant shares.
In addition to the "Factors Considered by the Board of Directors Regarding
the Acquisition," which apply to this Proposal, the "Background and Reasons for
the Acquisition," and "Certain Risks and Factors to Consider Regarding Proposals
I, II, III, IV and V," the Board of Directors considered the availability of
like financing from other sources and concluded that the arrangements with
Renaissance Capital were more favorable.
CERTAIN RISKS AND FACTORS TO CONSIDER REGARDING PROPOSALS I, II, III, IV AND V
The following risks and factors to consider apply to your decision as to
Proposals I, II, III, IV and V, above.
DILUTION OF EXISTING SHAREHOLDERS
The issuance of restricted shares will cause the issuance of 430,000 common
shares, which will become registered over the next two years. The warrant shares
issuance may, if the Bodin Warrants are exercised, cause the issuance of up to
100,000 shares of Digital's common stock. The convertible debentures, if
converted, may cause the issuance of up to 1,500,000 (or more, if the conditions
for the Automatic Adjustment of the conversion price applies) additional common
shares of Digital. The shares underlying the warrants granted to the debenture
holders, if exercised, could cause the issuance of 200,000 additional shares of
common stock. These new shares of Digital's common stock will cause substantial
dilution of the voting power of current Company shareholders. Collectively, if
the convertible debentures are converted, the Bodin warrants exercised and the
warrants granted to the debenture holders exercised, a total of 2,230,000 shares
of Digital's common stock will have been issued in connection with the
acquisition. This number of common shares would together constitute
approximately 68% of Digital's common stock outstanding on April 18, 2001 and
would constitute approximately 41% of Digital's common stock after exercise and
conversion. It is possible that additional shares could be issued if the
Automatic Adjustment for the conversion price of the convertible debentures
causes the conversion price to be less than $2.00 per share. See table of
debenture conversions in Proposal III, above. If the Automatic Adjustment of the
conversion price occurs, the conversion price may be substantially below the
current market price of the common stock. In the event that the Automatic
Adjustment occurs and the number of convertible shares exceeded 1,500,000 shares
(up to a maximum of 2,000,000 shares), Digital would have to seek additional
approval for shares issued in excess of 1,500,000 and further dilution of
existing shareholders could occur. If all or a substantial part of the
debentures are converted and Bodin warrants exercised and are subsequently sold,
subject to the registration provisions, this could have an adverse effect on the
common stock price.
38
INVOLVEMENT OF JOHN HIGGINS, A DIRECTOR OF DIGITAL, WITH FAIRNESS OPINION
John D. Higgins, a director of Digital, is an employee of Investec Ernst &
Company, the securities and investment banking firm engaged by Digital to render
a fairness opinion regarding the Mobitec acquisition. See "Fairness Opinion."
Mr. Higgins will also receive a fee in connection with the Renaissance Capital
convertible debenture financing. Mr. Higgins performed some of the due diligence
investigation conducted by Investec Ernst but did not perform the analyses
predicating the fairness opinion. His involvement and employment by the firm
providing the fairness opinion may detract from the legitimacy of the fairness
opinion because of a perceived conflict of interest. See "Factors Considered by
the Board of Directors Regarding the Acquisition," and "Interest of Certain
Persons in Proposed Acquisition."
CONSEQUENCES IF SHARE ISSUANCES ARE NOT APPROVED
Shareholder approval of each of the restricted shares issuance, the warrant
shares issuance, the debenture shares issuance and the issuance of the debenture
warrant shares, which are required by Nasdaq Marketplace Rules, is a condition
precedent to the consummation of the acquisition. If any of these share
issuances are not approved, then Digital has no obligation to complete the
acquisition. In that event, Digital will have incurred significant expense
without completing the acquisition.
COMPETITION
The Mobitec acquisition, because it would significantly increase Digital's
market presence in the destination sign systems market, particularly in Europe,
might attract the attention of larger competitors. This could lead to more
competitive pricing by Mobitec's and Transit-Media's competitors.
TECHNOLOGY ADVANCEMENTS BY COMPETITORS
New technology advances by Digital's competitors in the destination sign
market could adversely affect Digital, Transit-Media and Twin Vision of North
America, Inc. ("Twin Vision"), Digital's destinations signs systems' supplier in
the United States. After the Mobitec acquisition, Digital will have a larger
market share of the destination signs systems market in Europe based upon the
differing technologies offered by Mobitec and Transit-Media. If competitors were
to develop new advanced technologies, this could adversely affect Digital's
products offered by Transit-Media and Twin Vision. Further, if new technologies
were developed by competitors, this could also adversely affect Mobitec's
revenues.
RISKS REGARDING FINANCING OF CASH COMPONENT OF PURCHASE PRICE
The Acquisition Loan through Svenska Handelsbanken AB, which will provide
part of the cash portion of the purchase price of the Stock Purchase Agreement,
is secured by all of the Mobitec shares that Digital is purchasing in the
acquisition. If Digital were to default on the Acquisition Loan, Svenska
Handelsbanken AB could foreclose upon and take possession and ownership of
Digital's shares of Mobitec.
Part of the cash portion of the purchase price is being funded by the
issuance of the convertible debentures. The debentures are secured by all assets
of Digital and its subsidiaries, subordinated only to senior and asset-backed
lenders. If Digital were to default on its obligation to repay the Debentures in
accordance with their terms, any of Digital's assets could be at risk in a
foreclosure to satisfy the unpaid principal and interest due.
39
MARKET RECESSION
The market in which Mobitec, Transit-Media and Twin Vision operate could
suffer a recession which could adversely affect Digital's business.
ABILITY TO RETAIN KEY MOBITEC MANAGEMENT PERSONNEL
Digital hopes to retain certain key Mobitec management personnel after the
acquisition. However, there can be no assurance that such personnel may not
terminate their employment with Mobitec. The effect of losing certain key
management personnel might make the transition and integration of Mobitec's
business more difficult. In addition, the loss of such key personnel could have
an overall negative effect on the productivity, moral and revenues of Mobitec's
operations after the acquisition.
LIQUIDITY OF MOBITEC IN THE EVENT OF BUSINESS FAILURE
If, after the acquisition, Mobitec's business failed and it became necessary
to liquidate Mobitec's business in order to recoup Digital's investment, the
proceeds received from a sale or liquidation of Mobitec's business would depend
largely on the going concern value of Mobitec's business, which, depending on
the financial and operational status of the business at the time, could yield
less than the purchase price of the Stock Purchase Agreement.
ACCOUNTING TREATMENT OF MOBITEC ACQUISITION
The Transactions will be accounted for by Digital under the purchase method
of accounting in accordance with United States generally accepted accounting
principles, and all of the assets acquired and specific liabilities assumed by
Digital pursuant to the Stock Purchase Agreement will be recorded in Digital's
consolidated financial statements at their estimated relative fair value on the
closing date of the acquisition to reflect the aggregate consideration paid by
Digital in connection with the transactions.
TAX TREATMENT OF MOBITEC ACQUISITION
For United States Federal income tax purposes, no income, gain or loss will
be recognized by Digital or the Digital shareholders as a result of the
transactions.
DESCRIPTION OF SECURITIES TO BE ISSUED PURSUANT TO THE ACQUISITION
The 430,000 restricted shares that will be issued to the Bodin Sellers in
connection with the Stock Purchase Agreement and the transactions comprising the
acquisition of Mobitec are common stock of Digital which are subject to the same
dividend and voting rights as other common shares. The restricted shares are
restricted from trading pursuant to the provisions of Rule 144 promulgated under
the Securities Act of 1933.
Warrants to purchase up to 100,000 shares of Digital's common stock are
being issued to the Bengt Bodin pursuant to the Bodin Warrant Agreement. The
warrants are exercisable for a period of five years following their issuance at
a price of $4.00 per share. The common shares underlying the warrants contain
the same provisions as other common stock of Digital.
Convertible debentures in the aggregate amount of up to $3,000,000 are to be
authorized and issued to certain investment funds associated with Renaissance
Capital Group, Inc. of Dallas, Texas. The convertible debentures may be
converted into Digital's unregistered common stock at any time prior to
maturity. The debentures will yield interest of 8.00% per annum, payable monthly
and will mature in seven years. The convertible debentures are convertible into
Digital's common stock at an initial conversion price of $2.00 per share.
Accordingly, the debentures are initially convertible into 1,500,000 shares of
Digital's common stock. For a period of time, to be agreed upon, after the
40
debentures are issued, the conversion price of the debentures may be adjusted
downward if Digital does not achieve certain financial performance targets,
which are to be agreed upon, and if the market price of Digital's common stock
is below the conversion price at the time of publication of Digital's financial
results for the period (the "Automatic Adjustment"). The Automatic Adjustment,
if applicable, will be computed by reducing the conversion price to equal the
volume-weighted average closing price for Digital's common stock over a ten day
trading period following Digital's public disclosure of the fiscal 2001 year
earnings. The lowest that the conversion price can be reduced by the Automatic
Adjustment is to $1.50 per share. The debentures will be secured by all assets,
tangible and intangible, of Digital and its subsidiaries and will be
subordinated only to senior and asset-backed loans. Digital will have the right
to call the debentures at 101% of face value if certain conditions are met. The
debenture holders will have the right to require redemption of the debentures
under specific conditions to be defined in the Convertible Debenture Agreement
and Loan Agreement. After the debentures shares are converted, the debenture
holders will have certain registration rights, including "piggy-back"
registration rights at their expense; a shelf registration at Digital's expense
and demand registration rights at the debenture holders' expense. The debenture
shares have the same voting, preemptive and dividend rights as other shares of
Digital's common stock.
Warrants to purchase up to 200,000 shares of Digital's common stock will be
issued to the convertible debenture holders as part of the convertible debenture
financing. The warrants are exercisable for a period of five years at a price
equal to the closing price of the common stock on the trading day prior to the
date that the convertible debentures are issued. The common shares underlying
these warrants contain the same provisions as other common stock of Digital.
Each share of Digital's common stock is entitled to one vote. Dividends are
declared annually in the sole discretion of management. The common shares have
no preemptive rights.
PROPOSAL VI.
ELECTION OF DIRECTORS
Digital's Board of Directors is divided into three classes with each class
serving staggered terms of three years. Since this is the first election of
directors after staggered director terms was approved by the shareholders, all
nine nominees for election as directors are nominated for election this year.
Commencing with the annual meeting for 2002, those directors in Class One would
be eligible for reelection for a three year term, if nominated. The following
year, the directors in Class Two would be up for reelection, if nominated, and
in the next year, the directors in Class Three would be up for reelection, if
nominated. Commencing with the election at next year's annual meeting, each
re-elected director will serve a term of three years and until a successor has
been elected.
Attached as Appendix XIII to this Proxy Statement is the Amendment to
Digital's Bylaws and Articles of Incorporation which implemented the election of
directors with staggered terms.
The nine nominees for election as directors are identified below. Seven of
the nominees are now members of the Board of Directors. The Board of Directors
knows of no reason why any nominee would be unable to serve as a director. If
any nominee should for any reason become unable to serve, the shares represented
by all valid proxies will be voted for the election of such other person as the
Board of Directors may designate the Board of Directors may reduce the number of
directors to eliminate the vacancy.
The three Classes of Director/Nominees is:
Class One: Joseph Tang, Juliann Tenney, Lawrence A. Taylor and Stephanie
L. Pinson
Class Two: John K. Pirotte, C. James Meese, Jr. and David L. Turney
Class Three: J. Philips L. Johnston and John D. Higgins
41
NOMINEES STANDING FOR ELECTION AS DIRECTORS AT THE ANNUAL MEETING
TERM EXPIRES
NAME AGE CURRENT POSITION IF ELECTED
- ---- -------- ------------------------------ ------------
John D. Higgins............................ 68 Director 2004
J. Phillips L. Johnston, JD................ 61 Director 2004
C. James Meese, Jr......................... 59 Director 2003
Stephanie L. Pinson........................ 64 None 2002
John K. Pirotte............................ 51 Director 2003
Joseph Tang................................ 53 Director 2002
Lawrence A. Taylor......................... 54 CFO and Secretary 2002
Juliann Tenney............................. 48 Director 2002
David L. Turney............................ 57 Chairman of the Board and CEO 2003
NOMINEES FOR ELECTION
The following material contains information concerning the nominees for
election as directors, including their recent employment, positions with
Digital, other directorships and age as of the date of this Proxy Statement.
JOHN D. HIGGINS, age 68, was elected a director of Digital in
February 1998. Since 1990 and until 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. Mr. Higgins is currently an
employee of Investec Ernst & Company. Mr. Higgins holds B.B.A. and M.B.A.
degrees from Hofstra University.
J. PHILLIPS L. JOHNSTON, JD, age 61, has served on the Board of Directors
since April 1990. He is Chief Executive Officer and President of ID
Technologies, a public company since September 1999. He was Chief Executive
Officer of Pilot Therapeutics, Inc. from September 1998 to September 1999. He
was President and Special Programs Administrator of Digital Recorders from
April 1998 to May 15, 1998. From May 15, 1998 to December 31, 1998 he served as
Special Programs Administrator. Until April 1998 he had served as the Chairman
of the Board, President and Chief Executive Officer of Digital. He was the
Administrator of the North Carolina Credit Unions from September 1987 to
April 1990. From October 1979 to September 1987, Mr. Johnston served as
President and Chief Executive Officer of Data Pix, Inc., Norman Perry,
Chantry, Ltd., and Erwin-Lambeth, Inc., each of which were privately-held
companies. From 1971 through 1979, he was President and Chief Executive Officer
of Currier Piano Company, Marion, North Carolina. He is a director of several
private companies including RemoteLight.com, Inc. where he serves as Vice
Chairman. He has authored two books and is a Babcock Fellow at Wake Forest
University. Mr. Johnston received his AB degree in economics from Duke
University, attended the Stern Business School at New York University and
received his law degree from the University of North Carolina.
C. JAMES MEESE, JR., age 59, has served as a director of Digital since
April 1991 and was an independent sales representative for the DR business group
from February 1993 through May 1995. Since 1989 he has provided advice and
assistance to high growth companies on issues of market development,
capitalization, corporate governance and organizational structuring through
Business Development Associates, Inc., for which he is President. In addition,
during 2000, he became a General Partner in Passages Venture Fund, LP, a venture
capital fund that intends to invest in early stage technology-based companies.
Prior to 1989 he spent approximately 20 years in various senior corporate
marketing, business development and finance positions. Mr. Meese is also a
director of New Wave Powerboats, Inc. of Goldsboro, NC. Mr. Meese received a
B.A. degree in Economics from the University of Pennsylvania and an M.B.A. from
Temple University.
42
STEPHANIE L. PINSON, age 64, presently serves as President of Gilbert Tweed
Associates, Inc., a well established retained executive search firm based in
New York City. Ms. Pinson has served as President of Gilbert Tweed since 1996,
prior to which she held the title of Principle, joined the company in 1981, and
has been an owner since 1987. She is a member of the Gilbert Tweed Board of
Directors and has responsibility for the successful operation of the firm.
Ms. Pinson is the practice leader for the firm's widely recognized
Transportation Search Practice, specializing in searches for Public Transit
Authorities and their suppliers. The practice also supports aviation and port
clients. With her partner, Janet Tweed Gusman, Ms. Pinson is also engaged in the
Information Technology, Insurance and Industrial Practices. Her work with high
technology and manufacturing companies is global in nature, and she directs
Gilbert Tweed's offices in Bombay and New Delhi, India.
Prior to joining Gilbert Tweed Associates, Ms. Pinson served as Director of
Relocation Services for Real Estate World in Boulder, Colorado from 1978 to
1980. From 1972 to 1980, she studied and taught Medieval English Literature at
Rutgers, the State University in New Jersey. Ms. Pinson serves in a variety of
Association and Not for Profit Board positions. She is a member of the American
Public Transportation Association's ("APTA") Executive Committee, serving as
Vice Chair-Business Members at Large. She also serves on the APTA Chairman's
Diversity Council. She is a member of the Overlook Hospital Board of Advisors in
Summit, New Jersey where she chairs the Patient Satisfaction Committee.
Ms. Pinson received her Bachelors and Masters Degrees in English Literature from
Rutgers University where she also qualified for the Ph.D.
JOHN K. PIROTTE, age 51, became a director of Digital in May 1996. Since
1996, he has served as Chairman of Matrix Surface Technologies, Inc., a
privately held company that develops and markets patented surface treatment
abrasive products. Since 2000, Mr. Pirotte has served as President and Chief
Operating Officer of Teleron Wireless, Inc., a privately held company that
develops and markets wireless data modules for the telecommunications industry.
Since 1990, he has served as Chairman and Chief Executive Officer of CORPEX
Technologies, Incorporated, a privately held company that develops and markets
surface-active chemical technology. Mr. Pirotte received his B.A. degree in
economics from Princeton University and an M.S. in accounting from New York
University.
JOSEPH TANG, age 53, is the founder of Lite Vision Corp. Ltd. and has served
as Chairman and CEO since 1990. He has served as a director of Digital since
1998. From 1981 to 1990, Mr. Tang was the Vice President of marketing for Taiwan
Liton Electronics Corp. Ltd. Mr. Tang received his B.S. degree in industrial
engineering from Tung Hai University in Taiwan.
LAWRENCE A. TAYLOR C.P.A., age 54, has served as Chief Financial Officer and
Secretary of Digital since May 1998. From March 1997 to June 1999, Mr. Taylor
had been a partner with Tatum CFO Partners, LLP, a professional partnership of
career CFO's. From March 1995 to August 1996, Mr. Taylor was Senior Vice
President of Precept Business Products, Inc., a privately held holding company
whose principal businesses were a distributor of business forms, construction
and on demand courier delivery service. From May 1991 through December 1994,
Mr. Taylor was Vice President and Group Controller of Mark IV Transportation
Products Group ("Mark IV TPG"), a group of nine companies, subsidiaries and
operating units serving transit and transportation markets worldwide. Mark IV
TPG was an operating group of Mark IV Industries, Inc., formerly a New York
Stock Exchange listed company. Prior to 1991, Mr. Taylor served in various
financial managerial capacities in the food processing, commercial construction,
and oil field supply industries as well as other manufacturing environments.
Mr. Taylor received a B.S. degree in accounting from Wayne State University.
Mr. Taylor is a certified public accountant.
43
JULIANN TENNEY J.D., age 48, has served as a director of Digital since
April 1991. She is presently serving as Compliance Officer at Duke University
School of Medicine. From July 1993 to August 1998, Ms. Tenney was an instructor
in the non-profit management program at Duke University. From August 1990
through July 1993, she served as Executive Director of the Southern Growth
Policies Board, an interstate alliance charged with designing economic
development and growth strategies for southern Governors and legislators. From
August 1988 to August 1990, Ms. Tenney served as Director for the Economic and
Corporate Development Division of the North Carolina Biotechnology Center and
also as their House Legal Counsel. From November 1987 to August 1988,
Ms. Tenney was Assistant Secretary at the North Carolina Department of Commerce.
From August 1985 to November 1987, she was Executive Director of the North
Carolina Technological Development Authority. Prior to that time, she was a
practicing attorney. Ms. Tenney received a B.A. degree from the University of
North Carolina and a law degree from Duke University.
DAVID L. TURNEY, age 57, has served as Chairman of the Board and Chief
Executive Officer of Digital since May 1998 and as a director of Digital since
May 1996. Mr. Turney was co-founder, Chairman and CEO of Robinson Turney
International, Inc. ("RTI"), a consulting firm, which was merged into Digital
effective as of April 1998. RTI is engaged in business development, marketing
services, advisory services, and merger, acquisition and financing assignments
for selected clients. Until the date of merger, RTI clients included Digital and
all clients were in the transit and transportation equipment industries. From
March 1994 to December 1995, Mr. Turney was also engaged in strategic planning
and development consulting services for his former employer, Mark IV
Industries, Inc. ("Mark IV"), formerly a New York Stock Exchange listed company
since acquired by a private investor. From February 1991 to February 1994, he
was President and Group Executive of Mark IV Transportation Products Group, a
group of nine companies, subsidiaries and operating units of Mark IV, serving
transit and transportation markets worldwide, which group Mr. Turney founded and
developed. From 1984 to 1991, Mr. Turney was President of the Luminator division
of Gulton Industries, Inc., which became a wholly owned subsidiary of Mark IV in
1987. Prior to 1984, he served in various managerial and engineering capacities
in four corporations spanning the telecommunications, industrial hard goods,
consumer electronics and electromagnetic components industries. Mr. Turney
received his B.S. degree in industrial management from the University of
Arkansas and has participated in numerous postgraduate study courses in finance,
mergers and acquisitions, public company administration and operations.
EXECUTIVE OFFICERS
The following material contains information concerning the executive
officers of Digital who are not nominees for election as directors, including
their recent employment, positions with Digital and age as of the date of this
Proxy Statement.
LAWRENCE A. HAGEMANN, age 57, has served as Executive Vice President and
General Manager of TwinVision of North America, Inc., a wholly-owned subsidiary
of Digital since February 1998. From July 1996 until February 1998,
Mr. Hagemann was Vice President and General Manager of TwinVision of North
America, Inc. From July 1995 until July 1996, he served as Vice President of
ADDAX Sound Company, a privately held company based in Illinois. From
April 1991 to December 1993, he served as Assistant to the President of
Vapor-Mark IV. Since October 1993, he has served as a Director of Transtel
Communications Ltd., a developer of news media software based in London,
England. From 1973 through December 1990, he served as Vice President of Sales
and Marketing for Extel Corporation of Illinois and as a Director of Excom
Communications Limited (UK) and Extel Overseas Limited (HK). He is a co-editor
of the 1995 book titled HOOVER'S GUIDE TO COMPUTER COMPANIES. Mr. Hagemann
received his bachelors degree in electrical engineering from the University of
Detroit and his M.B.A. from Loyola University (Chicago).
44
ROBERT W. HUBER, age 61, founded Transit-Media GmbH on August 1, 1995. Since
May 1996, he has served as Managing Director of Transit-Media, now a wholly
owned subsidiary of Digital. From October 1989 to January 1985, Mr. Huber was
Managing Director of Lawo-Luminator-Europa, a Mark IV Industries, Inc. company
belonging to the Mark IV Industries Transportation Products Group ("Mark IV
TPG"), a group of nine companies, subsidiaries and operating units serving
transit and transportation markets worldwide. Mark IV TPG was an operating group
of Mark IV Industries, Inc., formerly a New York Stock Exchange listed company.
Prior to 1989 and since 1981, Mr. Huber served in various executive positions
introducing the then entirely new product of alphanumeric destination sign
systems for public transport vehicles in Europe. After having been elected twice
as Chairman of the Industry Council the International Union of Public Transport
("UITP"), Mr. Huber now serves as Honorary Chairman of the Industry Council of
UITP. Mr. Huber started his business career in a family owned business of
manufacturing jewelry and precision parts for the watch industry and gained
experience working in foreign countries including the U.S. with International
Telephone & Telegraph, and in Geneva, Switzerland with the United Nations.
TANYA L. JOHNSON, age 37, has served as Vice President and General Manager
of the Digital Recorders business group since February 1998. Digital Recorders
was previously described as Transit Communications ("TCS") business group. She
has been employed in various management positions with the TCS business group
since November 1995. Ms. Johnson also served as Manager of Engineering for TCS
from June 1990 to October 1995 and as an Engineering Specialist from
January 1988 to May 1989 and was, in that capacity, among the founders of the
TCS "Talking Bus" technology. Ms. Johnson served as a Component Engineer at
Teletec Corporation from June 1989 through May 1990. Ms. Johnson led the
development of the Talking Bus product line. Ms. Johnson holds a B.S. degree in
electrical engineering from Duke University.
CRAIG S. SCATES, age 36, has served as Vice President and General Manager of
Digital Audio Corporation ("DAC"), a wholly-owned subsidiary of Digital since
June 2000. Prior to joining DAC, Mr. Scates served as Director of the Public
Safety & Law Enforcement Solutions group of GTE Government Systems, and later
DynCorp Information Systems, from November 1997 to June 2000. From March 1996 to
November 1997, he served as Marketing Development Manager for GTE Government
Systems, located in Chantilly, VA. From May 1986 to March 1996, he held various
management positions with GTE Data Services in Tampa, FL including National
Account Manager, Section Supervisor, Systems Planning Administrator, and Sr.
Metrics Analyst. Mr. Scates is a Past President of the International Function
Point Users Group association where was a noted speaker on the subject of
software measurement and project management methods. He is currently an
Associate Member of the International Association of Chiefs of Police.
Mr. Scates holds a B.S. degree in Business Administration from Florida Southern
College and received his M.B.A. from Tampa University.
SIGNIFICANT EMPLOYEE
DR. JAMES E. PAUL, JR., age 57, has served as the Chief Scientist of Digital
Audio Corporation ("DAC"), the law enforcement and surveillance segment of
Digital, since March 1997 with focus primarily on the technology needs of the
DAC business unit. Prior to assuming that position, he had served as President
of the DAC business group since February 28, 1995 when Digital acquired
substantially all of the assets of DAC. Dr. Paul founded DAC in 1979 and served
as its President and chief engineer since its inception. DAC designs,
manufactures and markets digital signal processing equipment to law enforcement
agencies, and Digital employed Dr. Paul to continue such business operations as
a business group of Digital. From 1979 to 1981, Dr. Paul taught in the
Electrical Engineering and the Computer Science Departments of California State
University, Fullerton. From 1969 to 1979, he served as the senior research
engineer and manager of the Audio Science Group at
45
Rockwell International Corporation. He received B.S., M.E.E. and Ph.D. degrees
in electrical engineering from North Carolina State University.
None of Digital's directors, director nominees or executive officers is a
party to any arrangement or understanding with any other person with respect to
nomination as a director. There is no relationship by blood, marriage or
adoption, not more remote than first cousin, between any of Digital's directors,
director nominees or executive officers.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Digital's Common Stock as of April 18, 2001 by (i) each person
known by Digital to own beneficially more than 5% of the outstanding Common
Stock, (ii) each director and (iii) all executive officers and directors as a
group. The information with respect to institutional investors is derived solely
from statements filed with the Commission under Section 13(d) of the Securities
Exchange Act. Each person has sole voting and sole investment or dispositive
power with respect to the shares shown except as noted.
SHAREHOLDINGS ON APRIL 18, 2001(1)
------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- ---------------- ----------------- ----------------
David L. Turney(2).......................................... 385,950 11.0
Lawrence A. Taylor(3)....................................... 85,967 2.6
Lawrence A. Hagemann(4)..................................... 66,667 2.0
Robert W. Huber(5).......................................... 23,667 0.7
Tanya Johnson(6)............................................ 37,667 1.1
Craig Scates(5)............................................. 13,333 0.4
Floyd J. Diaz(5)............................................ 11,667 0.4
Gerald W. Sheehan(5)........................................ 19,000 0.6
John D. Higgins(7).......................................... 139,611 4.2
J. Phillips L. Johnston(8).................................. 116,782 3.5
C. James Meese, Jr.(9)...................................... 32,987 1.0
John K. Pirotte(10)......................................... 71,695 2.2
John M. Reeves, II(11)...................................... 22,000 0.7
Joseph Tang(12)............................................. 420,000 12.8
Juliann Tenney(13).......................................... 39,982 1.2
Lite Vision Corporation..................................... 400,000 12.2
736 Chung-Cheng Road, 18th Floor
Chung Ho City, Taipei Hsien, Taiwan, R.O.C.
All current directors and officers as a group (16
persons)(14).............................................. 1,887,975 57.7
- ------------------------
(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 18, 2001 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 4018 Patriot Drive, One Park Center,
Suite 100, Durham, North Carolina 27709.
(2) Includes 250,000 shares subject to currently exercisable options.
(3) Includes 46,667 shares subject to currently exercisable options.
(4) Includes 56,667 shares subject to currently exercisable options.
(5) Consists solely of shares subject to currently exercisable options.
46
(6) Includes 36,667 shares subject to currently exercisable options.
(7) Includes 20,000 shares subject to currently exercisable options.
(8) Includes 80,000 shares subject to currently exercisable options.
(9) Includes 31,987 shares subject to currently exercisable options.
(10) Includes 22,000 shares subject to currently exercisable options.
(11) Includes 22,000 shares subject to currently exercisable options.
(12) Includes 20,000 shares subject to currently exercisable options and 400,000
shares owned by Lite Vision Corporation, of which Mr. Tang is a director and
officer. Mr. Tang disclaims beneficial ownership of these 400,000 shares.
(13) Includes 22,000 shares subject to currently exercisable options.
(14) Includes 675,655 shares subject to currently exercisable options.
BOARD COMMITTEES
The Board of Directors has delegated certain of its authority to an
Executive Compensation Committee, Audit Committee, Acquisition and Alliance
Committee, Nominating Committee and Executive Committee. Other than the
Executive Committee, of which Mr. Turney is Chairman, no member of any committee
is an officer or employee of Digital. Mr. Turney serves as ex-officio member of
all committees.
The Compensation Committee is currently composed of Ms. Tenney and
Mr. Higgins and is chaired by Ms. Tenney. The Compensation Committee held two
meetings in fiscal year 2000. The primary function of the Compensation Committee
is to review and make recommendations to the Board with respect to certain
compensation policy matters and to administer Digital's incentive stock option
plan.
The Audit Committee is currently composed of Mr. Meese, Mr. Pirotte and
Mr. Higgins with Mr. Meese as Chairman. The members of the Audit Committee are
independent within the meaning of Rule 4200(a)(14) of the NASD Marketplace
Rules. The Audit Committee held five meetings in fiscal year 2000. The function
of the Audit Committee is to review and approve the scope of audit procedures
employed by Digital's independent auditors, to review and approve the audit
reports rendered by Digital's independent auditors and to approve audit fees
charged by the independent auditors. The Audit Committee reports to the Board of
Directors with respect to such matters and recommends the selection of
independent auditors. See "Audit Committee Report." A copy of Digital's Audit
Committee Charter is attached to this Proxy Statement as Appendix XII.
The Nominating Committee is composed of Mr. Higgins as Chairman and
Mr. Reeves and met one time during 2000. The Nominating Committee makes advisory
recommendations to the Board of Directors about appropriate composition and
membership on the Board of Directors. The Nominating Committee will consider
nominees for board election recommended by Digital's shareholders. Shareholders
wishing to propose nominees for directors for next year's annual meeting should
submit such proposed nominees to Digital by the date that Shareholder Proposals
in next year's proxy statement must be received. See "Shareholder Proposals."
All nominees proposed by shareholders will be considered by the Nominating
Committee in making its nominations for directors but will not necessarily be
accepted.
The Executive Committee consists of Mr. Pirotte, Mr. Reeves, Mr. Meese, and
Mr. Turney who also serves as Chairman. The Executive Committee met six times in
fiscal 2000 and serves as an
47
additional oversight of Digital in behalf for the Board of Directors normally
involving more details than would be practical for the larger Board of
Directors.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed with management Digital's
audited financial statements for the year ended December 31, 2000 (the "Fiscal
Year 2000 Financial Statements").
The Audit Committee has discussed with Digital's independent auditors the
matters required to be discussed by Statement on Auditing Standards No. 61,
COMMUNICATION WITH AUDIT COMMITTEES, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants.
The Audit Committee has received and reviewed the written disclosures and
the letter from the independent auditors required by Independence Standard
No. 1, INDEPENDENCE DISCUSSIONS WITH AUDIT COMMITTEES, as amended, by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence.
Based upon the reviews and discussions referred to above, the Audit
Committee has recommended to the Board of Directors that the Fiscal Year 2000
Financial Statements be included in Digital's Form 10-KSB for the year ended
December 31, 2000.
This Audit Committee Report shall not be deemed incorporated by reference in
any document previously or subsequently filed with the Securities and Exchange
Commission that incorporates by reference all or any portion of the proxy
statement, in connection with the Annual Meeting, except to the extent that
Digital specifically requests that this Report be specifically incorporated by
reference.
Dated: March 5, 2001.
The Audit Committee:
C. James Meese, Jr.
John D. Higgins
John K. Pirotte
BOARD AND COMMITTEE ATTENDANCE
In fiscal year 2000, the Board of Directors held six meetings. All
directors, except Mr. Tang, who joined the Board of Directors as of April 1999,
attended more than 75% of the aggregate of board and committee meetings held
during fiscal year 2000.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the annual and long-term
compensation for services in all capacities to Digital for the last three fiscal
years ended December 31, 2000 of David L. Turney, the Chief Executive Officer
and President of Digital, Lawrence A. Hagemann, Robert W. Huber, Tanya L.
Johnson, Craig S. Scates since June 1, 2000 and Lawrence A. Taylor. Listed below
are Digital's executive officers other than Mr. Turney who were serving as
executive officers at the end of the fiscal year ended December 31, 2000 (the
"Named Executive Officers"). J. Phillips L. Johnston held an executive officer
position during the three years ended December 31, 2000, but was not an employee
of Digital on December 31, 2000.
48
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ---------------------
SECURITIES UNDERLYING
SALARY BONUS OTHER ANNUAL OPTIONS/SARS
NAME AND PRINCIPLE POSITION YEAR ($) ($) COMPENSATION ($)
- --------------------------- -------- -------- -------- ------------ ---------------------
David L.Turney....................... 2000 185,000 30,000 $3,426(2) --
Chief Executive Officer and President 1999 185,000 20,000 -- --
1998 175,000 -- -- 250,000
J. Phillips L. Johnston.............. 1998 131,250 -- -- 50,000
Former Chief Executive Officer
Lawrence A. Hagemann................. 2000 140,000 77,000 -- 25,000
Executive Vice President and General 1999 122,727 10,000 -- 9,559
Manager, TwinVision 1998 115,416 -- -- 23,441
Lawrence A. Taylor................... 2000 136,677 20,000 -- 25,000
Chief Financial Officer and Secretary 1999 127,000 6,000 -- 10,000
1998 74,615(3) -- -- 20,000
Tanya L. Johnson..................... 2000 107,000 -- -- 10,000
Vice President and General Manager, 1999 100,000 25,908 -- 10,000
DR 1998 72,791(4) -- -- 2,000
Craig S. Scates...................... 2000 67,803(5) 20,000 -- 20,000
Vice President and General Manager,
DR
Robert W. Huber...................... 2000 89,766 -- 11,715(2) 10,000
Managing Director 1999 82,596 -- 11,558(2) 10,000
Transit-Media GmbH 1998 78,923 -- 8,555(2) --
Michael A. Connor, Jr................ 1999 99,167(6) 23,158 -- 2,000
Former Vice President and General 1998 80,507 40,608 -- --
Manager, DAC
- ------------------------
(1) Such options were granted pursuant to Digital's Incentive Stock Option Plan.
(2) Represents usage of company leased automobile and accident insurance.
(3) Mr. Taylor was first employed as an officer of Digital in May 1998.
(4) Ms. Johnson became Vice President and General Manager in March 1998.
(5) Mr. Scates was first employed as an officer of Digital and General Manager
of DAC in June 2000.
(6) Mr. Connor resigned from Digital effective December 31, 1999
The following table sets forth information concerning grants of stock
options to the Named Executive Officers pursuant to Digital's stock option plan
during the fiscal year ended December 31, 2000.
49
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE O
GRANTED EMPLOYEES IN THE BASE PRICE
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ---- ------------ ---------------- ---------- ---------------
Lawrence A. Hagemann..................... 25,000 11.8% 2.00 01-June-10
Lawrence A. Taylor....................... 25,000 11.8% 2.00 01-June-10
Tanya L. Johnson......................... 10,000 4.7% 2.00 01-June-10
Craig S. Scates.......................... 20,000 9.5% 2.00 01-June-10
Robert W. Huber.......................... 10,000 4.7% 2.00 01-June-10
No stock options were exercised by the Named Executive Officers in the
fiscal year ended December 31, 2000. The following table shows the stock option
values for the Named Executive Officers as of December 31, 2000.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY(1)
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END (#) YEAR-END
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
David L. Turney................................ 250,000 -- -- --
Lawrence A. Hagemann........................... 56,667 8,333 -- --
Lawrence A. Taylor............................. 46,667 8,333 -- --
Tanya L. Johnson............................... 36,667 3,333 -- --
Craig S. Scates................................ 13,333 6,667 -- --
Robert W. Huber................................ 23,667 3,333 -- --
- ------------------------
(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, 2000
was $1.563.
BOARD COMPENSATION
No employee of Digital receives any additional compensation for his or her
services as a director. Non-management directors receive no salary for their
services as such although travel or other out-of-pocket expenses incurred by
non-management directors in attending meetings of the Board of Directors and
Committee meetings are reimbursed on an actual but reasonable basis. Effective
June 2000, Digital instituted a meeting-fee schedule for non-employee directors
attending Board and Committee meetings. The fee related to board meetings is
$1,500 for regular meetings and $750 for telephonic meetings. The fee for
Committee meetings is $1,000/meeting with the Chair receiving an additional
$750/meeting. Certain directors of Digital are consultants or advisors to
Digital and receive compensation for such services. See "Certain Relationships
and Related Transactions" and "Interest of Certain Persons in Proposed
Acquisition." During the fiscal year 2000, the Board of Directors granted a
total of 70,000 options to non-employee, non-consultant directors. Such options
are exercisable at a price of $2.00 per share. The following table shows the
options granted to non-employee, non-consultant directors pursuant to the stock
option plan during fiscal year 2000.
50
OPTIONS GRANTED TO NON-EMPLOYEE/NON-CONSULTANT
DIRECTORS DURING FISCAL YEAR 2000
----------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------
% OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS NON-EMPLOYEE EXERCISE
GRANTED DIRECTORS IN THE BASE PRICE
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ---- -------------------- ---------------- ---------- ---------------
John D. Higgins...................... 10,000 14.3% 2.00 01-June-10
J. Phillips L. Johnston.............. 10,000 14.3% 2.00 01-June-10
C. James Meese, Jr................... 10,000 14.3% 2.00 01-June-10
John K. Pirotte...................... 10,000 14.3% 2.0 01-June-10
John M. Reeves, II................... 10,000 14.3% 2.00 01-June-10
Joseph Tang.......................... 10,000 14.3% 2.00 01-June-10
Juliann Tenney....................... 10,000 14.3% 2.00 01-June-10
No stock options were exercised by the non-employee non-consultant directors
in the the ficsal year ended December 31, 2000
401(k) PLAN
In January of 1996, Digital 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.
Digital does not make 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.
Digital pays all the costs of administering the savings plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Effective January 1, 1998, Digital entered into an employment agreement with
David L. Turney, to serve as Digital's Chief Executive Officer and President.
The agreement provides for an annual salary of $175,000 in the first year of the
term and $185,000 in the second and succeeding years, for a term of four years.
In addition, the agreement provides for bonus and incentive stock option
compensation. In the event of a "Triggering Event," which includes a change in
ownership of Digital of at least 50% or a merger, consolidation, reorganization
or liquidation of Digital, Mr. Turney would be entitled to receive 2.9 times his
annual salary, incentive and bonus payments during the most recent 12 month
period, if Mr. Turney's employment is terminated or he is unable to reach a
satisfactory new agreement. The agreement may be terminated by Digital or
Mr. Turney with or without cause. The agreement requires Mr. Turney to keep
confidential certain technology and trade secrets of Digital, and prohibits
Mr. Turney for engaging in business competing with Digital during his employment
and for one year after termination, if initiated by him, or six months, if
initiated by Digital. A copy of Mr. Turney's Employment Agreement is attached to
this Proxy Statement as Appendix XIV.
Effective January 1, 1999, Digital entered into an employment agreement with
Larry Hagemann to serve as its Executive Vice President for a period of one
year, subject to periodic extensions for like periods. The agreement provides
for compensation of an annual salary of $122,727, initially, and bonuses or
stock options, in the discretion of the Compensation Commitee. In the event of a
"Triggering Event," which includes a change in ownership of Digital of at least
50% or a merger, consolidation, reorganization or liquidation of Digital,
Mr. Hagemann would be entitled to receive two
51
times his annual salary, incentive and bonus payments during the most recent
12 month period, if Mr. Hagemann's employment is terminated or he is unable to
reach a satisfactory new agreement. The agreement may be terminated by Digital
or Mr. Hagemann with or without cause. The agreement requires Mr. Hagemann to
keep confidential certain technology and trade secrets of Digital, and prohibits
Mr. Hagemann for engaging in business competing with Digital during him
employment and for one year after termination, if initiated by him, or six
months, if initiated by Digital. A copy of Mr. Hagemann's Employment Agreement
is attached to this Proxy Statement as Appendix XV.
Effective January 1, 1999, Digital entered into an employment agreement with
Larry Taylor to serve as its Chief Financial Officer for a period of one year,
subject to periodic extensions for like periods. The agreement provides for
compensation of an annual salary of $127,000, initially, and bonuses or stock
options, in the discretion of the Compensation Commitee. In the event of a
"Triggering Event," which includes a change in ownership of Digital of at least
50% or a merger, consolidation, reorganization or liquidation of Digital,
Mr. Taylor would be entitled to receive two times his annual salary, incentive
and bonus payments during the most recent 12 month period, if Mr. Taylor's
employment is terminated or he is unable to reach a satisfactory new agreement.
The agreement may be terminated by Digital or Mr. Taylor with or without cause.
The agreement requires Mr. Taylor to keep confidential certain technology and
trade secrets of Digital, and prohibits Mr. Taylor for engaging in business
competing with Digital during him employment and for one year after termination,
if initiated by him, or six months, if initiated by Digital. A copy of
Mr. Taylor's Employment Agreement is attached to this Proxy Statement as
Appendix XVI.
Digital's Incentive Stock Option Plan (the "Plan") provides that, in the
event Digital enters into an agreement providing for the merger of Digital into
another corporation or the sale of substantially all Digital's assets, any
outstanding unexercised option shall become exercisable at any time prior to the
effective date of such agreement. Upon the consummation of the merger or sale of
assets, such options shall terminate unless they are assumed or another option
is substituted therefor by the successor corporation. See "Summary of the
Incentive Stock Option Plan."
The Board of Directors has approved and recommends that shareholders vote
for the director nominees identified above.
PROPOSAL VII
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Upon recommendation of the Audit Committee, the Board of Directors has
appointed McGladrey & Pullen, LLP to serve as independent public accountants of
Digital for its fiscal year ending December 31, 2001. The Board seeks to have
the shareholders ratify the appointment of McGladrey & Pullen, LLP, which has
served as the independent public accountants of Digital since September 1998.
Representatives of McGladrey & Pullen, LLP are expected to be present at the
Annual Meeting with the opportunity to make a statement if it is their desire to
do so, and will be available to respond to appropriate questions from
shareholders.
AUDIT FEES. The aggregate fees billed for audit of Digital's annual
financial statements for 2000 and the reviews of the financial statements
included in Digital's Forms 10-QSB was $71,491.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. Digital did
not engage the principal accountant for any services of this nature.
ALL OTHER FEES. The aggregate of all other fees billed by the principal
accountant was $119,880, the majority of which was for the due diligence and
proxy statement procedures and assistance in preparing tax returns. The Audit
Committee considers the nature of this work to be compatible with maintaining
the principal accountant's independence.
52
The Board of Directors recommends a vote for ratification of the appointment
of McGladrey & Pullen, LLP as independent public accountants for the Company for
fiscal year 2001.
PROPOSAL VIII
PROPOSAL TO APPROVE AMENDMENT TO THE INCENTIVE STOCK OPTION PLAN
Digital's Incentive Stock Option Plan (the "Plan") was adopted effective
April 27, 1993 and amended in June 1998, April 1999 and May 2000. The Board of
Directors believes the Plan has proved to be of substantial value in recruiting
new employees as well as stimulating the efforts of existing employees.
Digital desires to attract and retain the best available employees,
directors and consultants for Digital and to encourage the highest level of
performance by such persons, thereby enhancing the value of Digital for the
benefit of its stockholders. Digital and the Compensation Committee of the Board
of Directors believe that in order to accomplish these objectives it is
necessary to: (i) meet the competitive requirements of the workforce marketplace
by including equity incentives as part of the total compensation to be paid to
prospective directors, executive officers and key employees; and (ii) reward the
performance of existing and future directors, executive officers and key
employees and increase the proprietary and vested interest of all such persons
in the growth and performance of Digital in a manner that provides them with a
means to increase their holdings of Common Stock and aligns their interests with
the interests of the stockholders of Digital.
The Board of Directors has adopted an amendment to the Plan to increase the
number of shares available for issuance under the Plan by an additional 160,000
shares of Common Stock.
The provisions of the existing Plan, as well as the proposed amendments
thereto, are summarized below.
SUMMARY OF THE INCENTIVE STOCK OPTION PLAN
Digital's Incentive Stock Option Plan (the "Plan") was adopted by the Board
of Directors and approved by the shareholders of Digital effective April 1993
and amended in June 1999 and May 2000. An aggregate of 820,000 shares of Common
Stock is reserved for issuance under the Plan. The Plan provides for the
granting of incentive stock options ("Incentive Stock Options" or "ISOs") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), non-qualified stock options ("NQSOs") and stock appreciation rights
("SARs"). NQSOs may be granted to employees, directors and advisors of Digital,
while ISOs may be granted only to employees. No options may be granted under the
Plan subsequent to April 2003.
The Plan is administered by the Compensation Committee of the Board of
Directors, which determines the terms and conditions of the options and SARs
granted under the Plan, including the exercise price, number of shares subject
to the option and the exercisability thereof.
The exercise price of all ISOs granted under the Plan must be at least equal
to the fair market value of the Common Stock of Digital on the date of grant. In
the case of an optionee who owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of Digital, the exercise
price of ISOs shall be not less than 110% of the fair market value of the Common
Stock on the date of grant. The exercise price of all NQSOs granted under the
Plan shall be determined by the Compensation Committee. Digital agreed with the
underwriter of its initial public offering that the exercise price of options
granted under the Plan will not be less than 85% of the fair market value of the
Common Stock. The term of options granted under the Plan may not exceed ten
years. The Plan may be amended or terminated by the Board of Directors, but no
such action may impair the rights of a participant under a previously granted
option.
53
The Plan provides the Board of Directors or the Compensation Committee the
discretion to determine when options granted thereunder shall become exercisable
and the vesting period of such options. Upon termination of a participant's
employment, directorship or advisory relationship with Digital, all unvested
options terminate and are no longer exercisable. Vested options either terminate
immediately or remain exercisable for a specified period of time depending on
the nature and circumstances of the termination.
The Plan provides that, in the event Digital enters into an agreement
providing for the merger of Digital into another corporation or the sale of
substantially all Digital's assets, any outstanding unexercised option shall
become exercisable at any time prior to the effective date of such agreement.
Upon the consummation of the merger or sale of assets, such options shall
terminate unless they are assumed or another option is substituted therefor by
the successor corporation.
The Plan provides the Board of Directors or the Compensation Committee
discretion to grant SARs in connection with any grant of options. Upon the
exercise of a SAR, the holder shall be entitled to receive a cash payment in an
amount equal to the difference between the exercise price per share of options
then exercised by him and the fair market value of the Common Stock as of the
exercise date. The holder is required to exercise options covering twice the
number of shares, which are subject to the SAR so exercised. SARs are not
exercisable during the first six months after the date of grant, and may be
transferred only by will or the laws of descent and distribution.
As of December 31, 2000, a total of 803,787 NQSOs and ISOs were outstanding,
with exercise prices ranging from $1.63 to $3.00. There were no SARs outstanding
as of December 31, 2000. As of April 18, 2001, the market value of Digital's
common stock which underlies the NQSOs and ISOs was $1,256,946.
FEDERAL INCOME TAX EFFECTS OF THE ISSUANCE AND EXERCISE OF OPTIONS UNDER THE
PLAN
The following discussion summarizes the federal income tax consequences of
the 2000 Stock Incentive Plan based on current provisions of the Code, which are
subject to change. This summary does not cover any state or local tax
consequences of participation in the Plan.
NONQUALIFIED STOCK OPTIONS. The grant of a Nonqualified Stock Option, or
NQSO is not a taxable event to the recipient unless the option itself is
publicly-traded on an established securities market. Generally, when the
recipient of an option under the Plan exercises a NQSO, the difference between
the option exercise price and any higher fair market value of the shares of
Common Stock received on the date of exercise (the "Spread") will be ordinary
income to the recipient and will be generally allowed as a deduction for federal
income tax purposes to the employer.
Any gain or loss realized by an optionee on disposition of the Common Stock
acquired upon exercise of a NQSO will generally be capital gain or loss to such
optionee, long term or short term depending on the holding period, and will not
result in any additional tax consequences to the employer. The optionee's basis
in the shares of Common Stock is determined generally at the time of exercise.
Alternatively, if the stock is subject to a substantial risk of forfeiture
(such as vesting requirements) at the time of exercise, no compensation income
will generally be realized by the holder at that time. In that case, the holder
will not recognize compensation income until the tax year in which the
forfeiture restrictions lapse (i.e., when the stock becomes vested); at which
time the holder will recognize compensation income based on the excess of the
fair market value of such stock at the time of vesting over the holder's
exercise price for the shares. Moreover, the corporation will generally be
entitled to a corresponding tax deduction at the time of vesting equal to the
amount includable by the option holder/service provider in income. The holder's
holding period for the stock will begin on the vesting date.
54
There is a mechanism, however, pursuant to which a holder may elect to pay
tax based on the value of the stock at the time of exercise notwithstanding that
the stock may be subject to a risk of forfeiture at that time. Specifically, the
holder may make an election under Section 83(b) of the Internal Revenue Code of
1986, as amended (the "Code") to be taxed at the time of exercise as if the
vesting restrictions did not exist. A Section 83(b) election must be made by the
holder within 30 days after the restricted stock is transferred to such holder.
This election is generally strategically effective to minimize tax if there is
little or no Spread at the time of exercise, but it is anticipated that the
stock subject to the option is likely to appreciate significantly prior to the
time that the vesting restrictions would otherwise lapse. In the event of a
Section 83(b) election, the issuing corporation is generally entitled to a tax
deduction equal to the Spread on the date of exercise. Moreover, the holding
period of the stock in the hands of the holder would begin on the date that the
option is exercised, and the subsequent satisfaction of the vesting requirements
with respect to this stock will not be a taxable event. The holder will
generally recognize long-term capital gain (rather than compensation income
taxable at ordinary income rates) or loss to the extent that the stock is held
for more than one year after the exercise date at the time of the disposition.
If the stock with respect to which a Section 83(b) election has been made is
forfeited prior to vesting, the holder will generally be entitled to a capital
loss solely to the extent of the exercise price paid by the holder.
INCENTIVE STOCK OPTIONS. The grant of an Incentive Stock Option, or ISO is
generally not a taxable event to the recipient. Digital is not entitled to a
deduction as a result of the grant or exercise of an ISO. When an optionee
exercises an ISO, while employed by Digital or a subsidiary or within three
months (one year for disability) after termination of employment by reason of
retirement or death, no ordinary income will be recognized by the optionee at
that time, but the Spread (if any) will be an adjustment to taxable income for
purposes of the federal alternative minimum tax applicable to individuals. If
the shares of Common Stock acquired upon exercise of the ISO are not disposed of
prior to the expiration of one year after the date of acquisition and two years
after the date of grant of the option, the excess (if any) of the sales proceeds
over the aggregate option price of such shares of Common Stock will be long term
capital gain, but the employer will not be entitled to any tax deduction with
respect to such gain. Generally, if the shares of Common Stock are disposed of
prior to the expiration of such periods (a "Disqualifying Disposition"), the
excess of the fair market value of such shares at the time of exercise over the
aggregate option price (but not more than the gain on the disposition if the
disposition is a transaction on which a loss, if realized, would be recognized)
will be ordinary income at the time of such Disqualifying Disposition (and the
employer will generally be entitled to a federal income tax deduction in a like
amount). Any gain realized by the optionee as the result of a Disqualifying
Disposition that exceeds the amount treated as ownership income will be capital
in nature, long term or short term depending on the holding period. If an ISO is
exercised more than three months (one year for disability) after termination of
employment, the tax consequences are the same as described above for NQSOs.
Certain additional special rules apply if the exercise price for an option
is paid in shares of Common Stock previously owned by the optionee rather than
in cash.
ACCORDINGLY, EACH OPTIONEE SHOULD CONSULT HIS OR HER TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE STOCK INCENTIVE
PLAN AWARDS, AS WELL AS THE USE OF SHARES OF COMMON STOCK FOR EXERCISE,
INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL, OR FOREIGN INCOME
TAX AND OTHER LAWS.
INCENTIVE STOCK OPTION PLAN BENEFITS TABLE
Because benefits granted under the Plan are at the discretion of the
Compensation Committee, the benefits that will be awarded in the future under
the Plan are not currently determinable. The following table shows the options
that have been granted to executive officers, directors, and the groups below
since the Plan was implemented.
55
DIGITAL RECORDERS INCENTIVE STOCK OPTION PLAN -- SINCE INCEPTION
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY(1)
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END(#) YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
David L. Turney................................ 250,00 -- -- --
Lawrence A. Hagemann........................... 56,667 (8,333) -- --
Tanya L. Johnson............................... 36,667 (3,333) -- --
Craig S. Scates................................ 13,333 (6,667) -- --
Robert W. Huber................................ 23,667 (3,333) -- --
Lawrence A. Taylor............................. 46,667 (8,333) -- --
EXECUTIVE GROUP............................ 427,001 (29,999) -- --
John D. Higgins................................ 20,000 -- -- --
J. Phillips L. Johnston........................ 80,000 -- -- --
C. James Meese, Jr............................. 31,987 -- -- --
John K. Pirotte................................ 22,000 -- -- --
John M. Reeves, II............................. 22,000 -- -- --
Joseph Tang.................................... 20,000 -- -- --
Juliann Tenney................................. 22,000 -- -- --
NON-EXECUTIVE DIRECTOR GROUP............... 217,987 -- -- --
Floyd Diaz..................................... 11,667 (2,333) -- --
Jerry Sheehan.................................. 19,000 (5,000) -- --
NON-EXECUTIVE OFFICER EMPLOYEE GROUP....... 30,667 (7,333) -- --
- ------------------------
(1) Options of free-standing SARs are in-the-money if the fair market value of
the underlying securities exceed the exercise or base price of the option or
SAR. The closing market price of the Common Stock on December 31, 2000 was
$1.563.
The Board of Directors has unanimously approved and recommends that
shareholders vote for approval of the amendment to the incentive stock option
plan to permit the issuance of an additional 160,000 shares pursuant to the
plan.
FINANCIAL INFORMATION
Digital's audited consolidated financial statements for the years ended
December 31, 2000 and 1999 are contained in Digital's Annual Report on
Form 10-KSB for the year ended December 31, 2000, as amended by its
Form 10-KSB/A, which are incorporated herein by reference. The 2000 Annual
Report is being sent to the shareholders along with this proxy statement.
Digital's unaudited consolidated financial statements for the period ended
March 31, 2001 are contained in Digital's quarterly report on Form 10-QSB, which
is incorporated herein by reference.
The unaudited consolidated financial statements of Mobitec Holding AB and
Subsidiaries as of and for the years ended December 31, 2000 and 1999 and as of
and for the period ended March 31, 2001 and 2000 are attached to this proxy
statement as Appendix X.
56
Pro forma financial statements, consisting of the Digital and Mobitec
combined statements of operations for the year ended December 31, 2000 and for
the period ended March 31, 2001, and a combined balance sheet as of March 31,
2001, showing the effect of the acquisition, are attached to this proxy
statement as Appendix XI.
INFORMATION ABOUT DIGITAL
DESCRIPTION OF BUSINESS
Digital's Description of Business contained in its Annual Report on
Form 10-KSB for the year ended December 31, 2000, as amended, is incorporated
herein by reference.
DESCRIPTION OF PROPERTY
Digital's Description of Property contained in its Annual Report on
Form 10-KSB for the year ended December 31, 2000, as amended, is incorporated
herein by reference.
LEGAL PROCEEDINGS
Digital's description of Legal Proceedings contained in its Annual Report on
Form 10-KSB for the year ended December 31, 2000, as amended, is incorporated
herein by reference.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The description of Market for Common Equity and Related Stockholder matters
contained in Digital's Annual Report on Form 10-KSB for the year ended
December 31, 2000, as amended, is incorporated herein by reference.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Digital incorporates herein by reference its Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in its
annual report on Form 10-KSB for the year ended December 31, 2000, as amended,
and the Management's Discussion and Analysis contained in its quarterly report
on Form 10-QSB for the period ended March 31, 2001.
INFORMATION ABOUT MOBITEC
DESCRIPTION OF BUSINESS
Mobitec is approximately a $12.4 million sales volume company and operates
primarily in the Nordic market, which consists of Greenland, Greenland, Sweden,
Norway, Denmark, and Finland, for electronic destination sign systems. The
principal customers of Mobitec are transit bus, light rail manufacturers and
municipal transit authorities. Its technology is compatible with TwinVision of
North America, Inc. (TwinVision), a subsidiary of Digital, although it has opted
to not fully migrate to TwinVision light emitting diode/flip-dot hybrid type
technology. Mobitec uses traditional flip-dot displays indirectly illuminated by
strips of high-intensity light emitting diodes mounted in a similar location as
the fluorescent tubes of older illumination technology systems.
In addition to the Nordic markets, Mobitec operates in Australia,
participates in a 50:50 joint venture in Brazil, and recently established a
sales office in central Germany focused on smaller operators.
Mobitec was founded in 1987 and employs about 45 people. Its primary
operating office is in Herrljunga, Sweden located about a one-hour drive
East-Northeast of Goteborg Sweden. Electronic sign components including the
flip-dot strips, light emitting diode strips, housings, controller circuit
boards and cable assemblies are purchased in the open market through European
manufacturers and
57
assembled into completed sign systems in Herrljunga. The Swedish facility also
provides the assembled electronic signs, components and parts for its foreign
subsidiaries. Access from Central Europe is typically by land/sea from Denmark
or via air through either the Goteborg or Stockholm International Airports.
Mobitec is thus situated in a strategically important segment of this overall
general niche market and is further positioned to serve the former Eastern Block
markets.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for Mobitec's common stock. There are five holders
of Mobitec's stock. After the Acquisition, all the shares of Mobitec will be
owned by DRI Europa and/or Digital. Since January 1, 2000, Mobitec has paid
dividends consisting of SEK 519,000 ($48,258) to its shareholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Mobitec Holding AB ("Mobitec") has one wholly-owned subsidiary, Mobitec AB,
which in turn owns 100% of Mobitec GmbH and Mobitec Australia Pty. Ltd. In
addition, Mobitec AB owns 50% of a company operating in Brazil known as
Mobitec Ltda. Two other subsidiaries of Mobitec, Hexair AB and Mobitec Klimat
AB, are not part of the Stock Purchase Agreement and have been sold to Bengt
Bodin prior to the Closing Date. The financial results discussed below include
the results of these two subsidiaries that Digital is not acquiring. The results
of these two subsidiaries as compared to Mobitec's consolidated results for the
years 1999 and 2000 are not material. The sales of these two subsidiaries for
the fiscal years 2000 and 1999 was less than 6% of the total Mobitec sales for
these years. The net income for these two subsidiaries was a net loss of SEK
1,314,000 ($143,000) for the 2000 and a net income of SEK 113,000 ($14,000) for
1999. As of December 31, 2000, the total assets, liabilities and stockholders'
equity of these subsidiaries was $422,000, $296,000 and $127,000, respectively,
none of which amounts constituted more than 10% of the respective Mobitec
consolidated total. The absence of these two subsidiaries is not expected to
significantly impact future results.
Mobitec designs, manufactures or contracts for the manufacture of electronic
destination sign systems sold primarily in the transit and transportation
vehicle equipment market in Scandinavia, continental Europe, Brazil and
Australia. These customers include municipalities, regional and local
departments of transportation, transit agencies, vehicle manufacturers, and
public, private, or commercial operators of those vehicles. See "Information
about Mobitec--Description of Business" above. In fiscal 1999 and 2000, six
customers wholly owned by a major Scandinavian and European bus and truck
manufacturer accounted for 26.8% and 27.4%, respectively, of Mobitec's annual
revenues. These same customers collectively accounted for 28.5% and 30.8% of
Mobitec's revenues for the period ended March 31, 2001 and 2000, respectively.
The loss of these customers, collectively, would have a material adverse impact
on Mobitec's revenues. Mobitec expects that these customers will continue to
account for a significant portion of its annual revenues in the coming years.
Foreign currency assets and liabilities are translated using the Swedish
krona (SEK) exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rate prevailing throughout
the period. The effects of unrealized exchange rate fluctuations on translating
foreign currency assets and liabilities into U. S. dollars are accumulated as a
translation adjustment in stockholders' equity. The SEK to U.S. dollar foreign
exchange rates used in the financial statements are:
12/31/00 12/31/99 3/31/01 3/31/00
-------- -------- -------- --------
Balance Sheet....................................... 9.415 8.505 10.400 8.635
Income Statement.................................... 9.168 8.274 9.744 8.755
58
The following discussion provides an analysis of Mobitec's consolidated
results of operations and its liquidity and capital resources. This discussion
should be read in conjunction with the consolidated financial statements of
Mobitec and notes therein.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items included in Mobitec's Consolidated Statements of Operations. The
amounts stated below are in the functional currency of Sweden (krona -- SEK):
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
2000 1999 2001 2000
-------- -------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 59.6 68.4 53.5 57.7
----- ----- ----- -----
Gross profit.............................................. 40.4 31.6 46.5 42.3
----- ----- ----- -----
Operating expenses:
Selling, general and administrative....................... 33.1 25.0 29.6 31.3
Research and development.................................. 6.0 4.9 4.4 6.5
Other..................................................... .1 .4 -- --
----- ----- ----- -----
Total operating expenses................................ 39.2 30.3 34.0 37.8
----- ----- ----- -----
Operating income.......................................... 1.2 1.3 12.5 4.5
Other income (expense) and interest expense................. (.2) (.6) (0.4) (0.2)
----- ----- ----- -----
Income before income taxes................................ 1.0 .7 12.1 4.3
Income tax expense.......................................... (.5) .3 2.7 2.0
----- ----- ----- -----
Income before minority interest in net income of
consolidated subsidiary................................. .5 .4 9.4 2.3
Less: Minority interest in net income of consolidated
subsidiary................................................ (.7) .2 1.0 0.4
----- ----- ----- -----
Net income (loss)........................................... (.2)% .2% 8.4% 1.9%
===== ===== ===== =====
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 AND 1999
Net sales for the year ended December 31, 2000 were SEK 114,031,000
($12,437,774) an increase of SEK 17,938,000 ($823,923) or 18.7% as compared to
SEK 96,093,000 ($11,613,851) for the comparable year in 1999. The increase in
sales was primarily due to an increase in new customer sales of 12,256,000 SEK
($1,336,806) and 6,770,000 SEK ($738,428) in the recently formed Brazil and
Australia subsidiary operations, respectively.
Gross profit for the year ended December 31, 2000 was SEK 46,070,000
($5,025,021), an increase of SEK 15,724,000 ($1,357,388) or 51.8%, over gross
profit of SEK 30,346,000 ($3,667,634) for the year ended December 31, 1999. As a
percentage of sales, gross profit during the year ended December 31, 2000 was
40.4% of net sales, as compared to 31.6% during the corresponding year in 1999.
The increase in gross profit percentage was caused primarily by a lower cost of
electronic components.
Selling, general and administrative expenses during the year ended
December 31, 2000 were SEK 37,781,000 ($4,120,910), an increase of
SEK 13,767,000 ($1,218,566) or 57.3% as compared to expenses of SEK 24,014,000
($2,902,345) during the year ended December 31, 1999. This increase was
primarily due to an increase in total personnel costs of 2,362,000 SEK
($257,632) and an increase in external costs of 13,501,000 SEK ($1,472,000).
59
Research and development expenses for the year ended December 31, 2000 were
SEK 6,821,000 ($743,991) an increase of SEK 2,079,000 ($170,870) or 43.8%, as
compared to expenses of SEK 4,742,000 ($573,121) during the year ended
December 31, 1999. As a percent of sales, these expenses were 6.0% in 2000 and
4.9% for the same period in 1999. The increase was the result of higher expense
in development of electronic sign systems.
Total other income (expense) and interest income (expense) for the year
ended December 31, 2000 was SEK (215,000) (($23,451)), a decrease of SEK 316,000
($40,726) as compared to SEK (531,000) (($64,177)) for the year ended
December 31, 1999. This decrease is primarily due to the gain on the sale of the
Hexair subsidiary included in other income in 2000.
COMPARISON OF QUARTER ENDED MARCH 31, 2001 AND 2000.
Net sales for three months ended March 31, 2001 were SEK 34,207,000
($3,510,664), an increase of SEK 8,059,000 ($2,986,540) or 30.8% as compared to
SEK 26,148,000 ($524,129) for the comparable quarter in 2000. This increase in
sales was attributed to sales growth to both existing and new customers of
4,436,000 SEK ($455,267) and 1,919,000 SEK ($196,947) in Sweden and Brazil,
respectively, as well as new customer sales in the newly formed Australian
subsidiary of 3,778,000 SEK ($387,736).
Gross profit for the three months ended March 31, 2001 was SEK 15,901,000
($1,631,920) and represents an increase of SEK 4,829,000 ($367,312) or 43.6%,
over gross profit of SEK 11,072,000 ($1,264,608) for the three months ended
March 31, 2000. As a percentage of sales, gross profit during the quarter ended
March 31, 2001 was 46.5% of net sales, as compared to 42.3% during the
corresponding three months in 2000. The increase in gross profit was caused
primarily by improved margins from sales in Sweden.
Selling, general and administrative expenses during the three months ended
March 31, 2001 were SEK 10,113,000 ($1,037,897), an increase of SEK 1,935,000
($103,832) or 23.7% as compared to expenses of SEK 8,178,000 ($934,065) during
the three months ended March 31, 2000. This increase was due primarily to
increased personnel and fringe benefit costs of 864,000 SEK ($88,672) in Sweden
and of 371,000 SEK ($38,076) in Germany, as well as new personnel costs of
149,000 SEK ($15,292) in the Australian subsidiary.
Research and development expenses for the three months ended March 31, 2001
were SEK 1,500,000 ($153,945) a decrease of SEK 205,000 ($40,795) or 12.0%, as
compared to expenses of SEK 1,705,000 ($194,740) during the three months ended
March 31, 2000. As a percent of sales these expenses were 4.4% as of the three
months ended March 31, 2001 and 6.5% for the same period in 2000. The decrease
was primarily due to timing differences for such expenses.
Total other income (expense) and interest income (expense) for the three
months ended March 31, 2001 was SEK (148,000) (($15,189)), an increase of
SEK (103,000) ($10,049)) as compared to SEK (45,000) (($5,190)) for the three
months ended March 31, 2000. This increase is primarily due to increased
interest expense associated with higher average borrowings during the three
months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Mobitec has an agreement with a bank in which Mobitec may currently borrow
up to a maximum of 4,500,000 SEK ($477,961). At December 31, 2000 and 1999,
4,406,000 SEK ($467,961) and 4,531,000 SEK ($547,619), respectively, was
outstanding. At March 31, 2001 and 2000, SEK 4,525,000 ($435,096) and SEK
4,775,000 ($552,982), respectively, was outstanding. Advances under the
agreement are subject to a borrowing base of 75% of eligible accounts
receivable. The line of credit bears interest at 5.1% and is collateralized by
accounts receivable. This line of credit agreement expires and becomes due on
60
July 31, 2001 and can be extended. The terms of the agreement, if extended
beyond July 31, 2001, will not change.
Mobitec also has an agreement with a bank in which it may borrow up to
SEK 6,000,000 ($637,281) of which SEK 5,655,000 ($600,637) was outstanding at
December 31, 2000 and SEK 7,019,000 ($674,904) was outstanding at March 31,
2001. The terms of this agreement require the payment of an unused credit line
fee equal to 0.5% of the unused portion and interest at 5% of the oustanding
balance. This agreement is secured by a mortgage on substantially all assets of
Mobitec. This agreement expires on July 31, 2001 and can be extended. The terms
of the agreement, if extended beyond July 31, 2001, will not change.
Mobitec has no material commitments for capital expenditures.
As of December 31, 2000 Mobitec's principal sources of liquidity included
cash and cash equivalents of SEK 2,077,000 ($220,605), trade accounts receivable
of SEK 19,494,000 ($2,070,526), inventories of SEK 15,630,000 ($1,660,117) and
trade accounts payable of SEK 10,459,000 ($1,110,887) providing Mobitec with net
working capital of SEK 10,677,000 ($1,134,041). As of March 31, 2001, Mobitec's
principal source of liquidity included cash and cash equivalents of
SEK 2,182,000 ($209,808), trade accounts receivable of SEK 21,966,000
($2,112,115) inventories of SEK 15,557,000 ($1,495,865) and trade accounts
payable of SEK 10,614,000 ($1,020,577), providing Mobitec with net working
capital of SEK 14,129,000 ($1,358,558).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF DIGITAL
Effective April 1997, Digital entered into a lease agreement for an office
building with a stockholder, Dr. James Paul. Digital paid $53,118 in rental fees
during both 2000 and 1999 to Mr. Paul. Commitments under this lease are $57,840
and $60,156 for the years 2001 and 2002, respectively.
Digital purchases electronic components supporting the transportation
products segment from a major stockholder, Lite Vision Corporation ("Lite
Vision"), a public Taiwan company. Lite Vision holds 12.2% of the outstanding
shares of common stock. The components consist primarily of light emitting
diodes (LED) printed circuit boards and power supplies. Digital purchased
approximately $6.7 million and $5.3 million during 2000 and 1999, respectively.
A director of Digital, John D. Higgins, is employed by Investec Ernst &
Company, an investment banking and securities firm that is providing a fairness
opinion from a financial point of view with respect to the proposed acquisition
and related transactions for a flat fee. See "Fairness Opinion." Further,
Mr. Higgins will receive a fee upon successful completion of the Renaissance
Capital Group, Inc. convertible debenture financing. See "Interest of Certain
Persons in Proposed Acquisition."
Digital continues to follow a policy pursuant to which material transactions
between Digital and its executive officers, directors and principal shareholders
(I.E., shareholders owning beneficially 5% or more of the outstanding voting
securities of Digital) shall be submitted to the Board of Directors for approval
by a disinterested majority of the directors voting with respect to the
transaction.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, Digital's directors, its
executive officers, and any persons holding more than ten percent of Digital's
Common Stock are required to report their initial ownership of Digital's Common
Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and Digital. Specific due dates for these reports have been
established and Digital is required to disclose in this proxy statement any
failure to file, or late filing, of such reports with respect to the fiscal year
2000. To Digital's knowledge, based solely on a review of the copies of reports
furnished to Digital and written representations with respect to filing of such
reports, Digital believes that all Section 16(a) filing requirements applicable
to Digital's executive officers, directors and
61
greater than ten percent beneficial owners were complied with for the fiscal
year ended December 31, 2000.
SHAREHOLDER PROPOSALS
Shareholders who intend to submit proposals for inclusion in the Proxy
Statement for the 2002 annual meeting of shareholders must do so by sending the
proposal and supporting statements, if any, to Digital no later than
January 31, 2002. Such proposals should be sent to the attention of
Mr. Lawrence A. Taylor, 5949 Sherry Lane, Suite 1050, Dallas, Texas 75255.
OTHER MATTERS
Except for the matters described herein, management does not intend to
present any matter for action at the annual meeting and knows of no matter to be
presented at such annual meeting that is a proper subject for action by the
shareholders. However, if any other matters should properly come before the
annual meeting, it is intended that votes will be cast pursuant to the authority
granted by the enclosed proxy in accordance with the best judgment of the person
acting under the proxy.
DOCUMENTS INCORPORATED BY REFERENCE
Digital's Annual Report on Form 10-KSB and amended 10-KSB/A for the fiscal
year ended December 31, 2000 and Digital's Form 10-QSB for the period ended
March 31, 2001. These incorporated documents do not form any part of the
material for the solicitation of any Proxy.
A copy of the foregoing incorporated Form 10-KSB, without exhibits, is being
provided to shareholders with this proxy statement as part of Digital's annual
report. The Form 10-QSB for the period ended March 31, 2001 is being provided to
shareholders with this proxy statement. The incorporated Form 10-KSB/A is
available without charge to any shareholder of the Company upon written request
to Mr. Lawrence A. Taylor, 5949 Sherry Lane, Suite 1050, Dallas, Texas 75255.
These incorporated documents can also be viewed online at WWW.SEC.GOV.
62
APPENDIX A
DIGITAL RECORDERS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder hereby appoints David M. Furr, proxy and
attorney-in-fact for the undersigned, with full power to designate a substitute
representative, to represent the undersigned and to vote all of the shares in
Digital Recorders, Inc., a North Carolina corporation ("Digital"), which the
undersigned is entitled to vote at the annual meeting of the shareholders of
Digital to be held at the Microelectronics Center of North Carolina, 3021
Cornwallis Road, Research Triangle Park, North Carolina 27709, on June 25, 2001,
at 10:00 a.m., local time, and at any adjournment thereof as hereinafter
specified upon the proposals listed below and as more particularly in the proxy
statement of Digital dated June 6, 2001 (the "Proxy Statement"), receipt of
which is hereby acknowledged. This proxy is first being mailed on or about
June 8, 2001.
/X/ Please mark your vote as in this example
FOR AGAINST ABSTAIN
1. Approval of the issuance of 430,000 restricted / / / / / /
shares of Company Common Stock, pursuant to a Stock
Purchase Agreement among Digital, DRI Europa AB and
Bengt Bodin, Bengt Bodin, Annacarin Bodin, Mattias
Bodin, Tobias Bodin, Bertil Lindqvist (collectively
the "Sellers"), to acquire all of the outstanding
stock of Mobitec Holding AB.
FOR AGAINST ABSTAIN
2. Approval of the issuance of up to 100,000 shares of / / / / / /
Digital Common Stock underlying the Bodin Warrants
pursuant to the Bodin Warrant Agreement between
Digital and Bengt Bodin.
FOR AGAINST ABSTAIN
3. Approval of the authorization and issuance of / / / / / /
Convertible Debentures in the aggregate amount of
$3,000,000 to be issued to certain Investment Funds
associated with Renaissance Capital Group, Inc.
FOR AGAINST ABSTAIN
4. Approval of the issuance of up to 1,500,000 shares / / / / / /
of Digital's Common Stock, to be issued if the
Convertible Debentures are converted.
A-1
FOR AGAINST ABSTAIN
5. Approval of the issuance of up to 200,000 shares of / / / / / /
Digital Common Stock underlying warrants granted to
the Convertible Debenture holders.
6. To vote upon the proposal to elect the nominees to
serve on Digital's board of directors for a term of
one to three years or until their successors are
elected and qualified.
/ / For Election of All Nominees Listed / / To Withhold Authority to Vote for all
Nominees Listed
Instruction: To withhold authority to vote for any individual nominee, strike through the nominee's
name below:
FOR AGAINST ABSTAIN
a. John D. Higgins / / / / / /
b. J. Phillips L. Johnston, JD / / / / / /
c. C. James Meese, Jr. / / / / / /
d. Stephanie L. Pinson / / / / / /
e. John K. Pirotte / / / / / /
f. Joseph Tang / / / / / /
g. Lawrence A. Taylor / / / / / /
h. Juliann Tenney / / / / / /
i. David L. Turney / / / / / /
FOR AGAINST ABSTAIN
7. To ratify the appointment of McGladrey & Pullen, LLP / / / / / /
as the independent certified public accountants of
Digital.
FOR AGAINST ABSTAIN
8. To consider and act upon a proposal to amend / / / / / /
Digital's Incentive Stock Option Plan to permit the
issuance of an additional 160,000 shares of Common
Stock pursuant to the Plan.
I PLAN TO ATTEND THE ANNUAL MEETING / /
The shares represented hereby will be voted as specified. If no
Specifications are made, such shares will be voted FOR the above proposals for
which no specification is made.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THIS MEETING REGARDLESS
OF THE NUMBER OF SHARES YOU HOLD. PLEASE SIGN, DATE, AND RETURN THE PROXY
PROMPTLY IN THE ENCLOSED SELF ADDRESSED STAMPED ENVELOPE.
Signature(s) ____________________________________________________
Dated ________________, 2001
NOTE: Please sign name exactly as your name appears on the Stock
Certificate. When signing as attorney, executor, administrator, trustee or
guardian, please give the full title. If more than one trustee, all should sign.
All joint owners must sign.
A-2
APPENDIX I
STOCK PURCHASE AGREEMENT
BETWEEN
BENGT BODIN,
ANNACARIN BODIN,
MATTIAS BODIN,
TOBIAS BODIN,
BERTIL LINDQVIST,
AND
DRI EUROPA AB,
AND
DIGITAL RECORDERS, INC.,
DATED [ ] 2001
I-1
TABLE OF CONTENTS
1. Definitions................................................. I-5
2. Sale and purchase of the shares............................. I-8
3. Purchase Price.............................................. I-8
4. Conditions precedent to the purchaser's obligations......... I-11
5. Closing..................................................... I-11
6. Representations and warranties of all the sellers........... I-12
7. Representations and warranties of the Bodin Sellers......... I-13
8. Covenants................................................... I-20
9. Indemnification............................................. I-23
10. Representations and warranties of the purchaser............. I-25
11. Closing date................................................ I-26
12. General provisions.......................................... I-26
I-2
APPENDICES
1.9 a - b Consolidated Financial Statements
1.14 a - b Financial Statements
1.19 Interim Financial Statements
3.2.1.3 Registration Rights Agreement
3.2.1.4 Promissory Note
3.2.1.5 Bodin Warrant Agreement
5.3 Legal Opinion
6.5 a) Articles of Association, Share
Ledgers
7.4 Pledges, commitments and
contingent liabilities
7.6 Dividends since 1st January 2000
7.8 Inventory stored and obsolete
products
7.19 Material Agreements and Warranties
7.30 Customer List
7.36 Insurances
7.39 Employment conditions
7.41 List of persons authorised to sign
7.42 Bonus agreement
7.46 Pension arrangement Bengt Bodin
8.4 Mobitec Stock Option Program
8.5 Trademark License Agreement
8.10 Disputes
I-3
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of [ ] 2001, by
and between
Bengt Bodin, an individual resident at La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France;
Annacarin Bodin, an individual resident at La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France;
Mattias Bodin, an individual resident at Parkgatan 10, SE-112 30 Stockholm,
Sweden;
Tobias Bodin, an individual resident at Ovre Husargatan 23 A, SE-413 14
Gothenburg, Sweden; and
Bertil Lindqvist, an individual resident at Nybrogatan 45 B, 114 39
Stockholm.
(Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin and Bertil
Lindqvist are hereinafter collectively referred to as the "Sellers".)
AND
DRI Europa AB, a Swedish corporation, in the process of incorporation, to
have its principal office in Gothenburg, (the "Purchaser") and
Digital Recorders, Inc., a company duly incorporated and organised under the
laws of the state of North Carolina, USA, having its principal office at
Durham, North Carolina, ("DRI").
PREAMBLES
A. The Sellers are at the date hereof the owners of the shares (the Shares) of
Mobitec Holding AB, a Swedish corporation, registration number 556546-6793,
(the "Company"). The ownership of the Shares is, at the date hereof as
follows:
Bengt Bodin................................................. 51,900 shares
Annacarin Bodin............................................. 20,400 shares
Mattias Bodin............................................... 9,100 shares
Tobias Bodin................................................ 9,100 shares
Bertil Lindqvist............................................ 9,500 shares
--------------
TOTAL....................................................... 100,000 shares
B. The Company is the parent company of a group of companies engaged in
developing, manufacturing, marketing and selling information systems for
public transport vehicles.
C. The aforesaid group of companies has presently a strong market position on
its respective market, has a customer base on these markets and has highly
professional and skilled personnel in the field of business where the group
of companies is active.
D. The Purchaser is a wholly owned subsidiary of Digital Recorders, Inc.
E. DRI is engaged in the businesses of design, development, production,
marketing, sales and service of information systems for transit and
transportation markets worldwide.
F. DRI, using the Purchaser as a vehicle therefor, is desirous of strengthening
its presence and its operations in Europe. After analysis of the market
situation and the business environment in Europe, DRI believes that a
stronger presence and good business opportunities will be achieved by the
purchase of the shares of the Company.
I-4
G. The Sellers are willing to sell the Shares to the Purchaser and/or to DRI on
the terms and conditions set forth herein subject to the exercise by the
Purchaser and/or DRI of its right under the Option Agreement.
H. Although Bertil Lindqvist, owner of 9,500 shares of the Company, agrees to
sell his shares it is understood that he shall be paid the purchase price
for his portion of the shares in full on the Closing Date and shall only be
liable hereunder to the extent explicitly set forth hereunder. Any other
liability for breach of representations or warranties or any other failure
or breach under this Agreement will be assumed by the other Sellers in full
as if they were the Sellers of Bertil Lindqvist's shares too.
I. The Sellers have submitted to the Purchaser the budget for 2001, which has
been prepared with normal and reasonable care in accordance with previous
practice. The Board of Directors of Mobitec AB has stated that there is some
degree of uncertainty with respect to the budgeted result for Mobitec Ltda
but that this will probably be compensated by the result of other entities
of the Group. For the avoidance of doubt the purchase price for the Shares
is, however, not based on any forecasts or budgets issued by the Company or
any Subsidiary with respect to the operation of the Group beyond the Closing
Date.
J. It is understood between the parties that all shares of Klimat and Hexair
will be sold prior to Closing and that such sale will have no negative
effect on the Company or any Subsidiary except for changes in the net equity
to be reflected when adjusting the Preliminary Purchase Price into the Final
Purchase Price as set forth in sub-section 3.2.2 hereof.
K. Taking into consideration what has been set forth above, the Sellers and the
Purchaser, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purpose of this Agreement the following terms have the meanings set
forth below.
1.1 Bertil Lindqvist Shares shall mean the 9,500 shares out of the Shares
held by Bertil Lindqvist.
1.2 Bodin Sellers shall mean the aforesaid Bengt Bodin, Annacarin Bodin,
Mattias Bodin and Tobias Bodin collectively and Bodin Seller shall mean
any of them.
1.3 Bodin Shares shall mean the 90,500 shares out of the Shares held by the
Bodin Sellers.
1.4 Bodin Warrant Agreement shall mean the agreement referred to in
sub-section 3.2.1.5 below.
1.5 Closing shall mean the completion of the sale and purchase of the Shares
in accordance with this Agreement.
1.6 Closing Financial Statement shall mean the audited profit and loss
accounts and the balance sheets of the Company and each Subsidiary as
well as of the Group on a consolidated basis for the financial year 2000.
1.7 Closing Date shall mean the date set forth in section 11 below.
1.8 Company shall mean the aforesaid Mobitec Holding AB.
1.9 Consolidated Financial Statements shall mean the audited consolidated
annual reports for the Group for the financial years 1998 and 1999,
APPENDIX 1.9 a)-b) hereto.
1.10 DRI shall mean the aforesaid Digital Recorders, Inc.
1.11 Encumbrance shall mean any charge, claim, condition, lien, option,
pledge, security interest, right of first refusal or restriction of any
kind, including any restriction on use, voting, transfer or receipt of
income.
I-5
1.12 Family shall mean wife, husband and co-habitant (Sw. sambo).
1.13 Financial Documents shall mean the Financial Statements, the Consolidated
Financial Statements and the Interim Financial Statements.
1.14 Financial Statements shall mean the audited annual reports of the Company
and each Subsidiary for the financial years 1998 and 1999, APPENDIX 1.14
a)-b) hereto.
1.15 GAAP shall with respect to the Company and the Swedish Subsidiaries mean
the generally accepted accounting principles including the statements and
recommendations of the Swedish Financial Accounting Standards Council
(Sw. Redovisningsradet) of the Accounting Board (Sw. Bokforingsnamnden)
as well as the Swedish Accounting Act (Sw. Bokforingslagen) and shall
with respect to non-Swedish Subsidiaries mean the generally accepted
accounting principles in the country of domicile of each such Subsidiary.
1.16 Group shall mean the Company and the Subsidiaries.
1.17 Hexair shall mean Hexair AB, registration number 556505-5067.
1.18 Intellectual Property shall mean patents, trademarks, designs,
applications for any of the foregoing, copyrights and registerable
business names--including the name "Mobitec" but with the observation of
what has been set forth in sub-section 8.5 below--and any similar rights
in any country and all rights under licenses and consents in relation to
any of the foregoing.
1.19 Interim Financial Statements shall mean the profit and loss accounts and
the balance sheets of the Company and each Subsidiary as well as of the
Group on a consolidated basis for the period 1 January--31 March 2000,
Appendix 1.19 hereto.
1.20 Key Employee shall mean each of Bob Barwick, Roberto Demore and Bjorn
Ronnhede.
1.21 Klimat shall mean Mobitec Klimat AB, registration number 556487-3403.
1.22 Know-how shall--irrespective of whether it is in verbal or any other
form--mean all technical data, specifications, procedures, manufacturing
information, product information as well as all commercial information
such as but not limited to the Customer List (as defined in
sub-section 7.30 below) market information, information on customers and
competitors, price calculations and offers all of which is used in the
Company's or any Subsidiary's development, manufacture, marketing,
selling or use of any product of the Company or any Subsidiary
irrespective of whether such product is in one or more of the stages of
development, manufacture, marketing, sale or use.
1.23 Loss shall mean any claims, losses, deficits, damages, costs, liabilities
and expenses incurred by the Group, the Company, any Subsidiary, DRI, the
Purchaser or any of the Sellers, as the case may be, including settlement
costs and any reasonable legal, accounting and other expenses for
investigation or defending any actions or threatened actions.
1.24 Except for employment agreements, the contents of which appears from
Appendix 7.39, Material Agreement shall mean all agency-, distributorship
and other sales representative agreements as well as all license- and
secrecy agreements to which the Company or any Subsidiary is a party as
well as any other agreement, contract, obligation, promise or undertaking
(whether written or oral and whether express or implied) that is legally
binding between the Company or any Subsidiary on the one hand and any
third party or any of the Sellers on the other hand and having a contract
value of more than SEK 200,000 or a remaining contract term or a period
of notice of termination of more than six months.
1.25 Mobitec Stock Option Program shall mean the stock option program of the
Company, described in APPENDIX 8.4 hereto.
I-6
1.26 Option Agreement shall mean the agreement entered into between the
Sellers, the Purchaser and DRI under which the Sellers have granted the
Purchaser and DRI options to acquire the Shares.
This Stock Purchase Agreement is an appendix to the Option Agreement and
forms an integral part thereof.
1.27 Person shall mean any individual, corporation, general or limited
partnership, limited liability company, joint venture, estate, trust,
association, organisation, labour union, or other entity or governmental
body, agency or authority.
1.28 Promissory Notes shall mean the promissory notes referred to in
sub-section 3.2.1.4 below.
1.29 Purchaser shall mean the aforesaid DRI Europa AB, in the process of
incorporation.
1.30 Related Person shall with respect to a particular individual mean:
(i) each other member of such individual's Family;
(ii) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(iii) any Person in which such individual or members of such individual's
Family hold (individually or in the aggregate) a material interest;
and
(iv) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer,
partner, executor or trustee (or in a similar capacity).
1.31 Restricted Shares shall mean the 430,000 shares of the voting Common
Stock of DRI of the class authorized as of the date hereof to be issued
to Mattias Bodin and Tobias Bodin pursuant to the terms hereof.
1.32 Shares shall mean all the shares numbered from 1 to 100,000 of the
capital stock of the Company.
1.33 Sellers shall mean the aforesaid Bengt Bodin, Annacarin Bodin, Mattias
Bodin, Tobias Bodin and Bertil Lindqvist collectively and Seller shall
mean any of them.
1.34 Subsidiary shall mean each of
Mobitec AB, reg. number 556344-9999
Mobitec GmbH, reg. number DE 812 639 645
Mobitec Australia Pty Ltd, reg. number 092 439 159
Mobitec Brazil Ltda, reg. number CNPJ-03.393.064/0001-98
and Subsidiaries shall mean all of them.
1.35 The expression "Acquired Knowledge" shall mean that the statement has
been made after the Bodin Sellers have made due and reasonable inquiries
among those of the employees, consultants and representatives of the
Company and any Subsidiary who reasonably should have been asked with
respect to the relevant matter and that the statement shall be deemed to
include the knowledge obtained as aforesaid from such employees,
consultants and representatives. Knowledge, as aforesaid, of one Bodin
Seller shall be deemed to be the knowledge of all Bodin Sellers.
1.36 The expression "to the best of Bodin Sellers' Knowledge" shall mean that
the statement shall be deemed to include all information which--without
this being Acquired Knowledge--
I-7
reasonably should be known to the Bodin Sellers. Knowledge, as aforesaid,
of one Bodin Seller shall be deemed to be the knowledge of all Bodin
Sellers.
2. SALE AND PURCHASE OF THE SHARES
Upon the terms and subject to the conditions of this Agreement the Sellers
agree to sell to the Purchaser and the Purchaser agrees to purchase from the
Sellers the Shares.
3. PURCHASE PRICE
3.1 BERTIL LINDQVIST SHARES
The portion of the purchase price to be paid to Bertil Lindqvist for the
Bertil Lindqvist Shares shall be SEK 5,700,000 (five million seven hundred
thousand), the said amount to be paid in cash on the Closing Date--subject
to sections 4 and 5 below--to Aragon Fondkommission AB's bank account with
SEB, account number 5228 100 2225, swift code MT 100 ESSESSESS and giving
reference to Bertil Lindqvist's account with Aragon Fondkommission AB,
account number 457325.
3.2 BODIN SHARES
The purchase price for the Bodin Shares is a Preliminary Purchase Price to
be adjusted into a Final Purchase Price in accordance with the provisions
of sub-section 3.2.2 below.
The Preliminary Purchase Price has been calculated and agreed upon between
the Bodin Sellers and the Purchaser inter alia on the basis of the balance
sheet forming part of the Interim Financial Statement for the Group on a
consolidated basis as per 31 March 2000, Appendix 1.19 hereto.
3.2.1 PRELIMINARY PURCHASE PRICE
The following is the Preliminary Purchase Price to be paid to the Bodin
Sellers for the sale and transfer to the Purchaser of the Bodin Shares:
3.2.1.1 The Sellers shall notify the Purchaser and DRI in writing on 31
January 2001 at the latest of the amount set forth in
sub-section 3.2.1.2 to be paid in cash to each of the Bodin Sellers,
the number of Restricted Shares set forth in sub-section 3.2.1.3 to be
transferred to each of Mattias Bodin and Tobias Bodin as well as the
amounts of the Promissory Notes set forth in sub-section 3.2.1.4.
In the event that the Purchaser and DRI have not received notification as
aforesaid the aforesaid cash amounts, the Restricted Shares and the
amounts of the Promissory Notes shall be divided between the Bodin Sellers
in proportion to their holding of shares in the Company.
3.2.1.2 The cash amount of USD 3,680,000 to be paid in cash on the Closing Date
by wire transfer to the following Bodin Sellers' bank accounts
BANK
----------------------------------
Bengt Bodin Banque Populaire, 22bd Victor
Hugo, FR-0600 Nice
Annacarin Bodin Skandiabanken
Mattias Bodin Skandiabanken
TobiasBodin SEB
3.2.1.3 The Restricted Shares shall be transferred to the Bodin Sellers on the
Closing Date, which shares shall be voting Common Stock of DRI, subject
to all of the terms and conditions of the Registration Rights
Agreement, Appendix 3.2.1.3 hereto, dated as of the date hereof by and
I-8
among DRI, Bengt Bodin, Annacarin Bodin, Mattias Bodin and Tobias
Bodin. All certificates evidencing the Restricted Shares shall bear
legends as specified in Section 5.4 hereunder. The said shares shall be
divided among the Bodin Sellers (subject to adjustments as provided in
sub-sections (a) through (d) below:
(a) If, on or before the Closing Date, DRI shall issue any of its Common
Stock as a share dividend or subdivide the number of outstanding
shares of Common Stock into a greater number of shares then, in
either of such cases, the number of Restricted Shares issuable
pursuant to this Agreement shall be proportionately increased; and
conversely, if DRI shall reduce the number of outstanding shares of
Common Stock by combining such shares into a smaller number of shares
then, in such case, the number of Restricted Shares issuable pursuant
to this Agreement shall be proportionately decreased. If DRI shall,
on or before the Closing Date, declare a dividend payable in cash on
its Common Stock and shall at substantially the same time offer to
its shareholders a right to purchase new Common Stock from the
proceeds of such dividend or for an amount substantially equal to the
dividend, all Common Stock so issued shall, for the purpose of this
Agreement, be deemed to have been issued as a share dividend. Any
dividend paid or distributed upon Common Stock in shares of any other
class of securities convertible into Common Stock shall be treated as
a dividend paid in Common Stock to the extent that Common Stock is
issuable upon the conversion thereof.
(b) If, on or before the Closing Date, DRI shall be recapitalized by
reclassifying its outstanding Common Stock, or DRI or a successor
corporation shall consolidate or merge with or convey all or
substantially all of its or any successor corporation's property and
assets to any other corporation or corporations (any such corporation
being included within the meaning of the term "successor corporation"
used above in the event of any consolidation or merger of any such
corporation with, or the sale of all or substantially all of the
property of any such corporation, to another corporation or
corporations), the Bodin Sellers shall thereafter have the right to
receive, upon the basis and upon the terms and conditions and at the
time specified in this Agreement, in lieu of the Restricted Shares
theretofore issuable hereunder, such shares, securities or assets as
may be issued or payable with respect to, or in exchange for, the
number of Restricted Shares theretofore issuable hereunder had such
recapitalization, consolidation, merger or conveyance not taken place
and, in any such event, the rights of the Bodin Sellers to an
adjustment in the number of Restricted Shares issuable hereunder as
herein provided shall continue and be preserved in respect of any
shares, securities or assets which the Bodin Sellers become entitled
to receive.
(c) If: (i) DRI shall take a record of holders of its Common Stock for
the purpose of entitling them to receive a dividend payable otherwise
than in cash, or any other distribution in respect of the Common
Stock (including cash), pursuant to, without limitation, any
spin-off, split-off, or distribution of DRI's assets; or (ii) DRI
shall take a record of the holders of its Common Stock for the
purpose of entitling them to subscribe for or purchase any shares of
any class or to receive any other rights; or (iii) in the event of
any classification, reclassification or other reorganization of the
securities which DRI is authorized to issue, consolidation or merger
by DRI with or into another corporation, or conveyance of all or
substantially all of the assets of DRI; or (iv) in the event of any
voluntary or involuntary dissolution, liquidation or winding up of
DRI; then, and in any such case, DRI shall mail to the Bodin Sellers,
at least 15 days prior thereto, a notice stating the date or expected
date on which a record is to be taken for the purpose of such
dividend, distribution or rights, or the date on which such
classification, reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up,
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as the case may be, will be effected. Such notice shall also specify
the date or expected date, if any is to be fixed, as to which holders
of Common Stock of record shall be entitled to participate in such
dividend, distribution or rights, or shall be entitled to exchange
their Common Stock or securities or other property deliverable upon
such classification, reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up, as the
case may be.
(d) If DRI, on or before the Closing Date, shall sell all or
substantially all of its property, dissolve, liquidate or wind up its
affairs, the Bodin Sellers may thereafter receive upon exercise
hereof, in lieu of each Restricted Share which it would have been
entitled to receive, the same kind and amount of any securities or
assets as may be issuable, distributable or payable upon any such
sale, dissolution, liquidation or winding up with respect to each
share of Common Stock of DRI issuable to the Bodin Sellers hereunder.
3.2.1.4 The Promissory Notes totalling USD 2,000,000 (two million) to be issued
and submitted to each Bodin Seller on the Closing Date, the Promissory
Notes to carry the amounts mentioned below, subject to any adjustment
set forth in sub-section 3.2.2.8 below, and falling due 36 months from
the Closing Date and accruing interest at the rate of 9 per cent per
annum payable quarterly in arrears. The Promissory Notes shall have the
contents set forth in APPENDIX 3.2.1.4 hereto. The detailed terms of
the Promissory Notes appear from the said Appendix.
3.2.1.5 The Bodin Warrant Agreement, APPENDIX 3.2.1.5 hereto to be executed and
delivered to the Bodin Sellers. As set forth in the Bodin Warrant
Agreement, DRI will grant to the Bodin Sellers the right to purchase
for five (5) years (the "Warrant") up to an additional 100,000 shares
of registered Common Stock of DRI (the "Warrant Shares") at an exercise
price of USD 4.00 per share (the "Warrant Exercise Price"), all as more
fully set forth in the Bodin Warrant Agreement, subject to all the
terms and conditions of the Registration Rights Agreement.
3.2.2 FINAL PURCHASE PRICE
3.2.2.1 The Preliminary Purchase Price set forth in sub-section 3.2.1 shall be
adjusted into a Final Purchase Price on the basis of the balance sheet
forming part of the Closing Financial Statement for the Group on a
consolidated basis.
3.2.2.2 The Bodin Sellers shall procure that the Company prepares the Closing
Financial Statement which shall be audited by the Company's chartered
accountant (auktoriserad revisor) and submit the same to the Purchaser
within 15 days from the Closing Date, however, not earlier than 10
February 2001 together with all accounting and other documentation used
in the preparation of the Closing Financial Statement.
3.2.2.3 In the event that there is any discrepancy between the net equity
appearing in the balance sheet forming part of the Closing Financial
Statement for the Group--including the Company--on a consolidated basis
(koncernens beskattade egna kapital) and the net equity SEK 10.867.000
appearing in the balance sheet forming part of the Interim Financial
Statement on a consolidated basis for Mobitec AB, Mobitec GmbH and
Mobitec Ltda as per 31 March 2000, APPENDIX 1.19 hereto (koncernens
beskattade egna kapital) the Preliminary Purchase Price shall be
increased or decreased, as the case may be, by the full amount of any
such discrepancy provided the discrepancy exceeds SEK 100.000.
3.2.2.4 The aforesaid submission by the Bodin Sellers to the Purchaser of the
Closing Financial Statement shall be accompanied by the Bodin Sellers'
written statement of any discrepancy of the net equity as aforesaid and
reasonably detailed information on the calculation thereof.
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3.2.2.5 The Purchaser shall within 15 days from receipt of the Closing
Financial Statement and the documentation mentioned in
sub-section 3.2.2.2 as well as the Bodin Sellers' written statement
mentioned in sub-section 3.2.2.4 including information on the
calculation thereof notify the Bodin Sellers in writing whether the
Purchaser accepts the contents of the Closing Financial Statement
and/or the Bodin Sellers' calculation of the discrepancy, if any, of
the net equity as aforesaid. Failing such notice the Final Purchase
Price shall be determined according to the statement of the Bodin
Sellers referred to in sub-section 3.2.2.4 above.
3.2.2.6 In the event that the Bodin Sellers and the Purchaser have not agreed
in writing within 15 days from the date of the Bodin Sellers' receipt
of the Purchaser's notification mentioned in sub-section 3.2.2.5 above
the matter of the contents of the Closing Financial Statement and the
calculation of the discrepancy of the net equity shall be referred to
arbitration in accordance with sub-section 12.13 below unless the Bodin
Sellers and the Purchaser agree in writing on an extension of the
21 days period..
3.2.2.7 The Closing Financial Statement shall be prepared in accordance with
GAAP and all applicable laws applied on a basis consistent with that of
the Interim Financial Statements.
3.2.2.8 The amounts of the Promissory Notes shall proportionally be increased
or decreased, as the case may be, by the discrepancy of the net equity
as set forth in sub-sections 3.2.2.3 - 3.2.2.7 above should it exceed
the amount SEK 100,000.
4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS
4.1 The obligation of the Purchaser to consummate this Agreement is subject
to the satisfaction of the Purchaser at or prior to the Closing Date of
all of the following conditions, anyone or more of which may be waived,
in whole or in part, by the Purchaser.
4.1.1 All of the statements, representations, warranties and covenants of
Bertil Lindqvist and of the Bodin Sellers contained herein are true and
accurate, not only when made but also at and as of the Closing Date with
the same force and effect as if made at and as of such time.
4.1.2 No litigation, action, suit or other proceeding shall be pending or
threatened against any of the Sellers, the Purchaser, DRI or the Company
or any Subsidiary at the Closing Date wherein an unfavourable judgement,
decree or order would prevent or make unlawful the carrying out of this
Agreement.
5. CLOSING
The Closing shall take place on the Closing Date at the offices of
Advokatfirman Vinge KB at Nils Ericsonsgatan 17, Gothenburg, or at such other
place as is agreed between the Bodin Sellers and the Purchaser.
At the Closing each of the Sellers and the Purchaser shall do or procure to
be done all acts necessary in order to consummate the transactions contemplated
by this Agreement including, but not limited to, the following:
5.1 Bertil Lindqvist shall, subject to receipt of the purchase price for the
Bertil Lindqvist Shares referred to in sub-section 3.1 above, and each
Bodin Seller shall, subject to receipt of the Preliminary Purchase Price
referred to in sub-section 3.2.1 above, deliver to the Purchaser the
share certificates evidencing the Shares, duly endorsed in favour of the
Purchaser;
5.2 The Bodin Sellers shall present to the Purchaser the share ledger of the
Company evidencing that the Purchaser as per the Closing Date has been
registered as owner of the Shares.
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The Bodin Sellers shall further present to the Purchaser the original of
the share certificates as well as certified copies of the share ledger or
corresponding document with regard to each Subsidiary evidencing that all
the shares of each Subsidiary as per the Closing Date has the following
registered ownership:
Mobitec AB total of 100,000 shares 100% held by the Company
Mobitec GmbH 100% held by Mobitec AB
Mobitec Ltda total of 360,000 quotas 180,000 quotas or 50% held
by Mobitec AB
Mobitec Australia Pty Ltd total of one share held by Mobitec AB
5.3 DRI shall submit to the Bodin Sellers a legal opinion issued by Gray,
Leyton, Kersh, Solomon, Sigmon, Furr & Smith, P.A. in the form appearing
from APPENDIX 5.3 hereto.
5.4 DRI shall deliver to the Bodin Sellers the Restricted Shares. The
certificates evidencing said shares shall contain a legend showing them
to be restricted shares of DRI subject to restrictions on sale or
transfer provided for in the United States Securities Act of 1933, as
amended (the "Securities Act"). Upon registration pursuant to the
Registration Rights Agreement, but in no event later than one year from
the Closing Date, DRI shall remove the restrictive legends associated
with 200,000 shares and shall further remove the restrictive legends
associated with the remaining shares upon registration of such shares
pursuant to the Registration Rights Agreement, but in no event later than
on the second anniversary of the Closing Date. DRI shall reasonably and
expeditiously take necessary action to remove the restrictions on the
shares as aforesaid.
The Restricted Shares shall be divided between the Bodin Sellers as set
forth in sub-section 3.2.1.3 above.
5.5 The Bodin Warrant Agreement, the Registration Rights Agreement and the
Bodin Consulting Agreement shall be executed by the parties thereto.
6. REPRESENTATIONS AND WARRANTIES OF ALL THE SELLERS
The Sellers jointly and severally represent and warrant that on and as of
the date of signing of the Option Agreement as well as of this Agreement and on
and as of the Closing Date (unless the context otherwise requires):
CORPORATE
6.1 Each Seller has full authority to execute and deliver this Agreement and
each other document or instrument executed and delivered in connection
herewith and to consummate the transactions contemplated hereby.
6.2 The execution of this Agreement, the consummation of the transactions
provided for herein and the fulfilment of the terms hereof will not
result in a breach of any agreement to which any of the Sellers is a
party or the Articles of Association of the Company or any Subsidiary.
6.3 The Shares constitute the entire issued capital stock of the Company and
are legally and validly issued and fully paid. Each Seller lawfully owns
the number of the Shares set forth in Preamble A above, free and clear of
any Encumbrances whatsoever and each Seller has good and transferable
title to the said Shares and has the absolute right, power and capacity
to sell, assign and deliver the said number of the Shares to the
Purchaser in accordance with the terms of this Agreement, free and clear
of all Encumbrances and there are no outstanding
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subscriptions, options, rights or agreements which may require the
Company or any Subsidiary to issue or transfer any additional shares.
Matters related to the Mobitec Stock Option Program have been provided
for in sub-section 8.4 below.
6.4 The Company and each Subsidiary are duly organised and validly existing
and in good standing under the laws of Sweden or, in respect of
Subsidiaries domiciled outside of Sweden under the laws of the country of
domicile and have full corporate power and all necessary licenses,
permits and authorisations to carry on its businesses as presently and on
the Closing Date conducted and to own, lease and operate the assets and
properties used in connection therewith.
6.5 Copies of the Company's and each Subsidiary's Articles of Association,
and share ledger or corresponding documents are enclosed as APPENDIX 6.5
a)-[ ]), which copies are true and complete and fully and completely set
forth all information required to be recorded therein.
7. REPRESENTATIONS AND WARRANTIES OF THE BODIN SELLERS
The Bodin Sellers jointly and severally represent and warrant that on and as
of the date of signing of the Option Agreement as well as of this Agreement and
on and as of the Closing Date (unless the context otherwise requires):
FINANCIAL
7.1 Except for the Subsidiaries, the shares of which are held in accordance
with sub-section 5.2 above, lawfully and free and clear of any
Encumbrances whatsoever and to which the representations and warranties
contained in this section 7 shall apply, the Company does not own any
interest, directly or indirectly, in any corporation or partnership and
does not have a branch office in any country.
7.2 The Financial Documents
(i) give a true and fair view of the financial position and results of
the operations of the Group, the Company and of each Subsidiary as
of the dates appearing in the Financial Documents and for the
periods appearing in the Financial Documents and have been prepared
from and in accordance with the books and records of the Company and
of each Subsidiary;
(ii) have been prepared in accordance with GAAP and all applicable laws,
applied on a basis consistent with that of preceding years;
(iii) contain and reflect such reserves as were necessary and required by
the laws and principles referred to under (ii) above to be
reflected in such reports as of the said dates.
7.3 The net equity appearing in the balance sheet forming part of the Interim
Financial Statement as per 31 March 2000 on a consolidated basis
(koncernens beskattade egna kapital) for Mobitec AB, Mobitec GmbH and
Mobitec Ltda is not less than SEK 10,867,000 in accordance with GAAP and
all applicable laws applied on a basis consistent with that of preceding
years.
7.4 In excess of the pledges, commitments or contingent liabilities disclosed
in APPENDIX 7.4 neither the Company nor any Subsidiary have pledged any
assets or have any commitments or contingent liabilities and the Company
and each Subsidiary have full and exclusive title to all assets in the
balance sheets comprised by the Interim Financial Statement,
APPENDIX 1.19--except assets disposed of in the ordinary course of
business--and the assets are not the subject of any Encumbrance.
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7.5 The operations and other activities of the Company and each Subsidiary
during the period as from 1 January 2000 to the date hereof have been
conducted in the ordinary course of business with a view to maintaining
their respective businesses as a going concern and there has not occurred
or arisen since 1 January 2000 with respect to the Company or any of the
Subsidiaries
(i) any material adverse change in their financial conditions or in the
operations of their respective businesses; or
(ii) to Acquired Knowledge any obligations, commitments or liabilities,
liquidated or unliquidated, contingent or otherwise, except
obligations, commitments and liabilities arising in the ordinary
course of business and which are not material in relation to their
respective businesses; or
(iii) to Acquired Knowledge any amendment or termination or any agreement
to amend or terminate any Material Agreement, save in the ordinary
course of business; or
(iv) to Acquired Knowledge any extraordinary event or any extraordinary
loss suffered or any waiver of any debts, claims, rights under any
Material Agreement, or other rights representing a value in excess
of SEK 100,000; or
(v) any damage, destruction, or loss or any other event or condition
adversely affecting their respective properties and businesses,
representing loss to property to the extent not covered by insurance
in the aggregate in excess of SEK 100,000; or
(vi) any sale, assignment, transfer, pledge, lease or other disposal of
any individual asset with a value in excess of SEK 300,000 except
for the sale of real property Mellerud Frosbo 1:7, 1:10 and 1:32 at
a sales price of SEK 350,000; or
(vii) any increase in the rates of compensation (including bonuses)
payable or to become payable to any agent, distributor, sales
representative, independent contractor or consultant other than
increases made in the ordinary course of business; or
(viii) any change of accounting methods, principles or practices; or
(ix) any investment in fixed assets that exceed individually SEK 300,000
or in the aggregate SEK 500,000; or
(x) any other transaction other than in the ordinary course of business;
and neither the Company nor any of the Subsidiaries have to the Acquired
Knowledge agreed or arranged to do any of the foregoing.
The terms and conditions for the Company's sale of the shares of Hexair
and Klimat appear from sub-section 8.9 below.
7.6 Since 1 January 2000 no dividends or interim dividends have been declared
or paid by the Company or any of the Subsidiaries except for what has
been set forth in Appendix 7.6.
7.7 All accounts receivable of whatsoever nature appearing in the Financial
Documents have been valued in accordance with GAAP and all applicable
laws.
7.8 The inventory of the Company and of each Subsidiary as appearing in the
Closing Financial Statement will be valued in accordance with GAAP and
applicable laws applied on a basis consistent with that of the Interim
Financial Statement for the period 1 January--31 March 2000,
Appendix 1.19 hereto. The inventory of Mobitec AB as per 6 December 2000
was as set forth in Appendix 7.8 and was kept at Mobitec AB's premises at
Herrljunga. The said APPENDIX 7.8 also comprises the obsolete products as
of the said date.
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7.9 All liquid assets of the Company and each Subsidiary such as, but not
limited to, bank accounts and cash are on the Closing Date available free
and clear of any restriction or condition.
7.10 All assets, properties and rights belonging to the Company and each
Subsidiary, whether or not recorded in the books of the Company or the
Subsidiaries that until this date have been used in the Company's and the
Subsidiaries' respective businesses have been included in the transfer to
the Purchaser under the terms of this Agreement.
7.11 Neither the Company nor any Subsidiary has any liability or obligation of
any kind as a result of purchase or sale of shares or business operations
or part thereof or of individual assets and such purchases and sales, if
any, have been completed in all respects and neither the Company nor any
Subsidiary has or will have any liability of any kind as a result of any
such purchase or sale or as a result of any transaction or transfer
internally between any of the companies of the Group including but not
limited to payment of considerations, debts, taxes and social charges.
7.12 All properties and assets of the Company and the Subsidiaries are to
Acquired Knowledge in good physical repair and condition, ordinary wear
and tear excepted.
ENVIRONMENTAL MATTERS
To Acquired Knowledge
7.13 the Company and each Subsidiary has at all times obtained all necessary
environmental approvals, permits and consents for its operations;.
7.14 all environmental approvals, permits and consents, to the extent
required, are in full force and effect and there are no facts or
circumstances which may lead to any environmental approvals, permits or
consents being revoked, cancelled or modified;
7.15 the Company's and each Subsidiary's operations have in all respects and
at all times been carried out in compliance with any necessary
environmental approvals, permits and consents as well as any applicable
environmental laws;
7.16 all registrations and other information required to be provided by the
Company and each Subsidiary and all records and data required to be
maintained by the Company and each Subsidiary in accordance with any
environmental laws and any approvals, permits and consents, to the extent
required, have been provided and maintained;
7.17 no real property has at any point in time been used by the Company or a
Subsidiary in such way which have led to any real property having become
contaminated in a manner which will result in any liability under
environmental laws;
7.18 there are no environmental actions, claims, complaints, investigations or
other proceedings being taken or pending in connection with the
operations of the Company or any Subsidiary and there is no actual or
contingent liability to make good, repair, restore or clean up any real
property and no act or omission of the Company or any Subsidiary has
given rise to any such environmental liability.
AGREEMENTS
7.19 There are no other Material Agreements than those listed in
APPENDIX 7.19. The said Appendix contains information on the parties,
contract term, purpose of the agreement as well as any other vital matter
provided for in any Material Agreement.
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The Company and the respective Subsidiary have performed or taken all
action necessary to enable them to perform when due all obligations under
any Material Agreement. The execution of this Agreement, the consummation
of the transactions provided for herein, and the fulfilment of the terms
hereof will not result in a breach of any of the terms and provisions of,
or constitute a default under, or conflict with or give the counterparty
the right to terminate any Material Agreement and to Acquired Knowledge no
such third party has indicated its interest to terminate any Material
Agreement.
(i) NO DEFAULT. Neither the Company nor any of the Subsidiaries is
(a) in default under any provision of any contract, commitment,
agreement, letter of intent, lease or service arrangement to
which any of them is a party or by which any of them is bound,
which default would have a materially adverse effect on their
respective businesses, properties or condition, financial or
otherwise, and no event has occurred which would constitute such
a default;
(b) a party to or bound by any contract, commitment, agreement,
lease, service arrangement, order or letter of intent not made in
the ordinary course of their respective businesses;
(c) a party to any contract containing provisions for material price
redeterminations or price revision that is not on normal market
conditions, or
(d) a party to any contract containing any terms or conditions not
consistent with fair market terms, conditions and prices.
(ii) PRICING. Prices and payment terms on all contracts, bids and sales
order (order backlog) and purchase orders of the Company and any
Subsidiary which are presently in effect or outstanding have been
entered into by the Company and the respective Subsidiary on a
basis consistent with its prior practice with respect to profits
and profit margins which were estimated substantially in accordance
with its prior practice and contain no provision restricting
competition or being unlawful and all sales and services to
customers have been made at arm's-length prices, terms and
conditions.
(iii) WARRANTIES. Neither the Company nor any of the Subsidiaries have
granted or offered any other warranties for goods sold or services
rendered other than on normal market conditions or as is disclosed
in APPENDIX 7.19.
7.20 To Acquired Knowledge neither the Company nor any Subsidiary is or has
been a party to any agreement or is bound or has been bound by any
commitment, obligation or undertaking or has participated or is
participating in any activity prohibited or invalid pursuant to sections
6, 7 or 19 of the Swedish Competition Act or articles 81 or 82 of the
Treaty of Rome or pursuant to corresponding or similar rules or
regulations in any foreign jurisdiction.
7.21 Neither the Company nor any Subsidiary is bound by any prohibition to
compete or any other obligation which in any respect prohibits or
restricts the Company or any Subsidiary, to carry on such businesses as
the Company or any Subsidiary has been carrying on during five years
preceding the Closing Date.
INTELLECTUAL PROPERTY AND KNOW-HOW
7.22 All Intellectual Property, including software, which is used in, or is
necessary for, the business of the Company or any Subsidiary, whether
registered or not, is owned by or licensed to the Company or the
respective Subsidiary without any restrictions in respect of current use.
Matters related to the name Mobitec have been provided for in
sub-section 8.5 below.
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7.23 All Know-how is owned by or licensed to the Company or any of the
Subsidiaries without any restrictions in respect of current use.
7.24 There is no infringement by any third party of any Know-how or any
Intellectual Property owned by or licensed to the Company or any
Subsidiary within any country in which the Company or any Subsidiary is
operating except that a third party has registered the company name
"Nolato Mobitec AB."
7.25 The registrations of all registered Intellectual Property are made in the
name of the Company or any of the Subsidiaries and are in force and the
renewal fees for all such registrations have heretofore been paid.
7.26 There is no claim against the Company or any Subsidiary such as, but not
limited to infringement, damages or otherwise, raised by any third party
which relates to the use of Intellectual Property or Know-How by the
Company or any Subsidiary other than as set forth in Appendix 8.10
hereof.
7.27 Neither the Company nor any Subsidiary has granted, or is obliged to
grant, any license or assignment in respect of any Intellectual Property
or Know-How owned or used by it, or is obliged to disclose any
Intellectual Property or Know-How to any Person.
7.28 The Company and each Subsidiary fully owns or has a license or other
right to use, in addition to the Intellectual Property and Know-How set
forth above, all other technology, technical and commercial know-how used
in the businesses of the Company and the respective Subsidiary.
BUSINESS
7.29 The Company and each Subsidiary has in all material respects conducted
its respective businesses at all times in accordance with and have
complied with applicable national and local laws relating to its
operations and businesses, and is not a party to or subject to any
judgement, decree or order issued in any suit or proceeding brought by
any Person or party materially enjoining or otherwise restraining or
restricting the Company or any of the Subsidiaries with respect to any
business activity or practice in the conduct of its respective businesses
and will not be, in respect of circumstances, existing before or upon the
Closing Date and there is to Acquired Knowledge no controversy or
investigation pending or threatened with respect to the Company's or any
of the Subsidiary's respective businesses by any Person or party that
would materially be detrimental to the Company's or any Subsidiary's
businesses.
7.30 The Customer List, APPENDIX 7.30 hereto, contains any customer having
purchased products from the Group in excess of the aggregate sales value
of SEK 3.000.000 during the calendar year 1999 or the period as from 1
January 2000 up to and including the Closing Date.
7.31 To Acquired Knowledge all products sold and all services rendered by the
Company or any Subsidiary meet with the customer requirements with
respect to quality and suitability for intended purposes.
7.32 To Acquired Knowledge no customer appearing in the Customer List has
manifestly ceased to buy products from the Group during the calendar year
1999 or the period as from 1 January 2000 up to and including the Closing
Date except for the customers listed in APPENDIX 7.30 hereto.
7.33 To the best of Bodin Sellers' Knowledge no supplier of the Company or any
Subsidiary will cease to sell products or components to any of them and
to the best of Bodin Sellers' knowledge none of them will increase their
prices or otherwise make any changes in their businesses with the Company
or any Subsidiary which could have a materially adverse effect on the
Company's or any Subsidiary's businesses.
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7.34 To the best of Bodin Sellers' Knowledge no business partner of the
Company or any Subsidiary will terminate its business relations with the
Company or any Subsidiary.
7.35 Neither the Company nor any Subsidiary is or will be liable, due to
circumstances existing before or upon the Closing Date or related
thereto, to compensate for damages caused to the environment or third
parties as a result of products sold or services rendered.
7.36 Attached hereto as APPENDIX 7.36 is a schedule of the insurances for the
Group. The Company and each Subsidiary maintains the said policies of
fire, product and general liability, use and occupancy and other forms of
insurance covering its properties and assets in amounts and against such
losses and risks as are normally maintained for comparable business and
properties, and valid policies for the said insurances are now and will
be outstanding and duly in force on the Closing Date and for at least
30 days thereafter.
7.37 The books of account and other records of the Company and each Subsidiary
are complete and correct and have been maintained in accordance with all
relevant legislations and rules in each country of domicile of the
Company and each Subsidiary and all documents of the Company and each
Subsidiary such as, but not limited to, share ledgers, minutes of Board
of Directors' meetings and shareholders' meetings, contracts, permits and
licences exist and are safely kept and are correct, and all registrations
and applications related thereto have been fulfilled, and all applicable
fees have been paid.
7.38 To Acquired Knowledge there is no matters or circumstances that may
materially affect the businesses of the Company or any Subsidiary and the
financial results thereof other than as explicitly set forth herein.
EMPLOYEES
7.39 All employees of the Company and each Swedish Subsidiary are employed on
normal employment conditions and in accordance with applicable collective
bargaining agreements and all employees of each foreign Subsidiary are
employed on normal employment conditions in each respective country.
In APPENDIX 7.39 are shown all employment conditions of all employees of
the Company and each Subsidiary as well as the conditions of all Board
Directors of the Company and each Subsidiary as per 31 December 1999 and
no salary or other employment benefit or condition for any of the said
employees or Board Directors has been changed after the said date except
for what has been set forth in the said Appendix.
No salary increase or additional employment benefit may be granted for the
time period after 31 December 2000 without consultation with the
Purchaser.
7.40 There are no collective bargaining agreements or deferred compensation
agreements, pension, profit sharing, severance pay or retirement plans,
agreements or arrangements presently in force with respect to any former
employee of the Company or any of the Subsidiaries.
7.41 Attached hereto as APPENDIX 7.41 is a list of all employees and of all
other persons being authorised to sign for the Company and for each
Subsidiary, including all persons authorised to operate any bank accounts
and safe deposits. APPENDIX 7.41 also includes those employees holding
credit cards for the Company or any Subsidiary.
7.42 Any term, condition or obligation pursuant to the letter from the Company
to Ingemar Luppert, Stefan Lager and Anders Svensson dated 10
August 1998, APPENDIX 7.42 hereto has in its entirety ceased to have
effect prior to the Closing Date without any cost or other negative
financial effect of any kind to the Company or any Subsidiary or the
Purchaser in excess of what appears from the Closing Financial Statement
and neither the Company nor any
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Subsidiary has any other contractual relationship with any of the
aforesaid individuals, except for employment agreements, and none of them
has any other right to any kind of compensation from the Company or any
Subsidiary except for salary and other employment benefits as set forth
in Appendix 7.39.
THE SELLERS
7.43 None of the Sellers or any Related Person of any of the Sellers own,
directly or indirectly, individually or collectively, any interest in any
corporation, company, partnership, entity or organisation which is in a
business similar or competitive to the businesses of the Company or any
Subsidiary or which has any existing undisclosed contractual relationship
with the Company or any Subsidiary.
7.44 None of the Sellers or any Related Person to any of the Sellers or any of
the members of the Board of Directors of the Company or of any Subsidiary
has any claim against the Company or any Subsidiary for compensation or
payment of any nature whatsoever except for Directors' fees appearing in
the balance sheet forming part of the Closing Financial Statement and
there are no loans, guarantees or other forms of undertaking provided by
the Company and any of the Subsidiaries to any of the Sellers or to any
Related Person to any of them which are prohibited by chapter 12
section 7 of the Swedish Companies Act of 1975.
7.45 Except for the consultancy agreement with Bengt Bodin and the pension
arrangement referred to in sub-section 7.47 below, there are no
contractual relations of any kind between the Company or any Subsidiary
on one hand and any of the Sellers or any Related Person to any of the
Sellers on the other hand.
7.46 The pension arrangement with Bengt Bodin, which is described in full
detail in APPENDIX 7.46 hereto, will not have any negative net effect on
the financial position of the Company or any Subsidiary.
LITIGATION AND INVESTIGATIONS
7.47 Except for what has been provided for in sub-section 8.10 below neither
the Company nor any Subsidiary has been served with any law suit or
notice to arbitrate, and there is no law suit, administrative,
arbitration or other legal proceedings pending or to Acquired Knowledge
threatened against the Company or any Subsidiary or their businesses,
properties or assets, and there is no such suit or proceedings pending or
to Acquired Knowledge threatened by the Company or any Subsidiary against
any Person or party.
TAXES AND OTHER CHARGES
7.48 All necessary tax and other returns and reports with regard to taxes,
social charges and duties required to be filed prior to the Closing Date
by the Company or any Subsidiary have been duly filed with the
appropriate authorities and are true and correct.
7.49 All invoices with regard to all products sold or all services rendered by
the Company or any Subsidiary contain all taxes, duties and public fees
related to such sale or service.
7.50 All taxes, social charges and duties assessed or due by the Company or
any Subsidiary on or before the Closing Date have, where applicable, been
fully paid, or full reserves therefor has been made in the Financial
Documents.
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7.51 No deficiency in payment of taxes, social charges and duties or any
additional assessment thereof in respect of the period up to and
including the Closing Date, will be claimed or made by any authority for
any year or part thereof in respect of the Company or any Subsidiary.
7.52 All amounts required to be paid by the Company or any Subsidiary for the
purpose of social security, insurance, pensions and the like have been
duly and punctually paid and all amounts required to be deducted from
moneys paid to employees, consultants and others for the purposes of
taxes, social security, insurance, pensions and the like have been
deducted and have been accounted for to the appropriate authority or
person, and there is no dispute on any issue in respect of any of the
foregoing.
7.53 There are no audits with regard to taxes, social charges or duties
currently pending with respect to the Company, any Subsidiary or any of
the Sellers.
7.54 Full reserves or provisions have been made in the Financial Documents for
all liabilities in respect of pensions to be paid to employees or former
employees of the Company or any Subsidiary.
INFORMATION
7.55 No representation or warranty herein, and no document heretofore or
hereafter provided to the Purchaser by or on behalf of any of the Sellers
or the Company or any Subsidiary, contained or will contain any material
untrue statement of a fact or omitted or will omit to state a fact
necessary to make the statements contained herein or therein not
misleading.
7.56 The Bodin Sellers acknowledge that they are aware that their ownership of
the Restricted Shares is subject to a substantial risk of loss, including
risks associated with price fluctuations of the Common Stock on the
United States securities exchanges.
8. COVENANTS
8.1 CONDUCT OF BUSINESS PENDING CLOSING
After the date of the Sellers' and the Purchaser's signatures hereof no
contract or commitment shall be entered into by or on behalf of the
Company or any Subsidiary extending beyond the Closing Date, except for
contracts or commitments made in the ordinary course of business.
Moreover, neither the Company nor any Subsidiary shall borrow any
additional funds from banks or other external sources other than as
required in the ordinary course of business.
8.2 NON-COMPETITION
The Purchaser is entering into this Agreement and the purchase price has
been accepted inter alia on the basis of and in reliance upon the fact
that none of the Sellers will carry on activities competing with those of
the Company or of any Subsidiary. The Sellers have expressly stated their
full understanding thereof and have declared their willingness to
undertake the following non-competition obligation.
8.2.1 Each Seller agrees and ensures, for a period of three years from the
Closing Date not to directly or indirectly carry on, engage or otherwise
participate in any businesses competing with the businesses of the
Company or any Subsidiary in any part of the world--provided, however,
that in respect of countries which are members of the European Economic
Area, the non-compete obligation shall be limited to a period of two
years and shall apply only to the extent that the Company or the
Subsidiary was active in the market at issue on the Closing Date.
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8.2.2 In case of any breach of the obligations undertaken pursuant to
sub-section 8.2 and such breach is not remedied within five business
days of written notice to do so Bertil Lindqvist solely on his part and
the Bodin Sellers jointly and severally--in addition to any other remedy
that may be available to the Purchaser--shall be liable to pay to the
Purchaser the actual damage resulting from each such breach but in no
case an amount being less than SEK 8,000,000 (eight million) for each
such breach.
8.2.3 For the purposes of this sub-section 8.2 the Sellers' engagement in
Klimat's and Hexair's present businesses, Bengt Bodin's services under
the Bodin Consulting Agreement and the Bodin Sellers' shareholding in
DRI shall not be deemed competing.
8.3 EMPLOYMENT OF KEY EMPLOYEES
From the date of this Agreement and for a period of three years after the
Closing Date each Seller undertakes and ensures to refrain from employing,
or offering or negotiating employment with any Key Employee of the Company
or of any Subsidiary without the prior written consent of the Purchaser.
In case of breach of this obligation by any of the Bodin Sellers, the
Bodin Sellers shall jointly and severally be liable to pay to the
Purchaser the actual damage resulting from such breach but in no case with
an amount being less than SEK 3,000,000 for each such breach and in case
of breach of this obligation by Bertil Lindqvist he shall solely be liable
to pay the aforesaid damage or minimum amount.
8.4 MOBITEC STOCK OPTION PROGRAM
The Mobitec Stock Option Program is described in full detail in
APPENDIX 8.4 hereto.
The Bodin Sellers ensure that the Company and any Subsidiary will make
their best efforts in order to fulfil the obligations under the Mobitec
Stock Option Program prior to the Closing Date.
The Bodin Sellers shall have no responsibility for the acquisition of
additional options under the Mobitec Stock Option Program if on the
Closing Date there remain outstanding options representing 1000 shares or
less.
The costs of the Company and any Subsidiary in fulfilling the aforesaid
obligations will in full be accounted for and appear in the Closing
Financial Statement. However, for the purposes of adjusting the
Preliminary Purchase Price into the Final Purchase Price in accordance
with sub-section 3.2.2 above, any amount of such cost exceeding 50 per
cent of the aforesaid total cost, or the amount SEK 1,188,000 whichever is
the lower, shall be accounted for and appear in the Closing Financial
Statement.
8.5 MOBITEC NAME
The Bodin Sellers agree that Mobitec AB is the full and unrestricted owner
of the trademark and business name Mobitec and has the exclusive right
thereto.
The Bodin Sellers ensure that all measures will be taken within 12 months
from the Closing Date to remove the name Mobitec from the company name of
Klimat.
The Bodin Sellers agree and ensure that no Related Person of any of the
Sellers has any right of any kind to the name Mobitec or the use thereof
except for the rights set forth in the Trademark License AGREEMENT
APPENDIX 8.5 hereto.
8.6 PUBLICITY
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No announcement concerning the transaction contemplated by this Agreement
or any matter ancillary thereto shall be made by either party hereto
before or on the Closing Date, without the prior written consent of the
other party, provided that nothing herein shall prevent either party from
making, in consultation with the other party, any announcement or filing
required by law, regulations or by the rules and regulations of any stock
exchange on which it is listed including any announcement or filing in
connection with the filing under the SEC regulations of shareholders' vote
and proxies thereto.
8.7 DISCHARGE OF DIRECTOR LIABILITY
The Purchaser shall, provided that the auditors so recommend, discharge or
procure the discharge of all directors of the Company and any of the
Subsidiaries from their personal liability for the period as from 1
January 2001 to the Closing Date on the next Annual General Shareholders'
Meeting of the Company and of any Subsidiary, which discharges shall not
in any way limit or restrict or be construed to limit or restrict the
Purchaser's rights against the Sellers under this Agreement.
8.8 DIVIDENDS
The Purchaser shall be entitled to all dividends and other profits of the
Group deriving from the financial year 2000 and the Company shall not from
this day through the Closing Date declare or pay any dividend or make any
other distribution to its shareholders.
8.9 KLIMAT AND HEXAIR
8.9.1 The Bodin Sellers ensure that all measures shall have been taken by the
Company or any Subsidiary, as the case may be, prior to the Closing Date
to transfer and sell all its shares of Klimat and Hexair including all
obligations and liabilities of all types, direct as well as indirect,
contingent or otherwise in any way related to Klimat or Hexair or the
operations, activities or businesses carried on by any of them to an
aktiebolag wholly owned by the Sellers or the Bodin Sellers.
8.9.2 The said transfer and sale shall be made at purchase prices and other
terms and conditions having no negative effect on the Company's or any
Subsidiary's financial position or otherwise in any way be detrimental
to the remaining businesses of the Company or any Subsidiary except for
changes in the net equity to be reflected when adjusting the Preliminary
Purchase Price into the Final Purchase Price as set forth in
sub-section 3.2.2 hereof.
8.9.3 As per the Closing Date there shall not exist any financial, contractual
or other relation of any kind between any of Klimat or Hexair on one
hand and the Company or any Subsidiary on the other hand except for what
has been set forth in sub-section 8.5 above.
8.9.4 As per the Closing Date neither the Company nor any Subsidiary shall be
bound by any contract or have any commitment or obligation of any kind
or in any way relating to Klimat or Hexair or the operations, activities
or businesses carried on by any of them.
8.9.5 The Bodin Sellers shall jointly and severally indemnify and hold the
Company or any Subsidiary or the Purchaser harmless from any kind of
costs, damages and claims as a result of or in any way related to the
aforesaid sales and transfers pursuant to this sub-section 8.9 including
but not limited to any kind of taxes, duties and social charges.
8.10 DISPUTES
In APPENDIX 8.10 is a brief description of all disputes or pending or
threatened disputes involving the Company and/or any Subsidiary. The
following shall apply with respect to the said disputes.
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For the purposes of a potential payment of compensation to Aldridge
Electrical Industries Pty Ltd an amount of SEK 500.000 shall be reserved
and deducted for in the balance sheet forming part of the Closing
Financial Statement. However, such reservation and deduction shall not be
taken into account in the adjustment of the Preliminary Purchase Price
into the Final Purchase Price.
The tax dispute involving Mobitec Ltda and the dispute involving Thorsell
Elektronikmontering AB shall be reflected in the Closing Financial
Statement in accordance with GAAP.
The dispute with FP regarding the Buse component is handled as set forth
in the Option Agreement.
The Bodin Sellers shall have no liability for the outcome of the other
disputes set forth in Appendix 8.10.
8.11 LIABILITY OF BERTIL LINDQVIST
The following provisions shall apply with regard to Bertil Lindqvist's
liability under this Agreement:
Sections 1 and 2, sub-section 3.1, section 4, sub-section 5.1, section 6,
sub-sections 8.1 - 8.3, 8.6 - 8.8, 9.1 - 9.3, 9.5 - 9.11, section 11 and
sub-sections 12.3 and 12.4 and 12.6 - 12.13.
8.12 REGISTRATION OF DRI SHARES
DRI agrees that the Restricted Shares shall be duly registered under a
valid and effective registration statement of DRI pursuant to the
Securities Act and any applicable state securities laws, pursuant to all
terms, and subject to all the conditions, of the Registration Rights
Agreement. The Bodin Sellers acknowledge that the Registration Rights
Agreement has been prepared by their counsel and that they have been
advised of the basic terms and consequences of such Agreement.
9. INDEMNIFICATION
With the exclusion of the provisions of the Swedish Sales of Goods Act:
9.1 The Bodin Sellers shall--except for what has been set forth below with
respect to Bertil Lindqvist--jointly and severally be liable and shall
indemnify and hold the Purchaser harmless in full from and against any
Loss arising out of misrepresentation, breach of warranty or failure to
perform a covenant or other obligation or any other breach of this
Agreement on the part of any of the Sellers. Bertil Lindqvist shall be
liable and shall indemnify and hold the Purchaser harmless from and
against any Loss arising out of misrepresentation, breach of warranty or
failure to perform a covenant or other obligation undertaken by Bertil
Lindqvist under this Agreement as set forth in sub-section 8.11 above.
9.2 Payment for Losses and other forms of compensation under this Agreement
shall be made by reduction and repayment to the Purchaser of the purchase
price for the Bodin Shares or the Bertil Lindqvist Shares, as the case
may be. With respect to the Bodin Sellers, such reduction shall primarily
be made by the Purchaser reducing the Promissory Notes by any sum of any
such Loss and in the event that the sum of any such Loss exceeds the
total amount of the Promissory Notes the Bodin Sellers having received
Restricted Shares shall return such number of the Restricted Shares as
corresponds to the said excess amount.
In calculating the value of each Restricted Share it shall be valued at
USD 3 (three).
The Purchaser shall be entitled to compensation hereunder only upon
agreement with the Sellers or any of them or upon an arbitration award
having gained legal force and effect.
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The Sellers reserve the right to settle any claim with cash payment.
9.3 The liability of the Bodin Sellers and of Bertil Lindqvist to the extent
applicable with regard to Losses as a result of any misrepresentation or
breach of any of the representations and warranties
a) set forth in sub-sections 7.1-7.12, 7.19-7.34, 7.36-7.47 and
7.54-7.56 shall remain valid until 18 months from the Closing Date;
b) set forth in sub-sections 6.1-6.5, 7.13-7.18 and 7.35 shall remain
valid for a period of five years from the Closing Date; and
c) with regard to taxes, social charges and duties, such as
misrepresentation or breaches set forth in sub-sections 7.48 - 7.53
shall remain valid until three months from the date such taxes,
social charges and duties have been determined by the relevant
authority.
If a Loss has occurred before any of the aforesaid dates but the amount
hereof cannot be quantified, the Purchaser may claim compensation,
provided that the claim is made within the applicable time period and a
quantified claim is made as soon as information is available of the
amount.
9.4 The Purchaser shall only be indemnified under the provisions of
sub-section 9.3 if the aggregate amount of the aforesaid Losses equals or
exceeds SEK 500,000 provided, however, that in the event the Loss equals
or exceeds the said amount, the Purchaser is entitled to be indemnified
for the full amount of the Loss.
In calculating the aforesaid aggregate amount individual Losses amounting
to less than SEK 50,000 shall not be taken into account.
9.5 In calculating a Loss in accordance with this section 9 consideration
shall be given to the fact whether the Loss fully or partly is a
deductible item which can be used by the Company for tax purposes.
9.6 The aggregate liability of the Bodin Sellers under sub-section 9.3 above
shall not exceed SEK 33,000,000 (thirty three million) and with respect
to Bertil Lindqvist it shall not exceed the purchase price for the Bertil
Lindqvist Shares.
9.7 There shall be no exemption from any of the Sellers' liability for
representations, warranties, covenants or obligations under this
Agreement other than as explicitly set forth herein or by reference to an
Appendix attached hereto or pursuant to sub-section 9.8 below and no
representation, warranty, covenant or other obligation of any of the
Sellers set forth herein shall be deemed waived or otherwise affected
-- by any commercial or financial analysis, or any inquiry or
investigation which the Purchaser, its advisors, auditors, legal
counsels or representatives have made or may make with respect to the
Company, any of its Subsidiaries or their businesses or the Closing
Balance Sheet or the approval thereof; or
-- by the fact that the Board of Directors and/or the Managing Director
of the Company or any Subsidiary nominated and appointed by the
Purchaser have approved the annual report for the financial year 2000
or that the Annual General Shareholders' Meeting of the Company or
any of the Subsidiaries--at which the Shares have been represented by
the Purchaser--has adopted the aforesaid annual report; or
-- by the fact that the Purchaser has agreed to the adjustment of the
Preliminary Purchase Price into the Final Purchase Price as set forth
in sub-section 3.2.2 above.
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9.8 No liability shall arise in respect of any misrepresentation, breach of
warranty or failure to perform a covenant or other obligation or any
other breach of this Agreement on the part of any of the Sellers
-- if and to the extent a Loss has been made part of the Closing
Financial Statement has been taken into account in adjusting the
Preliminary Purchase Price into the Final Purchase Price; or
-- if and to the extent that a claim occurs as a result of any
legislation not in force at the date hereof which takes effect
retrospectively or occurs as a result of any increase in the rate of
tax in force at the date hereof;
-- in respect of any Loss which is recoverable and recovered under any
of the insurances set forth in Appendix7.36 and in force on the date
of Loss (for the avoidance of doubt it is hereby expressly stated
that any deductible shall be compensated by the Sellers as a claim).
9.9 The Purchaser shall not make any admission of liability, agreement or
compromise with any third party concerning any claim for which the
Sellers or any of them may be liable without prior written notification
with Bengt Bodin.
9.10 In the event that an exemption from liability hereunder has explicitly
been made--by reference made herein or by reference to an Appendix
attached hereto--in one provision hereof the same exemption shall apply
in respect of other provisions providing for the same subject matter.
9.11 In the event that the Purchaser shall demand indemnification hereunder,
the Purchaser shall notify each Seller without undue delay, such
notification to be given within the period of limitation as set out in
sub-section 9.3 above and in any event not later than on the sixth
anniversary of the Closing Date, whichever occurs first.
10. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
10.1 The Purchaser represents and warrants that on and as of the date of
signing of the Option Agreement as well as this Agreement and on and as
of the Closing Date (unless the context otherwise requires).
10.1.1 The Purchaser and DRI have full authority to execute and deliver this
Agreement and each other document or instrument executed and delivered
in connection herewith and to consummate the transactions contemplated
hereby.
10.1.2 The execution of this Agreement, the consummation of the transactions
provided for herein and the fulfilment of the terms hereof will not
result in a breach of any agreement to which any of the Purchaser or DRI
is a party nor the Articles of Association of the Purchaser.
10.1.3 The Purchaser or DRI are duly organised and validly existing and in good
standing under the laws of its respective country of domicile and have
full corporate power and all necessary licenses, permits and
authorisations to carry on its businesses as presently and on the
Closing Date conducted and to own, lease and operate all material assets
and properties used in connection therewith.
10.1.4 The Restricted Shares are credited as fully paid, non assessable and
rank PARI PASSU in all respects with the existing issued shares of DRI
and, subject to the provision in sub-section 5.4 are free and clear of
any Encumbrances whatsoever and free from all taxes, liens and charges
with respect to the issue thereof and DRI has the absolute right, power
and capacity to issue all Restricted Shares to the Bodin Sellers in
accordance with the terms of this Agreement.
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11. CLOSING DATE
The Closing Date shall occur five business days from the date of all
parties' signatures hereof.
12. GENERAL PROVISIONS
12.1 CONSULTANCY AGREEMENT BENGT BODIN
DRI and Bengt Bodin will enter into a separate Consultancy Agreement, the
said agreement to enter into effect on the Closing Date.
12.2 DRI LIABILITY
DRI shall be jointly and severally liable with the Purchaser with regard
to the fulfilment of any liability of the Purchaser under this
Agreement--including the liability to pay the Promissory Notes.--If the
Purchaser has not fulfilled such liability within 14 days from the date
the liability becomes due DRI shall upon the Sellers' request fulfil such
liability including interest for delayed payment, if any.
12.3 POWER OF ATTORNEY
12.3.1 Each Seller undertakes to issue on the Closing Date all necessary Powers
of Attorney and other documents requested by the Purchaser to the
Purchaser or its nominees to represent the Company and any Subsidiary
until the new Board of Directors has been registered.
12.3.2 Further each of Mattias Bodin and Tobias Bodin shall on the Closing Date
issue a Power of Attorney to Bengt Bodin to represent their DRI shares
during a period of 36 months from the Closing Date.
12.4 NOTICES
Any notice to be provided under this Agreement shall be in the English
language and deemed valid and effective if sent by courier or registered
mail or telefax to the following addresses:
If to Bengt Bodin: Bengt Bodin
La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France
Fax: +33 493 775 186
If to Annacarin Bodin: Annacarin Bodin
La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France
Fax: + 33 493 775 186
If to Mattias Bodin: Mattias Bodin
Parkgatan 10
SE-112 30 STOCKHOLM, Sweden
If to Tobias Bodin: Tobias Bodin
Ovre Husargatan 23 A
SE-413 14 GOTEBORG, Sweden
If to Bertil Bertil Lindqvist
Lindqvist: Nybrogatan 45 B,
SE-114 39 STOCKHOLM, Sweden
Fax: +46 8661 8126
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If to the Purchaser DRI Europa AB
c/o Mannheimer Swartling
Advokatbyra AB
Box 2235
SE-403 14 GOTEBORG, Sweden
Fax: +46 31 10 96 01
If to DRI Digital Recorders, Inc.
Sterling Plaza, Box 26
5949 Sherry Lane, Suite 1050
DALLAS, TX 75225
The communications will be considered having reached the addressees:
(i) if sent by courier -- on delivery
(ii) if sent by registered mail -- seven days from the date of dispatch
(iii) if sent by telefax -- on the day of recipient confirms
receipt
Each Seller and the Purchaser shall be obliged to send a communication to
the other parties in accordance with this sub-section 12.4 notifying any
changes in the relevant details set out herein, which details shall then
be deemed to have been amended accordingly.
12.5 CONSULTATION WITH DRI
Bengt Bodin, Mattias Bodin and Tobias Bodin undertake for a period of
36 months from the Closing Date to consult with DRI prior to any sale of
any of their shares of DRI.
12.6 CONFIDENTIALITY
Subject to sub-section 8.6 the parties agree not to disclose in whole or
in part any of the contents of this Agreement to any third party, unless
required by law.
12.7 COSTS
Each party agrees to carry his own fees and costs (including brokers',
finders' and attorney's fees) relating to this Agreement and the
consummation of the transactions hereunder.
12.8 ASSIGNMENT
None of the parties shall have the right to assign this Agreement partly
or wholly without the prior written consent of the other parties.
12.9 EXHAUSTIVE CONTRACT DOCUMENT
This Agreement sets forth exhaustively all terms and conditions related to
the transfer of the Shares and supersedes all prior agreements between the
Sellers and the Purchaser with respect to the subject matter hereof.
12.10 AMENDMENTS
No amendment to this Agreement shall be effective unless made in writing
and signed by authorised representatives of each Seller and the Purchaser.
12.11 WAIVER
The failure of any of the parties hereto to insist upon strict adherence
to any provision of this Agreement on any occasion shall not be considered
as a waiver of any right hereunder, nor shall it deprive that party of the
right thereafter to insist upon strict adherence to that provision or any
other provision of this Agreement.
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12.12 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of Sweden.
12.13 ARBITRATION
Any dispute arising out of or in connection with this Agreement shall be
exclusively settled by arbitration in accordance with the Rules of the
Arbitration Institute of the Stockholm Chamber of Commerce
(the"Institute"). The arbitral tribunal shall be composed of three
(3) arbitrators. The place of arbitration shall be Gothenburg, Sweden. The
arbitration proceedings shall be conducted in the English language.
Each party shall nominate one arbitrator and the Institute shall nominate
the third arbitrator, who shall be the Chairman. If arbitration is
initiated by more than one claimant simultaneously and/or against one or
more respondents, each side shall jointly appoint an arbitrator. If the
respondent has not (or, if there are more respondents than one, the
respondents have not jointly) within 30 days after receipt of a request
for arbitration, appointed an arbitrator, such arbitrator shall upon
request of any claimant be appointed by the Institute. If the provision
related to the appointment of the arbitrators is held by any court of
competent jurisdiction or arbitrators to be illegal, void or unenforceable
the illegality, voidness or unenforceability of such provision shall have
no effect upon and shall not impair the enforceability of any other
provisions of this sub-section 12.13. The parties agree that the Institute
in such case shall appoint all three arbitrators.
Any dispute arising at any time between the parties shall be referred to
one single arbitration tribunal, unless (i) the arbitration tribunal
considers it inappropriate having regard to the point of time at which the
request for arbitration is made, or (ii) one or more of the arbitrators
declares that he or they do not accept to serve as arbitrators in a
dispute other than the actual dispute for which such arbitrator(s) was
appointed.
The rules regarding joinder of claims in Chapter 14 of the Code of
Judicial Procedure (Sw. Rattegangsbalken) shall be applied by the arbitral
tribunal to the extent so is appropriate and accepted by the arbitrators.
The voting rules in the Code of Judicial Procedure shall be applied by the
arbitral tribunal.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement in six
copies as of the day and year first above written.
------------------------
DRI EUROPA AB
- --------------------------------------- ---------------------------------------
Bengt Bodin
DIGITAL RECORDERS, INC.
- ---------------------------------------
Annacarin Bodin
- --------------------------------------- ---------------------------------------
Mattias Bodin
- ---------------------------------------
Tobias Bodin
- ---------------------------------------
Bertil Lindqvist
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APPENDIX II
AMENDED OPTION AGREEMENT
This Amended Option Agreement (the "Agreement") is made as of March 2001, by
and between
Bengt Bodin, and individual resident at La Piniere, Cidec 206, R.D. 2085,
FR-06330 Roquefort les Pins, France;
Annacarin Bodin, an individual resident at La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France;
Mattias Bodin, an individual resident at Parkgatan 10, SE-112 30 Stockholm,
Sweden;
Tobias Bodin, an individual resident at Ovre Husargatan 23 A, SE 413 14
Gothenburg, Sweden; and
Bertil Lindqvist, an individual resident at Nybrogatan 45 B, 114 39
Stockholm.
(Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin and Bertil Lindqvist
are hereinafter collectively referred to as the "Offerors".)
and
DRI Europa AB, a Swedish corporation, incorporated under the laws of Sweden,
having its principal office in Gothenburg, ("DRI Europa") and
Digital Recorders, Inc., a company duly incorporated and organized under the
laws of the state of North Carolina, USA, having its principal office at Durham,
North Carolina ("DRI Inc.").
PREAMBLES
A. The Offerors are at the date hereof the owners of the shares (the "Shares")
of Mobitec Holding AB, a Swedish corporation, registration number
556546-6793 (the "Company"). The ownership of the Shares is, at the date
hereof as follows:
Bengt Bodin................................................. 51.900 shares
Annacarin Bodin............................................. 20.400 shares
Mattias Bodin............................................... 9.100 shares
Tobias Bodin................................................ 9.100 shares
Bertil Lindqvist............................................ 9.500 shares
TOTAL....................................................... 100.000 shares
B. The Company is the parent company of a group of companies engaged in
developing, manufacturing, marketing and selling information systems for
public transport vehicles.
C. In accordance with an Option Agreement dated 7 December 2000 (the Option
Agreement) the Offerors have given DRI Europa as well as DRI Inc. and DRI
Europa jointly--as set forth in section 1 thereof - options to purchase the
Shares on the terms and conditions set forth in the stock purchase agreement
attached thereto as Appendix A (the "Stock Purchase Agreement").
The parties to the Option Agreement have agreed to extend the option period
set forth in section 2 thereof on the terms and conditions set forth in this
Amended Option Agreement, this Amended Option Agreement thereby replacing
the Option Agreement.
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D. Taking into consideration what has been set forth above, the Offerors and DRI
Europa and DRI Inc., intending to be legally bound, agree as follows:
------------------------
The terms appearing in this Amended Option Agreement having been defined in
section 1 of the Stock Purchase Agreement shall have the same meaning as in the
Stock Purchase Agreement unless the context requires otherwise. All references
in the Share Purchase Agreement to the Option Agreement shall be deemed to refer
to this Amended Option Agreement.
1. OPTION
1.1 OPTION A
The Offerors hereby grant to DRI Europa the irrevocable right of option to
purchase from the Offerors the Shares on the terms and conditions set forth in
the Stock Purchase Agreement.
1.2 OPTION B
The Offerors hereby grant to DRI Europa and DRI Inc. the irrevocable right of
option to purchase from the Offerors the Shares on the terms and conditions set
forth in the Stock Purchase Agreement.
The individual Shares to be sold by each Offeror to DRI Europa and DRI Inc. as a
result of the exercise of Option B appears from APPENDIX B hereto.
The modifications of the Stock Purchase Agreement to be made as a result of the
exercise of Option B are set forth in APPENDIX C hereto.
2. OPTION PERIOD
Option A and Option B shall have effect during the period as from the effective
date of this Amended Option Agreement up to and including 16 June 2001 (the
Option Period). The parties will work diligently and cooperate with each other
during the Option Period to produce all documents, disclosures, and other
relevant requests for submission to the SEC and to facilitate timely completion
of the transactions contemplated herein.
3. EXERCISE OF OPTIONS
3.1 Based upon the Sellers' representation of the structure of Option B and
the availability of group contribution (koncernbidrag) implied therein to
DRI Europa as set forth in APPENDIX D hereto DRI Inc. and DRI Europa --
in the event they wish to exercise their option rights hereunder -- will
exercise OptionB and thereby undertake not to transfer the Shares or to
cause any other changes in respect of their shareholding in the Company
prior to the expiry of year 2001.
If group contribution is not available to DRI Europa as aforesaid DRI
Europa -- in the event it wishes to exercise its option rights hereunder
-- will exercise Option A.
3.2 In order to exercise any of Option A or Option B DRI Europa and DRI Inc.
or DRI Europa, as the case may be, shall give notice in writing during
the Option Period to any of the Offerors to that effect, such notice to
include whether Option A or Option B is exercised.
With respect to the Bodin Sellers notice hereunder shall be made to Bengt
Bodin who is hereby by the other Bodin Sellers irrevocably authorized to
receive such notice on their behalf.
In the event that such notice is not given within the Option Period this
Amended Option Agreement shall become null and void.
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3.3 In the event that Option A is exercised the Stock Purchase Agreement
shall apply without any modifications.
In the event that Option B is exercised the Stock Purchase Agreement shall
be modified in accordance with APPENDIX B AND C hereto.
3.4 In the event that any of Option A or Option B is exercised the parties
shall within five business days from the date of exercise sign the Stock
Purchase Agreement and in case of exercise of Option B also modify the
same in accordance with APPENDIX B AND C hereto.
4. COVENANTS
4.1 Each of the Offerors undertakes during the Option Period not to sell,
pledge or in any other way dispose of any of the Shares to any other
party than DRI Europa or DRI Inc. and DRI Europa jointly.
4.2 From the date hereof and until the date of exercise of any of the option
rights hereunder, no contract or commitment shall be entered into by or
on behalf of the Company or any Subsidiary extending beyond the date of
exercise of any of the option rights, except for contracts or commitments
made in the ordinary course of business. Moreover, neither the Company
nor any Subsidiary shall borrow any additional funds from banks or other
external sources other than as required in the ordinary course of
business.
5. JOINT LIABILITY
Each one of the Offerors guarantees, as for his own debt, the due and timely
fulfilment by the other Offerors of all obligations under this Agreement.
6. MODIFICATIONS OF THE STOCK PURCHASE AGREEMENT
The parties hereto agree to make the following modifications of the Stock
Purchase Agreement.
6.1 Sub-section 1.6 shall read: "Closing Financial Statement shall mean the
audited profit and loss accounts and the balance sheets of the Company
and each Subsidiary as well as of the Group on a consolidated basis for
the period 1 January - 31 March 2001".
6.2 Sub-section 1.9 shall read: "Consolidated Financial Statements shall mean
the audited consolidated annual reports for the Group for the financial
years 1998, 1999 and 2000, APPENDIX 1.9 a)-c) hereto".
6.3 Sub-section 1.14 shall read: "Financial Statements shall mean the audited
annual reports of the Company and each Subsidiary for the financial years
1998, 1999 and 2000, APPENDIX 1.14 a)-c) hereto".
6.4 Sub-section 3.2.2.2 shall be amended as follows:
"...however, not earlier than 10 February 2001" shall be deleted.
6.5 Sub-section 7.6 shall be amended as follows:
The following shall be added at the end of this provision:
"...and except for a dividend of SEK 500.000 the said dividend to be taken
into account in adjusting the Preliminary Purchase Price into the Final
Purchase Price".
6.6 Sub-section 8.8 shall be amended as follows:
The following shall be added at the end of this provision:
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"...except for the dividend of SEK 500.000 mentioned in sub-section 7.6
above".
6.7 The reference in sub-section 8.10 second paragraph to "Closing Financial
Statement" shall be replaced by "the Annual Report for the financial year
2000".
7. INTEREST TO THE OFFERORS
The amounts of SEK 5.700.000 and USD 3.680.000 set forth in sub-section 3.1 and
sub-section 3.2.1.2 respectively of the Stock Purchase Agreement as well as the
Promissory Notes in the total amount of USD 2.000.000 set forth in sub-section
3.2.1.4 of the Stock Purchase Agreement shall accrue annual interest at the rate
of eight per cent as from 16 March 2001 up to and including the Closing Date.
The said interest shall be paid in cash to the Offerors on the Closing Date to
each of them in proportion to their portion of the amounts SEK 5.700.000 and USD
3.680.000 respectively.
In the event that the option is not exercised within the Option Period for
reasons not attributable to the Offerors the aforesaid interest shall still be
paid and shall be calculated for the period 16 March -- 16 June 2001. The
payment thereof in such event to be made in cash on 16 June 2001.
8. PAYMENT TO BENGT BODIN
The Company shall pay to Bengt Bodin a monthly salary amount of SEK 54.075 or
any fraction thereof for any Part of a month as from 1 January 2001 up to and
including the Closing Date.
The aforesaid amounts shall be taken into account in adjusting the Preliminary
Purchase Price into the Final Purchase Price.
The Sellers shall not be deemed to be in default of sub-sections 7.39, 7.44 and
7.45 as a result of these payments.
9. PATENT MATTERS
The Offerors represent to DRI Inc. and DRI Europa that in their opinion the
patent infringement claims related to Polish patent number 177 576 are
substantially without merit and not outside of normal course of business.
Based upon the Offeror's aforesaid representation DRI Inc. and DRI Europa are
proceeding with the Amended Option Agreement, it being understood that DRI Inc.
and DRI Europa preliminarily concur with the Offerors' representation, subject
to complete review by patent counsel of DRI Inc. and DRI Europa at its own
expense.
10. NOTICES
Any notice to be provided under this Amended Option Agreement shall be in the
English language and deemed valid and effective if sent by courier or registered
mail or telefax to the following addresses:
If to Bengt Bodin: Bengt Bodin
La Piniere, Cidex 206, R.D. 2085
FR-06330 Roquefort les Pins,
France
Fax +33-493 775 186
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If to Annacarin Bodin: Annacarin Bodin
La Piniere, Cidex 206, R.D. 2085
FR-06330 Roquefort les Pins,
France
Fax +33-493 775 186
If to Mattias Bodin: Mattias Bodin
Parkgatan 10
SE-112 30 STOCKHOLM
Sweden
If to Tobias Bodin: Tobias Bodin
Ovre Husargatan 23 A
SE-413 14 GOTEBORG
Sweden
If to Bertil Lindqvist: Bertil Lindqvist
Nybrogatan 45 B
114 39 STOCKHOLM
Sweden
Fax +46-8 661 81 26
If to DRI Europa AB: DRI Europa AB
c/o Mannheimer Swartling
Box 2235
403 14 GOTHENBURG
Sweden
Fax +46 31 10 96 01
If to Digital Recorders Inc.: Digital Recorders Inc.
Sterling Plaza, Box 26
5949 Sherry Lane, Suite 1050
Dallas, TX 75225 USA
Fax +1 214 378 8437
With copies to: David Furr
Gray, Layton, Kersh, Solomon, Sigmon, Furr &
Smith, P.A.
P.O. Box 2636
Gastonia, NC 28053 USA
Fax +1 704 866 8010
Hans-Elof Olsson
Mannheimer Swartling
Box 2235
403 14 GOTHENBURG
Sweden
Fax +46 31 10 96 01
The communications will be considered having reached the addressees:
(i) if sent by courier - on delivery
(ii) if sent by registered mail - seven days from the date of dispatch
(iii) if sent by telefax - on the day the recipient confirms receipt
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Each Offeror and DRI Europa and DRI Inc. shall be obliged to send a
communication to the other parties in accordance with this section 10 notifying
any changes in the relevant details set out herein, which details shall then be
deemed to have been amended accordingly.
11. CONFIDENTIALITY
11.1 No announcement concerning the transaction contemplated by this Amended
Option Agreement or any matter ancillary thereto shall be made by either
party hereto without the written consent of the other party, provided
that nothing herein shall prevent either party from making, in
consultation with the other party, any announcement or filing required by
law, regulations or by the rules and regulations of any stock exchange on
which it is listed including any announcement or filing in connection
with the filing under the SEC regulations of shareholders' vote and
proxies thereto.
11.2 Subject to sub-section 11.1 above, the parties agree not to disclose in
whole or in part any of the contents of this Amended Option Agreement to
any third party, unless required by law.
12. EFFECTIVE DATE
This Amended Option Agreement shall enter into effect on the date it has been
signed by all Offerors, DRI Europa and DRI Inc.
The Option Agreement shall cease to have effect on the date this Amended Option
Agreement enters into effect.
13. ASSIGNMENT
None of the parties shall have the right to assign this Amended Option Agreement
partly or wholly without the prior written consent of the other parties.
14. EXHAUSTIVE CONTRACT DOCUMENT
This Amended Option Agreement sets forth exhaustively all terms and conditions
related to the option rights hereunder and supersedes all prior agreements
including the Option Agreement between the Offerors and DRI Europa and DRI Inc.
with respect to the subject matter hereof.
15. AMENDMENTS
No amendment to this Amended Option Agreement shall be effective unless made in
writing and signed by authorised representatives of each Offeror and DRI Europa
and DRI Inc.
16. GOVERNING LAW
This Amended Option Agreement shall be governed by and construed in accordance
with the laws of Sweden.
17. ARBITRATION
Any dispute arising out of or in connection with this Amended Option Agreement
shall be exclusively settled by arbitration in accordance with the Rules of the
Arbitration Institute of the Stockholm Chamber of Commerce (the "Institute").
The arbitral tribunal shall be composed of three (3) arbitrators. The place of
arbitration shall be Gothenburg, Sweden. The arbitration proceedings shall be
conducted in the English language.
Each party shall nominate one arbitrator and the Institute shall nominate the
third arbitrator, who shall be the Chairman. If arbitration is initiated by more
than one claimant simultaneously and/or against
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one or more respondents, each side shall jointly appoint an arbitrator. If the
respondent has not (or, if there are more respondents than one, the respondents
have not jointly) within 30 days after receipt of a request for arbitration,
appointed an arbitrator, such arbitrator shall upon request of any claimant be
appointed by the Institute. If the provision related to the appointment of the
arbitrator is held by any court of competent jurisdiction or arbitrators to be
illegal, void or unenforceable the illegality, voidness or unenforceability of
such provision shall have no effect upon and shall not impair the enforceability
of any other provisions of this section 10. The parties agree that the Institute
in such case shall appoint all three arbitrators.
Any dispute arising at any time between the parties shall be referred to one
single arbitration tribunal, unless (i) the arbitration tribunal considers it
inappropriate having regard to the point of time at which the request for
arbitration is made, or (ii) one or more of the arbitrators declares that he or
they do not accept to serve as arbitrators in a dispute other than the actual
dispute for which such arbitrator(s) was appointed.
The rules regarding joinder of claims in Chapter 14 of the Code of Judicial
Procedure (Sw: Rattegangsbalken) shall be applied by the arbitral tribunal to
the extent so is appropriate and accepted by the arbitrators. The voting rules
in the Code of Judicial Procedure shall be applied by the arbitral tribunal.
------------------------
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IN WITNESS WHEREOF, the parties hereto have executed this Amended Option
Agreement in six copies as of the day and year first above written.
----------------------------------------- -----------------------------------------
Bengt Bodin DRI Europa AB
----------------------------------------- -----------------------------------------
Annacarin Bodin Digital Recorders Inc.
-----------------------------------------
Mattias Bodin
-----------------------------------------
Tobias Bodin
-----------------------------------------
Bertil Lindqvist
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APPENDIX III
BODIN WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of December , 2000, by and between BENGT
BODIN, a resident of Nice, France (the "Warrantee"), on the one hand, and
DIGITAL RECORDERS, INC., a North Carolina corporation ("DRI") on the other.
WHEREAS, the Warrantee and DRI have agreed to a form of a Promissory Note
(the "Promissory Note") to be made effective on the Closing Date of the Stock
Purchase Agreement (the "Purchase Agreement" or the "Stock Purchase Agreement")
(capitalized terms herein shall be consistent with those found in the Purchase
Agreement) pursuant to which, among other things, the Warrantee is to receive
the right (the "Warrant") to purchase up to 100,000 shares of Common Stock, par
value $.10 per share (the "Warrant Shares") of DRI pursuant to the terms of this
warrant agreement, subject to all the terms and conditions of the Registration
Rights Agreement dated as of the date hereof by and among DRI, Bengt Bodin,
Annacarin Bodin, Mattias Bodin and Tobias Bodin; and
WHEREAS, this warrant agreement (the "Bodin Warrant Agreement") constitutes
the warrant agreement described in the Purchase Agreement;
NOW, THEREFORE, in consideration of the agreements set forth below, the
parties hereto agree as follows:
1. THE WARRANT. Subject to the terms and conditions hereof, the
Warrantee is hereby granted the Warrant, at any time or from time to time
commencing on the date of this Bodin Warrant Agreement and at or before
5:00 P.M., Eastern Time, on January , 2006 (such five-year period
hereinafter the "Warrant Exercise Period"), but not thereafter, to subscribe
for and purchase any or all of the Warrant Shares for a price of $4.00 per
Warrant Share purchased (the "Warrant Exercise Price"). If the rights
represented hereby shall not be exercised during the Warrant Exercise
Period, this Warrant shall become and be void without further force or
effect, and all rights represented hereby shall cease and expire.
2. EXERCISE OF WARRANT. During the Warrant Exercise Period, the
Warrantee may exercise this Warrant upon presentation and surrender of this
Warrant and upon payment of the Warrant Exercise Price for the Warrant
Shares to be purchased or by notice of non-cash exercise as provided in
Section 15 herein below to DRI at the principal office of DRI. Upon exercise
of this Warrant, the form of election hereinafter provided must be duly
executed and delivered to DRI. If this Warrant is exercised in part, the
Warrantee shall be required to exercise this Warrant with respect to a
minimum of 25,000 shares of Common Stock upon each such exercise in part. In
the event of the exercise of this Warrant in part only, DRI shall cause to
be delivered to the Warrantee a new Warrant of like tenor to this Warrant in
the name of the Warrantee evidencing the right of the Warrantee to purchase
the number of Warrant Shares purchasable hereunder as to which this Warrant
has not been exercised. On exercise of this Warrant, unless (i) DRI receives
an opinion from counsel satisfactory to it that such a legend is not
required in order to assure compliance with the Securities Act of 1933, as
amended (the "1933 Act"), or any applicable state securities laws, or
(ii) the Warrant Shares are registered under the 1933 Act, each certificate
for Warrant Shares issued hereunder shall bear a legend reading
substantially as follows:
These securities have not been registered under the Securities Act of
1933, as amended, and may be offered and sold only if registered pursuant
to the provisions of that Act or if, in the opinion of counsel to the
Warrantee, an exemption from registration thereunder is available, the
availability of which must be established to the satisfaction of DRI.
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The foregoing legend may be removed with respect to any Warrant Shares
sold upon registration or sold pursuant to an exemption from registration,
including the exemption for sales made in accordance with Rule 144
promulgated under the 1933 Act; provided DRI receives an opinion from
counsel satisfactory to it that such legend may be removed; and provided
further that such legend shall be removed from the certificates representing
the Warrant Shares upon registration thereof pursuant to the Registration
Rights Agreement but in no event later than one year from the date hereof.
3. ASSIGNMENT.
Subject to the terms contained herein, this Warrant may be assigned by
the Warrantee in whole or in part by execution by the Warrantee of the form
of assignment attached hereto, in the sole discretion of the Warrantee, to a
"Permitted Assignee" as defined below, or with the prior written consent of
DRI, to any other party. In the event of any permitted assignment, DRI, upon
request and upon surrender of this Warrant by the Warrantee at the principal
office of DRI accompanied by payment of all transfer taxes, if any, payable
in connection therewith, shall transfer this Warrant on the books of DRI. If
the permitted assignment is in whole, DRI shall execute and deliver a new
Warrant or Warrants of like tenor to this Warrant to the appropriate
assignee expressly evidencing the right to purchase the aggregate number of
Warrant Shares purchasable hereunder; and if the permitted assignment is in
part, DRI shall execute and deliver to the appropriate assignee a new
Warrant or Warrants of like tenor expressly evidencing the right to purchase
the portion of the aggregate number of Warrant Shares as shall be
contemplated by any such permitted assignment, and shall concurrently
execute and deliver to the Warrantee a new Warrant of like tenor to this
Warrant evidencing the right to purchase the remaining portion of the
Warrant Shares purchasable hereunder which have not been transferred to the
Permitted Assignee. For purposes of this Agreement, a "Permitted Assignee"
shall mean (a) if the Warrantee or successor holder (collectively, a
"Holder") is an individual, any (i) descendant or ancestor of the Holder,
(ii) trust for the benefit of the Holder, descendant or ancestor,
(iii) beneficiary of any such trust or any descendant or ancestor of any
such beneficiary, (iv) trust or entity in which the Holder or beneficiary or
any descendant or ancestor of the Holder or beneficiary, trust or other
entity shall have any interest, (v) any of the foregoing, or any entity in
which any of the foregoing, or any trust for any foregoing Holder or
beneficiary, holds, directly or indirectly, or in trust, at least fifty
percent (50%) of the aggregate voting power and (vi) any immediate relative
or spouse of any such foregoing person (including the Holder) or persons;
and (b) if the Holder is an entity, any (i) subsidiary or affiliate of the
Holder, (ii) corporation, partnership, limited liability company or other
entity that may be organized by the Holder, or by its owners, as a separate
business unit in connection with the business activity of the Holder or of
its owners and (iii) corporation, partnership or other entity resulting from
the reorganization, merger or consolidation of the Holder with any other
corporation, partnership or other entity or to which all or substantially
all of the Holder's business or assets may be sold, assigned or transferred.
4. NOTICE. The Warrantee, by acceptance hereof, agrees that, before
any transfer is made of all or any portion of this Warrant, the Warrantee
shall give written notice to DRI at least fifteen (15) days prior to the
date of such proposed transfer, which notice shall specify the identity,
address and affiliation, if any, of such transferee. No such transfer shall
be made unless and until DRI has received an opinion of counsel for DRI or
for the Warrantee stating that no registration under the 1933 Act or any
state securities law is required with respect to such disposition or a
registration statement has been filed by DRI and declared effective by the
Securities and Exchange Commission covering such proposed transfer and the
Warrant has been registered under appropriate state securities laws.
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5. SHARE DIVIDENDS, RECLASSIFICATION, REORGANIZATION PROVISIONS.
(a) If, prior to the expiration of this Warrant by exercise or by its
terms, DRI shall issue any of its Common Stock as a share dividend or
subdivide the number of outstanding shares of Common Stock into a greater
number of shares then, in either of such cases, the Warrant Exercise Price
per share purchasable pursuant to this Warrant in effect at the time of such
action shall be proportionately reduced and the number of Warrant Shares
purchasable pursuant to this Warrant shall be proportionately increased; and
conversely, if DRI shall reduce the number of outstanding shares of Common
Stock by combining such shares into a smaller number of shares then, in such
case, the Warrant Exercise Price per share purchasable pursuant to this
Warrant in effect at the time of such action shall be proportionately
increased and the number of Warrant Shares at that time purchasable pursuant
to this Warrant shall be proportionately decreased. If DRI shall, at any
time during the life of this Warrant, declare a dividend payable in cash on
its Common Stock and shall at substantially the same time offer to its
shareholders a right to purchase new Common Stock from the proceeds of such
dividend or for an amount substantially equal to the dividend, all Common
Stock so issued shall, for the purpose of this Warrant, be deemed to have
been issued as a share dividend. Any dividend paid or distributed upon
Common Stock in shares of any other class of securities convertible into
Common Stock shall be treated as a dividend paid in Common Stock to the
extent that Common Stock is issuable upon the conversion thereof.
(b) If, prior to the expiration of this Warrant by exercise or by its
terms, DRI shall be recapitalized by reclassifying its outstanding Common
Stock, or DRI or a successor corporation shall consolidate or merge with or
convey all or substantially all of its or any successor corporation's
property and assets to any other corporation or corporations (any such
corporation being included within the meaning of the term "successor
corporation" used above in the event of any consolidation or merger of any
such corporation with, or the sale of all or substantially all of the
property of any such corporation, to another corporation or corporations),
the Warrantee shall thereafter have the right to purchase, upon the basis
and upon the terms and conditions and during the time specified in this
Warrant, in lieu of the Warrant Shares theretofore purchasable upon the
exercise of this Warrant, such shares, securities or assets as may be issued
or payable with respect to, or in exchange for, the number of Warrant Shares
theretofore purchasable upon the exercise of this Warrant had such
recapitalization, consolidation, merger or conveyance not taken place and,
in any such event, the rights of the Warrantee to an adjustment in the
number of Warrant Shares purchasable upon the exercise upon this Warrant as
herein provided shall continue and be preserved in respect of any shares,
securities or assets which the Warrantee becomes entitled to purchase.
(c) If: (i) DRI shall take a record of holders of its Common Stock for
the purpose of entitling them to receive a dividend payable otherwise than
in cash, or any other distribution in respect of the Common Stock (including
cash), pursuant to, without limitation, any spin-off, split-off, or
distribution of DRI's assets; or (ii) DRI shall take a record of the holders
of its Common Stock for the purpose of entitling them to subscribe for or
purchase any shares of any class or to receive any other rights; or
(iii) in the event of any classification, reclassification or other
reorganization of the securities which DRI is authorized to issue,
consolidation or merger by DRI with or into another corporation, or
conveyance of all or substantially all of the assets of DRI; or (iv) in the
event of any voluntary or involuntary dissolution, liquidation or winding up
of DRI; then, and in any such case, DRI shall mail to the Warrantee, at
least 15 days prior thereto, a notice stating the date or expected date on
which a record is to be taken for the purpose of such dividend, distribution
or rights, or the date on which such classification, reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation
or winding up, as the case may be, will be effected. Such notice shall also
specify the date or expected date, if any is to be fixed, as to which
holders of Common Stock of record shall be entitled to participate in such
dividend,
III-3
distribution or rights, or shall be entitled to exchange their Common Stock
or securities or other property deliverable upon such classification,
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up, as the case may be.
(d) If DRI, at any time while this Warrant shall remain unexpired and
unexercised in whole or in part, shall sell all or substantially all of its
property, dissolve, liquidate or wind up its affairs, the Warrantee may
thereafter receive upon exercise hereof, in lieu of each Warrant Share which
it would have been entitled to receive, the same kind and amount of any
securities or assets as may be issuable, distributable or payable upon any
such sale, dissolution, liquidation or winding up with respect to each share
of Common Stock of DRI purchased upon exercise of this Warrant.
6. RESERVATION OF SHARES ISSUABLE ON EXERCISE OF WARRANT. At all times
during the Warrant Exercise Period, DRI will reserve and keep available out
of its authorized Common Stock, solely for issuance upon the exercise of
this Warrant, such number of shares of Common Stock and other securities as
from time to time may be issuable upon exercise of this Warrant. All Shares
that may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be validly issued, fully paid, non-assessable,
and free from all taxes, liens and charges with respect to the issue
thereof, issued in compliance with all applicable federal and state
securities laws.
7. REQUEST TO TRANSFER AGENT. On exercise of all or any portion of
this Warrant, DRI shall, within ten days of the receipt of good and clean
funds (or receipt of notice of Warrantee's election pursuant to Section 15
below) for the purchase of any or all of the Warrant Shares, advise its
Transfer Agent and Registrar of the required issuance of the number of
Warrant Shares and the names in which such Warrant Shares are to be
registered pursuant to the exercise form attached hereto. DRI shall also
execute and deliver any and all such further documents as may be requested
by the Transfer Agent and Registrar for the purpose of effecting the
issuance of Warrant Shares upon payment therefor by the Warrantee or any
assignee.
8. LOSS THEFT DESTRUCTION OR MUTILATION. Upon receipt by DRI of
evidence satisfactory to it (in the exercise of its reasonable discretion)
of the ownership of and the loss, theft, destruction or mutilation of this
Warrant, and the purchase by the Warrantee of a lost security bond (or, if
acceptable to DRI, the provision of a satisfactory indemnity from the
Warrantee) in an amount equal to or exceeding the total value of the Warrant
Shares to be purchased hereunder, DRI will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
9. WARRANTEE NOT A SHAREHOLDER. The Warrantee or any other holder of
this Warrant shall, as such, not be entitled by reason of ownership of this
Warrant to any rights whatsoever of a shareholder of DRI until this Warrant
shall have been exercised and the Warrant Shares purchasable upon the
exercise shall have become deliverable, as provided herein.
10. TRANSFER TAXES. DRI will pay all stamp taxes and other duties, if
any, to which, under the laws of the United States of America or any State
or political subdivision thereof, this Agreement or the original issuance of
this Warrant may be subject. The issuance of certificates for shares of
Common Stock upon exercise of this Warrant shall be made without charge to
Warrantee for any issuance tax in respect hereof, provided that DRI shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of this Warrant. The Warrantee or its
assignee(s) will pay all taxes in respect of the transfer of this Warrant or
the Warrant Shares issuable upon exercise hereof.
11. MAILING OF NOTICE. All notices and other communications from DRI
to the Warrantee or from the Warrantee to DRI shall be mailed by first
class, certified mail, postage prepaid, or sent by receipt confirmed
facsimile transmission, to the address furnished to each party in writing by
the other party.
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12. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant. With
respect to any fraction of a share called for upon the exercise hereof, DRI
shall issue to the Warrantee at no extra cost another whole share for any
fraction which is one-half or greater, and the Warrantee shall forfeit the
fractional share that is less than one-half of a share.
13. COMMON STOCK DEFINED. Whenever reference is made in this Warrant
to the issue or sale of Common Stock, the term "Common Stock" shall mean the
voting Common Stock of DRI of the class authorized as of the date hereof and
any other class of stock ranking on a parity with such Common Stock.
14. REDUCTION IN NUMBER OF WARRANTS. The Warrantee and DRI acknowledge
their execution of a Promissory Note pursuant to a Stock Purchase Agreement
("Stock Purchase Agreement") between the parties which provides, among other
things, for certain offset rights by DRI against the Promissory Note
pursuant to the indemnification provisions set forth in the Stock Purchase
Agreement. To the extent the parties agree to an offset or reduction in the
Promissory Note pursuant to said provisions, the number of warrants granted
hereunder shall be proratably reduced.
15. NON-CASH EXERCISE.
(a) Warrantee shall be permitted at his election, in lieu of payment in
cash, to offset and reduce any part or all of the aggregate Warrant Exercise
Price payable under Section 2 by the sum, to the extent thereof on the date
of exercise, of (i) the unpaid principal amount of the Promissory Note plus
(ii) accrued and unpaid interest thereon. An election pursuant to this
Section 15(a) shall be made by a written notice of exercise in the form
attached hereto specifying the amount of such principal and interest to be
applied to the Warrant Exercise Price of the Warrant Shares to be purchased.
(b) In lieu of payment in cash, the rights represented by this Warrant
may also be exercised by a written notice of exercise in the form attached
hereto specifying that the holder of this Warrant wishes to convert all or
any portion of this Warrant (the "Conversion Right") into a number of Shares
equal to the quotient obtained by dividing (x) the current market value of
the Warrant Shares subject to the portion of this Warrant being exercised
(determined by subtracting the aggregate Warrant Exercise Price for all such
Warrant Shares in effect immediately prior to the exercise of the Conversion
Right from the aggregate current or closing market price of such Shares
issuable upon exercise of such portion of this Warrant immediately prior to
the exercise of the Conversion Right) by (y) the current or closing market
price (as defined below) of one share of Common Stock immediately prior to
the exercise of the Conversion Right. For the purpose of any computation
under this Section 15(b), the current or closing market price per share of
Common Stock at any date shall be deemed to be the average of the daily
closing prices for five (5) consecutive trading days commencing ten
(10) trading days before the date of such computation. The closing price for
each day shall be the last sale price for such day, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the NASDAQ National
Market (or if the Common Stock is not listed on the NASDAQ, then on the
principal United States national securities exchange on which the Common
Stock is listed or quoted. If the Common Stock is not listed or quoted on
any United States national securities exchange, then the current or closing
market price per share of Common Stock shall be determined by the Board of
Directors of DRI in good faith.
16. GOVERNING LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of North Carolina.
17. ARBITRATION. Any controversy, dispute or claim arising out of, or
relating to, this Agreement and/or its interpretation shall, unless resolved
by agreement of the parties, be settled
III-5
by binding arbitration in Raleigh, Wake County, North Carolina, in
accordance with the Rules of the American Arbitration Association then
existing. This Agreement to arbitrate shall be specifically enforceable
under the prevailing arbitration law of the State of North Carolina. The
award rendered by the arbitrators shall be final and judgment may be entered
upon the award in any court of the State of North Carolina having
jurisdiction of the matter.
18. BINDING EFFECT. All of the obligations of DRI relating to the
Common Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant and all of the covenants and
agreements of DRI shall inure to the benefit of the successors and assigns
of the Holder.
IN WITNESS WHEREOF, the parties have executed this Bodin Warrant Agreement
on the day and year first above written.
DRI:
DIGITAL RECORDERS, INC.
By
--------------------------------------
Print Name
--------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
WARRANTEE:
--------------------------------------
BENGT BODIN
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FORM TO BE USED TO EXERCISE Warrant:
EXERCISE FORM
The undersigned hereby elects irrevocably to exercise the within Warrant and
to purchase (up to a maximum 100,000) shares of Common Stock of
Digital Recorders, Inc., called for hereby, and hereby
[makes payment of $ (at the rate of $4.00 per share) in payment of
the Warrant Exercise Price pursuant hereto in cash or by offset against the
Promissory Note as provided in Section 15(a) of the Warrant as follows:
[elects to purchase shares of Common Stock of Digital
Recorders, Inc. pursuant to non-cash conversion of the Warrant as provided in
Section 15(b) of the Warrant.]
Please issue the shares as to which this Warrant is exercised in accordance
with the instructions given below.
--------------------------------------
Signature
Signature Guaranteed
Date:
- ------------------------------------------------------------
INSTRUCTIONS FOR REGISTRATION OF SHARES:
Register Shares in name of:
- -------------------------------------------
Address:
- ------------------------------------------------------------
(print)
III-7
FORM TO BE USED TO ASSIGN Warrant:
ASSIGNMENT
For value received does hereby sell, assign and transfer unto
the right to purchase shares of Common Stock of Digital
Recorders, Inc., evidenced by the within Warrant, and does hereby irrevocably
constitute and appoint Digital Recorders, Inc. and/or its Transfer Agent as
attorney to transfer the same on the books of Digital Recorders, Inc. with full
power of substitution in the premises.
--------------------------------------
Signature
Signature Guaranteed
Date:
- ------------------------------------------------------------
NOTICE: The signature to the form to exercise or form to assign must correspond
with the name as written upon the face of the within Warrant in every particular
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank, other than a savings bank, or by a trust company or by a
firm having membership on a registered national securities exchange.
III-8
APPENDIX IV
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement (this "AGREEMENT") dated as of
by and among DIGITAL RECORDERS, INC., a North Carolina
corporation (the "COMPANY"), Bengt Bodin, Annacarin Bodin, Mattias Bodin and
Tobias Bodin (together with their respective permitted transferees, the
"Holders").
WHEREAS, it is contemplated under that certain Stock Purchase Agreement by
and among the Company, Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin
and Bertil Lindqvist dated as of the date hereof (as such may be amended from
time to time, the "STOCK PURCHASE AGREEMENT") and that certain Warrant Agreement
dated the date hereof by and between the Company and Bengt Bodin (as such may be
amended form time to time, the "WARRANT AGREEMENT"), that the Company provide
the Holders with the registration rights set forth in this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
REQUIRED REGISTRATIONS
1.1 REQUIRED REGISTRATION. Subject to Sections 1.3, and 5.2 hereof, the
Company shall effect registration on a continuous or delayed basis pursuant to
Rule 415 or an equivalent provision promulgated under the Securities Act of
(a) Warrant Shares and Initial SPA Shares on or before the date that is one year
after the date hereof and (b) Remaining SPA Shares on or before the date that is
two years after the date hereof. All registrations pursuant to this Section 1.1
are referred to herein as "REQUIRED REGISTRATIONS."
1.2 EXPENSES. The Company will pay all Registration Expenses in connection
with any Required Registration, including any Registration Statement that is not
deemed to be effected pursuant to the provisions of Section 1.3 hereof.
1.3 EFFECTIVE REGISTRATION STATEMENT. A registration pursuant to
Section 1.1 of this Agreement shall not be deemed to have been effected
(i) unless a Registration Statement with respect thereto has been declared
effective by the Commission, (ii) if after it has become effective, such
registration is interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any
reason or (iii) the Registration Statement does not remain continuously
effective until termination of the Company's registration obligations pursuant
to Section 5.2 hereof. If a registration pursuant to this Article I is deemed
not to have been effected as provided in this Section 1.3, then the Company
shall continue to be obligated to effect the Required Registrations as set forth
in Section 1.1.
ARTICLE II
REGISTRATION PROCEDURES
Whenever any Registrable Securities are to be registered pursuant to this
Agreement, the Company will use reasonable efforts to effect the registration
and the sale of such Registrable Securities in accordance with the intended
method of disposition thereof as quickly as possible, and pursuant thereto the
Company will as expeditiously as reasonably possible:
(a) prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities and use all reasonable efforts to
cause such Registration Statement to become and remain effective until the
completion of the distribution contemplated thereby;
IV-1
PROVIDED, that as promptly as practicable before filing a Registration
Statement or Prospectus or any amendments or supplements thereto, the
Company will (i) furnish to counsel selected by the Holders copies of all
such documents proposed to be filed, and (ii) notify each holder of
Registrable Securities covered by such Registration Statement of (x) any
request by the Commission to amend such Registration Statement or amend or
supplement any Prospectus, or (y) any stop order issued or threatened by the
Commission, and take all reasonable actions required to prevent the entry of
such stop order or to promptly remove it if entered;
(b) (i) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to keep such Registration Statement
effective until all Registrable Securities covered by such Registration
Statement are sold in accordance with the intended plan of distribution set
forth in such Registration Statement, and (ii) comply with the provisions of
the Securities Act with respect to the disposition of all securities covered
by such Registration Statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
Registration Statement;
(c) furnish to each seller of Registrable Securities, without charge,
such number of conformed copies of such Registration Statement, each
amendment and supplement thereto, the Prospectus included in such
Registration Statement (including each preliminary Prospectus and, in each
case including all exhibits) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such seller;
(d) use all reasonable efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any seller thereof shall reasonably
request, to keep such registration or qualification in effect for so long as
such Registration Statement remains in effect and do any and all other acts
and things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller; PROVIDED, HOWEVER, that the
Company will not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this clause (d), (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction;
(e) use all reasonable efforts (if the offering is underwritten) to
furnish to each seller of Registrable Securities a signed copy, addressed to
such seller (and the underwriters, if any) of an opinion of counsel for the
Company or special counsel to the selling stockholders, dated the effective
date of such Registration Statement (and, if such Registration Statement
includes an underwritten public offering, dated the date of the closing
under the underwriting agreement), covering substantially the same matters
with respect to such Registration Statement (and the Prospectus included
therein) as are customarily covered in opinions of issuer's counsel
delivered to the underwriters in underwritten public offerings, and such
other legal matters as the seller (or the underwriters, if any) may
reasonably request;
(f) notify each seller of Registrable Securities, at a time when a
Prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event known to the Company as a result of which
the Prospectus included in such Registration Statement, as then in effect,
contains an untrue statement of a material fact or omits to state any fact
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made,
and, at the request of any such seller, the Company will prepare and furnish
such seller a reasonable number of copies of a supplement to or an amendment
of such Prospectus as may be necessary so that, as thereafter delivered to
the purchasers of such Registrable Securities, such Prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make
IV-2
the statements therein not misleading in the light of the circumstances
under which they were made;
(g) cause all such Registrable Securities to be listed on each
securities exchange and quotation system on which similar securities issued
by the Company are then listed and to enter into such customary agreements
as may be required in furtherance thereof, including, without limitation,
listing applications and indemnification agreements in customary form;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such Registration Statement;
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to
such Registration Statement and any attorney, accountant or other agent
retained by any such seller or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors, employees and independent accountants to
supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such Registration Statement
to enable them to conduct a reasonable investigation within the meaning of
the Securities Act;
(j) subject to other provisions hereof, use all reasonable efforts to
cause such Registrable Securities covered by such Registration Statement to
be registered with or approved by such other governmental agencies or
authorities or self-regulatory organizations as may be necessary to enable
the sellers thereof to consummate the disposition of such Registrable
Securities; and
(k) promptly notify the holders of the Registrable Securities of the
issuance of any stop order by the Commission or the issuance by any state
securities commission or other regulatory authority of any order suspending
the qualification or exemption from qualification of any of the Registrable
Securities under state securities or "blue sky" laws, and use every
reasonable effort to obtain the lifting at the earliest possible time of any
stop order suspending the effectiveness of any Registration Statement or of
any order preventing or suspending the use of any preliminary Prospectus.
ARTICLE III
REGISTRATION EXPENSES
3.1 REGISTRATION EXPENSES. All Registration Expenses will be borne as
provided in Section 1.2 of this Agreement.
3.2 SELLERS' EXPENSES. The Company shall have no obligation to pay any
underwriting discounts or commissions or stock transfer taxes attributable to
the sale of Registered Securities, which expenses will be borne by all sellers
of securities included in such registration in proportion to the aggregate
selling price of the securities to be so registered.
ARTICLE IV
INDEMNIFICATION
4.1 COMPANY'S INDEMNIFICATION OBLIGATIONS. The Company agrees to indemnify
and hold harmless each of the holders of any Registrable Securities covered by
any Registration Statement referred to herein and each other Person, if any, who
controls such holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act (collectively, the "HOLDER INDEMNITEES"):
(i) against any and all loss, liability, claim, damage or expense
arising out of or based upon an untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement (or any amendment
or supplement thereto), including all documents incorporated therein by
reference, or in any preliminary Prospectus or Prospectus (or any amendment
or
IV-3
supplement thereto) or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense to
the extent of the aggregate amount paid in settlement of any litigation,
investigation or proceeding by any governmental agency or body, commenced or
threatened, or of any claim based upon any such untrue statement or omission
or any such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Company; and
(iii) against any and all reasonable expense incurred by them in
connection with investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim based upon any such untrue
statement or omission or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under clause (i) or
(ii) above;
PROVIDED, that this indemnity does not apply to any loss, liability, claim,
damage or expense to the extent arising out of an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Holder expressly for use in the preparation of any Registration Statement
(or any amendment or supplement thereto), including all documents incorporated
therein by reference, or in any preliminary Prospectus or Prospectus (or any
amendment or supplement thereto); and PROVIDED FURTHER, that the Company will
not be liable to any holder or any other Holder Indemnitee under the indemnity
agreement in this Section 4.1, with respect to any preliminary Prospectus or the
final Prospectus or the final Prospectus as amended or supplemented, as the case
may be, to the extent that any such loss, liability, claim, damage or expense of
such Holder Indemnitee results from the fact that such holder sold Registrable
Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final Prospectus or of the
final Prospectus as then amended or supplemented, whichever is most recent, if
the Company has previously and timely furnished copies thereof to such holder.
4.2 HOLDER'S INDEMNIFICATION OBLIGATIONS. In connection with any
Registration Statement in which a holder of Registrable Securities is
participating, each such holder agrees to indemnify and hold harmless (in the
same manner and to the same extent as set forth in Section 4.1 of this
Agreement) the Company and each Person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act with respect to any statement or alleged statement in or omission or alleged
omission from such Registration Statement, any preliminary, final or summary
Prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with information furnished to the Company by or
on behalf of such holder. The obligations of each holder pursuant to this
Section 4.2 are to be several and not joint (however, husband and wife are to be
treated as one holder); PROVIDED, that with respect to each claim pursuant to
this Section 4.2, each such holder's maximum liability under this Section shall
be limited to an amount equal to the net proceeds actually received by such
holder (after deducting any underwriting discount and expenses) from the sale of
Registrable Securities being sold pursuant to such Registration Statement or
Prospectus by such holder.
4.3 NOTICES; DEFENSE; SETTLEMENT. Promptly after receipt by an indemnified
party hereunder of written notice of the commencement of any action or
proceeding involving a claim referred to in Section 4.1 or Section 4.2 of this
Agreement, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
commencement of such action; PROVIDED, that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under Section 4.1 or Section 4.2 of this Agreement except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In
IV-4
case any such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified, to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, in
which case the indemnifying party shall not be liable for the fees and expenses
of (i) more than one counsel for all holders of Registrable Securities, selected
by the Holders or (ii) more than one counsel for the Company in connection with
any one action or separate but similar or related actions. An indemnifying party
who is not entitled to, or elects not to, assume the defense of a claim will not
be obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim, in which event the indemnifying
party shall be obligated to pay the fees and expenses of such additional counsel
or counsels. The indemnifying party will not, without the prior written consent
of each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
indemnified party or any Person who controls such indemnified party is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of such indemnified party from all
liability arising out of such claim, action, suit or proceeding. Notwithstanding
anything to the contrary set forth herein, and without limiting any of the
rights set forth above, in any event, any party will have the right to retain,
at its own expense, counsel with respect to the defense of a claim.
4.4 INDEMNITY PROVISION. The Company and each holder of Registrable
Securities shall provide for the foregoing indemnity (with appropriate
modifications) in any underwriting agreement with respect to any required
registration or other qualification of securities under any Federal or state law
or regulation of any governmental authority other than the Securities Act.
4.5 CONTRIBUTION BASED ON RELATIVE FAULT. Each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in Section 4.1 or
Section 4.2 of this Agreement in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, in connection with statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations, including, without limitation, the
relative benefits received by each party from the offering of the securities
covered by such Registration Statement, the parties' relative knowledge and
access to information concerning the matter with respect to which the claim was
asserted and the opportunity to correct and prevent any statement or omission.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statements or omission. The parties hereto agree that it
would not be just and equitable if contributions pursuant to this Section 4.5
were to be determined by pro rata or per capita allocation (even if the
underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this Section 4.5. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this Section 4.5 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any action or claim (which shall be
limited as provided in Section 4.3 of this
IV-5
Agreement if the indemnifying party has assumed the defense of any such action
in accordance with the provisions thereof) which is the subject of this
Section 4.5. Promptly after receipt by an indemnified party under this
Section 4.5 of notice of the commencement of any action against such party in
respect of which a claim for contribution may be made against an indemnifying
party under this Section 4.5, such indemnified party shall notify the
indemnifying party in writing of the commencement thereof if the notice
specified in Section 4.3 of this Agreement has not been given with respect to
such action; PROVIDED, that the omission to so notify the indemnifying party
shall not relieve the indemnifying party from any liability which it may
otherwise have to any indemnified party under this Section 4.5, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. The Company and each holder of Registrable Securities agrees with
each other and the underwriters of the Registrable Securities, if requested by
such underwriters, that (i) the underwriters' portion of such contribution shall
not exceed the underwriting discount and (ii) that the amount of such
contribution shall not exceed an amount equal to the net proceeds actually
received by such indemnifying party from the sale of Registrable Securities in
the offering to which the losses, liabilities, claims, damages or expenses of
the indemnified parties relate. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
4.6 PAYMENTS. The indemnification required by this Article IV shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
ARTICLE V
TRANSFER AND TERMINATION OF REGISTRATION RIGHTS
5.1 TRANSFER OF RIGHTS. Any Holder may transfer his rights to register
such Holder's Registrable Securities hereunder, provided that such rights may
not be transferred (a) to any person or entity who or which is engaged in an
activity or business directly competitive with any activity or business of the
Company or any subsidiary of the Company as presently conducted; or (b) to any
person or entity, other than any Bodin Seller (as defined in the Stock Purchase
Agreement), without the Company's prior written consent which shall not be
unreasonably withheld; and provided further that the proposed transferee enters
into a written agreement with the Company, agreeing to be bound by the terms and
conditions hereof.
5.2 TERMINATION OF RIGHTS. The registration rights of any holder of such
rights hereunder and the registration obligations of the Company hereunder will
terminate on the earliest date at which all Registrable Securities held by such
holder may be sold (a) within a three month period pursuant to the exemption
from registration provided under Rule 144 promulgated under the Securities Act,
or (b) pursuant to the exemption from registration provided under Rule 144(k)
promulgated under the Securities Act.
ARTICLE VI
DEFINITIONS
6.1 TERMS. As used in this Agreement, the following defined terms shall
have the meanings set forth below:
"BUSINESS DAY" means a day other than Saturday, Sunday or any day on
which banks located in the State of New York are authorized or obligated to
close.
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON STOCK" means the common stock, par value $.10 per share of the
Company, any securities into which such common stock shall have been changed
or any securities resulting from any reclassification or recapitalization of
such common stock, and all other securities (other than
IV-6
Preferred Stock) of any class or classes (however designated) of the Company
the holders of which have the right, without limitation as to amount, after
payment on any securities entitled to a preference on dividends or other
distributions upon any dissolution, liquidation or winding up, either to all
or to a share of the balance of payments upon such dissolution, liquidation
or winding up.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any similar Federal statute then in effect, and any reference to a
particular section thereof shall include a reference to the equivalent
section, if any, of any such similar Federal statute, and the rules and
regulations thereunder.
"INITIAL SPA SHARES" means (i) 200,000 shares of Common Stock issued or
issuable under the Stock Purchase Agreement (allocated among Annacarin
Bodin, Mattias Bodin and Tobias Bodin in proportion to the total number of
shares of Common Stock issuable to each of them thereunder), and (ii) any
securities issued or issuable with respect to such shares of Common Stock in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization.
"PERSON" means any individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"PROSPECTUS" means the prospectus included in any Registration Statement
(including without limitation, a prospectus that disclosed information
previously omitted from a Prospectus filed as part of an effective
Registration Statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the securities
covered by such Registration Statement, and all other amendments and
supplements to the prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference
in such prospectus.
"REGISTRABLE SECURITIES" means (i) Initial SPA Shares, Remaining SPA
Shares and Warrant Shares. As to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have been
(x) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them or (y) transferred
pursuant to Rule 144 (or any similar rule then in force) under the
Securities Act or otherwise transferred and, in each case, new certificates
for them not bearing a restrictive Securities Act legend have been delivered
by the Company and can be sold without complying with the registration
requirements of the Securities Act.
"REGISTRATION EXPENSES" means, with respect to any Required
Registration, all of the reasonable costs and expenses incurred in
connection with such Registration, including reasonable attorney's fees up
to $10,000 for one special counsel to the selling stockholders (the "Special
Counsel"), other than (i) underwriting discounts and commissions;
(ii) transfer taxes; and (iii) all attorney's fees for selling stockholders'
attorneys other than Special Counsel, and all Special Counsel fees in excess
of $10,000.
"REGISTRATION STATEMENT" means any registration statement of the Company
which covers any of the Registrable Securities pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits
and all material incorporated by reference in such registration statement.
"REMAINING SPA SHARES" means (i) with the exception of Initial SPA
Shares, all shares of Common Stock issued or issuable under the Stock
Purchase Agreement and (ii) any securities issued or issuable with respect
to such shares of Common Stock in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
IV-7
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar Federal statute then in effect, and any reference to a particular
section thereof shall include a reference to a comparable section, if any,
of any such similar Federal statute, and the rules and regulations
thereunder.
"WARRANT SHARES" means (i) the Common Stock issued or issuable under the
Warrant Agreement, and (ii) any securities issued or issuable with respect
to such shares of Common Stock in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
6.2 DEFINED TERMS IN CORRESPONDING SECTIONS. The following defined terms,
when used in this Agreement, shall have the meaning ascribed to them in the
corresponding Sections of this Agreement listed below:
"Agreement" -- Preamble
"Company" -- Preamble
"Holder Indemnitees" -- Section 4.1
"Holders" -- Preamble
"Required Registrations" -- Section 1.1
"Stock Purchase Agreement" -- Recitals
"Warrant Agreement" -- Recitals
ARTICLE VII
MISCELLANEOUS
7.1 REMEDIES. In the event of a breach by any party to this Agreement of
its obligations under this Agreement, any party injured by such breach, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The parties agree that the provisions of this Agreement
shall be specifically enforceable, it being agreed by the parties that the
remedy at law, including monetary damages, for breach of any such provision will
be inadequate compensation for any loss and that any defense in any action for
specific performance that a remedy at law would be adequate is waived.
7.2 AMENDMENTS AND WAIVERS. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement will be
effective against the Company or any holder of Registrable Securities, unless
such modification, amendment or waiver is approved in writing by the Company and
the Holders representing a majority of the Registrable Securities then
outstanding. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
7.3 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not.
7.4 NOTICES. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given only if delivered
personally against written receipt or mailed by pre-paid registered or certified
mail, return receipt requested or mailed by overnight courier prepaid to the
parties at the following addresses:
IV-8
If to the Company, to: Digital Recorders, Inc.
----------------------------------------
----------------------------------------
----------------------------------------
If to Bengt Bodin: Bengt Bodin
La Piniere, Cidex 206, R.D. 2085,
FR-06330 Roquefort les Pins, France
If to Mattias Bodin: Mattias Bodin
Parkgatan 10
SE-112 30 STOCKHOLM, Sweden
If to Tobias Bodin: Tobias Bodin
Ovre Husargatan 23 A
SE-413 14 GOTEBORG, Sweden
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 7.4, be deemed given upon
delivery, (ii) if delivered by mail in the manner described above to the address
as provided in this Section 7.4, be deemed given on the earlier of the tenth
full Business Day following the day of mailing or upon receipt, and (iii) if
delivered by overnight courier to the address provided in this Section 7.4, be
deemed given on the earlier of the third Business Day following the date sent by
such overnight courier or upon receipt. Any party from time to time may change
its address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other parties hereto.
7.5 HEADINGS. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
7.6 GENDER. Whenever the pronouns "he" or "his" are used herein they shall
also be deemed to mean "she" or "hers" or "it" or "its" whenever applicable.
Words in the singular shall be read and construed as though in the plural and
words in the plural shall be construed as though in the singular in all cases
where they would so apply.
7.7 INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
7.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of North Carolina, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of North Carolina or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of North
Carolina.
7.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IV-9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
COMPANY:
DIGITAL RECORDERS, INC.
By:
-----------------------------------------
Name:
Title:
HOLDERS:
---------------------------------------------
Bengt Bodin
---------------------------------------------
Annacarin Bodin
---------------------------------------------
Mattias Bodin
---------------------------------------------
Tobias Bodin
IV-10
APPENDIX V
TRADEMARK LICENSE AGREEMENT
BETWEEN
MOBITEC AB
AND
MOBITEC KLIMAT AB
DATED [ ] 2001
V-1
THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is made as of [ ] 2001, by
and between
Mobitec AB, a Swedish corporation, registration number 556344-9999
("Mobitec")
and
Mobitec Klimat AB, a Swedish corporation, registration number 556487-3403
("Klimat").
PREAMBLES
A. DRI Europa AB, a wholly owned subsidiary of Digital Recorders, Inc., North
Carolina, USA, has this day on its own or together with Digital
Recorders, Inc. acquired all the shares of Mobitec Holding AB including the
ownership of all rights to the trademark and business name "Mobitec."
B. Mobitec, which is the holder of the full and unrestricted ownership of all
rights to the trademark and business name "Mobitec," is a wholly owned
subsidiary of the aforesaid Mobitec Holding AB.
C. Prior to the aforesaid acquisition of the shares of Mobitec Holding AB the
shares of Klimat were transferred and sold to an aktiebolag wholly owned by
the Sellers or the Bodin Sellers as defined in the Stock Purchase Agreement.
D. Klimat will within twelve months after the signature of this Agreement change
its company name, i.a. removing the name "Mobitec" therefrom.
E. Klimat desires to be able to continue to use the trademark "Mobitec" in
Klimat's Business (as hereinafter defined).
F. It is important for Digital Recorders, Inc., DRI Europa AB and Mobitec
Holding AB, with subsidiaries, to prevent any of their competitors from
gaining control over the trademark "Mobitec."
G. Taking into consideration what has been set forth above, Mobitec and Klimat,
intending to be legally bound, agree as follows.
1. DEFINITIONS
For the purposes of this Agreement the following terms shall have the meanings
set forth below.
1.1 Klimat's Business shall mean the development, marketing and sale of
climate-systems and other climate-products to the vehicle industry.
1.2 Products shall mean the products currently offered by Klimat.
1.3 The Stock Purchase Agreement shall mean the stock purchase agreement
between on the one hand Bengt Bodin, Annacarin Bodin, Mattias Bodin,
Tobias Bodin and Bertil Lindqvist, and on the other hand DRI Europe AB
and Digital Recorders, Inc., dated [ ] 2001.
1.4 Territory shall, subject to sub-section 2.3 below, mean the whole world.
1.5 Trademark shall mean the trademark "Mobitec."
2. THE LICENSE
2.1 Mobitec hereby grants to Klimat a royalty-free, non-exclusive license to
use the Trademark, without additions or modifications, in the Territory.
Klimat shall use the Trademark in a form approved by Mobitec, solely in
respect of the Products and solely for the purpose of conducting Klimat's
Business.
V-2
2.2 Mobitec reserves to itself every right to use, and to grant others the
license to use, the Trademark.
2.3 It is a condition for the granting of license with respect to each
country within the Territory that such license will not create or involve
any risk of impairment or loss of the legal protection for the Trademark
in such country.
3. USE OF THE TRADEMARK
3.1 Klimat shall use the Trademark in accordance with the provisions of this
Agreement and all laws relating to the Trademark in force from time to
time. Klimat shall however, after twelve months from the signing of this
Agreement, not use the Trademark in its company name.
3.2 Klimat recognizes and acknowledges that Mobitec is the rightful owner of
the Trademark. Klimat shall not represent in any way that it has any
right or title to, or interest in, the Trademark or any registration or
use thereof, other than the license granted to it under this Agreement.
3.3 Klimat shall not take any actions which may mislead persons to believe
that Klimat and the Products are related to Mobitec and its products
other than the relationship created by this Agreement.
3.4 Klimat shall not, during the term of this Agreement or after its
termination, adopt or use any word or mark resembling the Trademark and
which is likely to deceive or cause confusion.
3.5 Klimat shall continuously inform Mobitec in writing of any country in
which Klimat uses or intends to use the Trademark.
3.6 Klimat agrees with respect to each country that it will make use of the
license granted by Mobitec only under the condition, and in such a
manner, that there will be no risk that Mobitec's rights in and to the
Trademark will be impaired or lost.
3.7 In any country within the Territory where, in accordance with legal
requirements, registration of a trademark license, or other special
conditions for or requirements relating to a trademark license must be
observed, Klimat agrees to use the Trademark only after such requirements
have been fully complied with, and only as long as they remain fully
complied with.
3.8 Klimat shall at its own expense record this Agreement or enter Klimat as
a registered or authorised user of the Trademark in those countries in
the Territory in which such action is required by law to protect the
Trademark or is advisable in the reasonable opinion of Mobitec. Klimat
does not have any other right to register or cancel any registration of
licence without having obtained Mobitec's prior written consent.
3.9 Klimat will cooperate with Mobitec in, and Mobitec will take reasonable
steps to keep Klimat fully advised of
(i) any execution, filing and prosecution, as desired by Mobitec, of any
trademark applications in the Territory relating to the Trademark;
and
(ii) the maintenance of existing trademark registrations relating to the
Trademark, including renewals thereof, in the Territory
3.10 Mobitec shall during the term of this Agreement be under no obligation to
maintain any registration regarding the Trademark in any country of the
Territory. If Mobitec intends to make any changes or termination of or
refrain from prolonging the registrations of the Trademark, Mobitec
shall, however, endeavour to inform Klimat thereof. If Mobitec for any
reason so notifies Klimat that it does not intend to maintain any
registration relating to the
V-3
Trademark in any country of the Territory, Klimat may, upon written
approval by Mobitec, at its own expense and in the name of Mobitec make
all arrangements necessary to keep the registrations in force and good
standing.
3.11 Mobitec and Klimat shall inform each other in writing of any acts of
infringement by third parties involving the Trademark anywhere in the
Territory of which Mobitec or Klimat has knowledge and they shall consult
together in a view to determine the appropriate course of action, if any,
to be taken in such circumstances. Klimat shall fully and at its own
expense assist Mobitec in any proceeding against an infringer.
If the parties are unable to agree on any joint course of action to be
taken then Mobitec may at its own discretion decide whether or not to take
action against the infringer. If Mobitec decides not to take action
against the infringer then Mobitec may authorize Klimat to take such
action at its own expense.
3.12 Klimat recognizes and acknowledges that it uses the Trademark at its own
risk and that Mobitec in no way is responsible for Klimat not being able
to use the Trademark in every country in the Territory or for any
infringements of other trademarks or other intellectual property rights
which such usage may result into.
4. QUALITY STANDARDS AND QUALITY CONTROL
4.1 Klimat shall ascertain that the Products maintain a high reputable
standard and are of such quality that the goodwill associated with the
Trademark is fully preserved. The Products shall be produced, marketed
and provided in conformity with all applicable laws or other regulations
in force in the country, or part thereof, where any such production,
marketing or provision takes place.
4.2 Klimat shall maintain a high reputable standard in connection with the
use of the Trademark on signs, labels, packing materials, advertising,
promotional materials and the like.
4.3 Klimat shall in no way act or fail to act so as to disparage or lessen
the value of the Trademark.
5. INDEMNITY
5.1 Klimat shall have complete and exclusive responsibility for all its
activities concerning the Product in the Territory and Klimat undertakes
to indemnify and hold Mobitec harmless against all claims, losses,
damages, expenses or liability, directly or indirectly, resulting from
the use, manufacture, sale or lease of the Products in the Territory,
including but not limited to claims from third parties.
5.2 Klimat further agrees to indemnify and hold Mobitec harmless against all
claims, losses, damages, expenses or liability directly or indirectly
incurred by Mobitec as a result of Klimat's breach of this Agreement.
6. ASSIGNMENT OF THE AGREEMENT
Klimat may not wholly or partly sub-license, assign or pledge its rights
or obligations under this Agreement to any third party.
7. TERM AND TERMINATION
7.1 This Agreement shall enter into force when duly signed by both parties.
Unless terminated pursuant to the provisions in sub-section 7.2, the
Agreement shall remain in force for five years. If any one of the parties
wishes to terminate the Agreement at the end of this initial
V-4
period that party shall give the other party written notice not less than
six months in advance. If not terminated as aforesaid, this Agreement
shall after its initial term remain in force for successive periods of
three years until terminated at the end of any such period by either
party giving the other party written notice not less than six months in
advance.
7.2 This Agreement and the license rights granted hereunder may further be
terminated by written notice by Mobitec with immediate effect in the
event that
(i) Klimat fails to fulfil any of its obligations under this Agreement
and such failure is not remedied within fourteen days of written
notice to do so;
(ii) Klimat becomes insolvent or a petition for bankruptcy should be
filed by or against it, or a receiver of its property or a
substantial part thereof should be appointed; or
(iii) The ownership in Klimat should change so that the aforementioned
Bengt Bodin no longer, directly or indirectly, controls more than
fifty per cent of the capital and of the votes of Klimat.
Termination under this sub-section 7.2 (iii) may not take place if
Mobitec accepts in writing the change of ownership, such acceptance
not to be unreasonably withheld.
(iv) The ownership in Klimat has changed after acceptance by Mobitec in
accordance with sub-section 7.2 (iii) and the direct or indirect
ownership in Klimat should change thereafter.
7.3 Upon termination of this Agreement, Klimat shall, and shall cause its
distributors, dealers and agents and any other persons appointed by it to
discontinue any further use of the Trademark or any other marks
confusingly similar to the Trademark. Further, Klimat shall fully and at
its own expense cooperate with Mobitec in all measures, including i.a.
registrations relating to the Trademark, required by law or advisable in
the reasonable opinion of Mobitec as a result of the termination of this
Agreement.
7.4 The termination of this Agreement shall not effect Mobitec's rights of
indemnification in accordance with section 5 above.
8. NOTICES
Any notice provided under this Agreement shall be in the English language
and deemed valid and effective if sent by courier or registered mail or
telefax to the following addresses:
If to Mobitec: [ ]
If to Klimat: [ ]
The communications shall be considered having reached the addressee:
(i) if sent by courier --on delivery
(ii) if sent by registered mail --seven days from the date of dispatch
(iii) if sent by telefax --on the day the recipient confirms receipt of the
telefax
Mobitec and Klimat shall be obliged to send a communication to the other
party in accordance with this section 8 notifying any changes in the
relevant details set out herein, which details shall then be deemed to
have been amended accordingly.
V-5
9. EXHAUSTIVE CONTRACT DOCUMENT
This Agreement sets forth exhaustively all terms and conditions related to
the licensing of the Trademark by Mobitec to Klimat and supersedes all
prior agreements between Mobitec and Klimat with respect to the subject
matter hereof.
10. AMENDMENTS
No amendment to this Agreement shall be effective unless made in writing
and signed by authorised representatives of Mobitec and Klimat.
11. SEVERABILITY
If any provision of this Agreement or part thereof shall to any extent be
or become invalid or unenforceable, the parties shall agree upon any
necessary and reasonable adjustment of the Agreement in order to secure
the vital interests of the parties and the main objectives prevailing at
the time of execution of the Agreement. Failing an agreement between the
parties on adjustments of the Agreement, such adjustments shall be made by
arbitrators in accordance with the provisions of the arbitration clause in
this Agreement.
12. WAIVER
The failure of any of the parties hereto to insist upon strict adherence
to any provision of this Agreement on any occasion shall not be considered
as a waiver of any right hereunder, nor shall it deprive that party of the
right thereafter to insist upon strict adherence to that provision or any
other provision of this Agreement.
13. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of Sweden.
14. ARBITRATION
14.1 Any dispute arising out of or in connection with this Agreement shall be
exclusively settled by arbitration in accordance with the Rules of the
Arbitration Institute of the Stockholm Chamber of Commerce (the
"Institute"). The arbitral tribunal shall be composed of three
(3) arbitrators. The place of arbitration shall be Gothenburg, Sweden.
The arbitration proceedings shall be conducted in the English language.
Each party shall nominate one arbitrator and the Institute shall nominate
the third arbitrator, who shall be the Chairman. If the respondent has not
within 30 days after receipt of a request for arbitration, appointed an
arbitrator, such arbitrator shall upon request of the claimant be
appointed by the Institute. If the provision related to the appointment of
the arbitrators is held by any court of competent jurisdiction or
arbitrators to be illegal, void or unenforceable the illegality, voidness
or unenforceability of such provision shall have no effect upon and shall
not impair the enforceability of any other provisions of this section 13.
The parties agree that the Institute in such case shall appoint all three
arbitrators.
Any dispute arising at any time between the parties shall be referred to
one single arbitration tribunal, unless (i) the arbitration tribunal
considers it inappropriate having regard to the point of time at which the
request for arbitration is made, or (ii) one or more of the arbitrators
declares that he or they do not accept to serve as arbitrators in a
dispute other than the actual dispute for which such arbitrator(s) was
appointed.
V-6
The rules regarding joinder of claims in Chapter 14 of the Code of
Judicial Procedure (Sw. Rattegangsbalken) shall be applied by the arbitral
tribunal to the extent so is appropriate and accepted by the arbitrators.
The voting rules in the Code of Judicial Procedure shall be applied by the
arbitral tribunal.
------------------------
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in two
copies as of the day and year first above written.
MOBITEC AB MOBITEC KLIMAT AB
- ------------------------------------------- -------------------------------------------
V-7
APPENDIX VI
APPENDIX 3.2.1.3.a)
TO THE STOCK PURCHASE AGREEMENT
PROMISSORY NOTE
We, the undersigned DRI Europa AB, registration number 556546-6793,
undertakes to pay 36 months from the Closing Date (as defined in the Stock
Purchase Agreement) to Bengt Bodin, an individual resident at La Piniere, Cidex
206, R.D. 2085, FR-06330 Roquefort les Pins, France, the sum of USD____.
The aforesaid amount shall accrue annual interest at the rate of 9 (nine)
per cent. The interest shall be paid for each period of 90 days in arrears, each
payment to be made within 10 days after the expiration of each aforesaid period.
The aforesaid principal amount of USD____ may be adjusted in accordance with
sub-section 3.2.2. of the Stock Purchase Agreement and may be reduced in
accordance with sub-section 9.2 of the Stock Purchase Agreement.
This Promissory Note is an Appendix to and forms an integral part of the
Stock Purchase Agreement.
Any payment of the principal amount hereunder shall only be made after our
loan from _____ banken of SEK has been paid to the bank in full
Gothenburg ____________ 2000
For DRI Europa AB
by
------------------------------------------
VI-1
[LOGO]
November 28, 2000 APPENDIX VII
Via Regular Mail
Mr. David L. Turney
Digital Recorders, Inc.
Sterling Plaza, Box 26
5949 Sherry Lane, Suite 1050
Dallas, TX 75225
PRELIMINARY OUTLINE OF TERMS
This Preliminary Outline of Terms (the "Terms Letter") sets forth a proposed
financing for Digital Recorders, Inc. (the "Company"). Renaissance Capital
Group, Inc. ("Renaissance") is interested in providing the Company with
financing from one or more of its investment funds ("Investment Funds" or
"Debenture Holders"), subject to certain terms and conditions as discussed
below. It should be clearly understood that this Term Letter does not constitute
a binding commitment but is merely an expression of interest subject to
satisfactory completion of due diligence and approval by the Independent Board
of Directors of each and every Investment Fund advancing monies.
1. INVESTMENT AMOUNT: A total investment in the amount of up to $3,000,000.
The investment will be in the form of a Convertible Debenture (see
conversion price below). It is understood that TBUS will have received
shareholder approval for this transaction. If such approved is not obtained,
this term sheet is deemed withdrawn.
2. DISBURSEMENT AND USE OF PROCEEDS: Disbursement will only be made after
Renaissance completes due diligence in a manner satisfactory to it and
obtains the approval of each Independent Board of Directors for every
Investment Fund advancing monies. Proceeds shall be used for working capital
and acquisitions.
3. CONVERTIBLE DEBENTURE YIELD RATE AND PAYMENTS: 8.00% per annum paid
monthly.
4. CONVERTIBLE DEBENTURE MATURITY: 7 years.
5. CONVERTIBLE DEBENTURE PRINCIPAL REPAYMENT: For the first three years,
monthly installments will consist of interest payments only. After three
years, mandatory principal redemption installments in the amount of $10 per
$1,000 of the then remaining principal amount are required with a final
installment of the remaining unpaid principal balance to be paid at
maturity.
6. UNIT CONVERSION TERMS: The Debentures and underlying Common Stock shall be
subject to the following conversion terms:
a. INITIAL CONVERSION PRICE: The Debentures will have an Initial
Conversion Price (the "Conversion Price") equal to the volume-weighted
average closing price for TBUS common stock for the 5 day period leading
up to closing, but in no circumstance will the conversion price exceed
$3.00 per share or be below $2.00 per share.
b. ADJUSTMENT TO CONVERSION PRICE: After the close of this transaction
until a mutually agreeable date, the Investment Funds will be entitled to
a downward adjustment to the Conversion Price (the "Automatic
Adjustment") if the Company does not attain a specific performance
benchmark (to be agreed upon) based on earnings before interest, taxes,
depreciation and amortization for the Company's 2001 fiscal year and the
market price of the Common Stock is
VII-1
below the conversion price at the time of publication of the Company's
results for that period. At the adjustment date, the Conversion Price
will be reduced to equal the volume-weighted average closing price for
the Company's common stock over a ten day trading period following the
Company's public press release of that year's results. Renaissance agrees
the Investment Funds will not convert and/or sell any of the Company's
common stock during the time period used to define the market price for
the adjustment as well as for nine days prior to the time the period
begins running, which restriction extends to all short selling in the
securities of the Company by the Investment Funds.
c. ANTI-DILUTION PROVISIONS: The Conversion Price shall be subject to
certain anti-dilution adjustments in the event of stock splits, stock
dividends or issuance of additional stock at a price below the Conversion
Price as defined in the Convertible Debenture Agreement, except that no
adjustment shall be made for issuance of stock pursuant to presently
outstanding options and warrants. Notwithstanding the foregoing, the
Company can issue stock options to acquire up to 300,000 shares to
employees and directors at prices below the then effective conversion
price. The Company shall submit a report at the end of each quarter to
the lenders setting forth the number of options so issued in the quarter
and cumulatively.
7. SECURITY. The Debentures will be secured by all assets, tangible and
intangible, of the Company and its subsidiaries, which will be subordinated
to senior and asset-backed lenders only.
8. CONDITIONS PRECEDENT: The Investment Funds will not be obligated to commit
to the financing unless the following conditions are met:
a. All Loan Agreements, Convertible Debenture Agreements, Security
Agreements, and other documents necessary to memorialize the transaction
are executed in a manner satisfactory to Renaissance;
b. Satisfactory opinions have been received by Renaissance from the
Company's counsel;
c. At closing, the Company shall make good on all representations and
warranties and there shall be no material or adverse change in the
Company's financial or competitive position;
d. Completion of all due diligence in a manner satisfactory to Renaissance,
and receipt of all materials requested by Renaissance from the Company,
including, but not limited to, current financial statements and a summary
of the Company's capital structure.
9. DEBENTURE CALL PROVISIONS: The Company shall have the right to call the
Debentures at 101% of face value provided that: (i) the average closing bid
price for the Company's common stock for a period of 20 consecutive trading
days exceeds a value equal to 3 times the then effective Conversion Price;
(ii) the market price for the Company's common stock at the time of call is
supported by a price-to-earnings ratio of no greater than 25 times fully
diluted earnings per share excluding any extraordinary gains; (iii) the
average daily trading volume of the Company's common stock for a period of
20 consecutive trading days shall be no less than 40,000 shares; and
(iv) the shares of common stock underlying the Debentures are fully
registered. These call provisions shall be subject to the Debentures
Holders' right to convert.
10. OPTIONAL REDEMPTION OF DEBENTURES: The Debenture Holders will have the
right to require redemption of the Debentures under specific conditions as
defined in the Convertible Debenture Agreement and Loan Agreement. In the
event the redemption conditions are met and the Debenture Holders elect to
have their position redeemed, the redemption amount will be equal to the
principal amount outstanding at the redemption date plus an amount equal to
an 18% annual yield on the principal amount through the date of redemption.
In addition, the Company shall have the option to redeem the unconverted
debentures if the Holders notify it of their intent to sell those
debentures, such option remaining in effect for a 30 day period after
issuance of
VII-2
notification. Such redemption will be for the principal amount offered plus
an amount equal to an 18% annual return on such amount.
11. REGISTRATION OF COMMON STOCK: The Debentures and underlying common stock
issuable upon conversion shall grant the Debenture Holders, at our request,
the following registration rights with regard to shares underlying the
Debentures:
a. "Piggy-back" registration rights shall be available to the Investment
Funds, at their expense, any time the Company files a registration
(subject to a 90 day delay at the underwriter's request).
b. A shelf registration (SEC Form S-3) covering all shares underlying the
Debentures shall be filed at the Company's expense within 180 days of the
sale of the Debentures or sixty days after Issuer becomes shelf eligible,
whichever date is later, which shelf shall terminate when the Debenture
Holders can sell their underlying common stock position in the open
market free of any restriction pursuant to Rule 144.
c. Demand registration rights on a one-time basis at the expense of the
Investment Funds.
12. COVENANTS: Affirmative and Negative Covenants shall be required including,
but not limited to, requiring the Company to do the following:
a. Provide audited financial statements annually and unaudited financial
statements quarterly together with compliance reports by a duly
authorized officer;
b. Furnish monthly financials within 30 days of the end of each month and
budgets (as currently used by management to conduct business) on a
rolling four month basis;
c. Stay current on all required SEC filings;
d. Make interest payments on a timely basis. In the event of noncompliance
in this regard the Debenture Holders together shall have the right to
nominate a single representative to the Company's Board of Directors;
e. Maintain compliance with existing bank requirements, and comply with
minimum financial standards (to be agreed upon following completion of
due diligence) as set forth in the Convertible Debenture and Loan
Agreements, including the maintenance of standard financial ratios as the
following:
a. Current ratio;
b. Total debt to equity ratio;
c. Interest coverage or times interest earned ratio; and
d. Cash flow to total debt ratio.
13. RESTRICTIONS: So long as any Debentures remain outstanding, the Company
shall not:
a. Issue any debt senior to or PARI PASSU with the Debentures without the
Investment Funds' consent which shall not be unreasonable withheld,
except for senior credit facilities and asset-backed loans for operations
and/or acquisitions.
b. Declare or pay any cash dividend or authorize or make any cash
distribution to any debt or equity holder junior in position to the
Debentures, except for dividend payments to the Series AAA holders of the
Company's Preferred Stock and except for any contractual obligation of
the Company to redeem the AAA Preferred during the term of the
Debentures. In the case of any debt prepayment, the Debentures will be
paid on a pro rata basis with any other debt holders that are PARI PASSU
to be Debentures.
VII-3
14. RETENTION OF STOCK OWNERSHIP: So long as the Debentures remain outstanding,
David Turney, Lawrence Taylor, and all members of the Company's Board of
Directors will agree to withhold sale or assignment of their ownership in
the Company (except for intra-family transfers or estate planning purposes)
for 12 months following closing. Notwithstanding the foregoing, sales may be
made during the 12 month period with the prior approval of each Holder so
long as such sales are made above $5 per share.
15. DEFAULT PROVISIONS: Standard default provisions will be included in the
closing documentation that will define when default occurs and outline
remedies available to the Debenture Holders in the event of default.
16. BOARD REPRESENTATIVE: The Investment Funds will designate Russell Cleveland
as a member of the Company's Board of Directors, and the Company shall
reimburse the Investment Funds for all appropriate and reasonable expenses
incurred in connection with that Board representation. In addition, the
Debenture Holders shall have the right to nominate an additional Director to
the Board in the event the Company fails to comply with interest payment
provisions as outlined in paragraph 12 above.
COMMITMENT AND CLOSING FEES AND EXPENSES.
The foregoing is intended to provide an outline of investment terms rather than
a complete statement of all conditions and documents which would be required. It
is possible that substantive terms or conditions may be changed in order to
account for or reflect changes in statutory or regulatory rules governing the
subject matter of the transaction. In addition to the above terms, the following
fees shall apply:
a. COMMITMENT FEES: Upon notification that Renaissance intends to present
the investment proposal to the Board of Directors of each respective
Investment Fund, the Borrower shall make a good faith deposit equal to
1.0% of the commitment amount (the "Commitment Fee") in an escrow account
established at Renaissance's bank. If the investment is approved,
Renaissance shall claim the Commitment Fee one day following Board
approval. If the investment is not approved, the commitment fee will be
refunded to the Company within ten (10) days after such decision. In the
event approval is obtained and the Company subsequently decides not to
proceed with the funding, Renaissance will be entitled to retain the
commitment fee.
b. CLOSING FEE: A fee of 1.0% of all funds to be disbursed shall become
due and payable at closing.
c. CLOSING EXPENSE FEE: Upon notification that Renaissance intends to
present the investment proposal to the Board of Directors of each
respective Investment Fund, the Borrower shall make a good faith deposit
in the amount of 0.50% of the commitment amount (the "Closing Expense
Fee") in an escrow account established at Renaissance's bank. The Closing
Expense Fee shall pay for all reasonable closing costs and out-of-pocket
expenses (including attorney's fees) incurred by Renaissance in
connection with the preparation and documentation of the proposed
investment up to the amount deposited. If the investment is approved,
Renaissance shall claim the Closing Expense Fee one day following
approval. If the investment is not approved, the Closing Expense Fee will
be refunded to the Company within ten (10) days after such decision, less
any legal fees and other out-of-pocket expenses incurred up to the date
the investment proposal is rejected. If Renaissance commits in writing to
disburse and the Company decides not to proceed with the funding, the
Closing Expense Fee shall be retained by Renaissance.
VII-4
d. DUE DILIGENCE FEE: To cover due diligence expenses, Borrower shall pay
Renaissance a non-refundable due diligence fee equal to $15,000.
If the Company desires Renaissance to investigate and present this plan of
financing to the Boards of Directors of each of its respective Investment Funds,
have an authorized officer execute a copy of this letter and return it to the
undersigned with a $15,000 check for the due diligence fee described above.
Except with respect to provisions relating to the commitment and closing fees
and expenses described above, this letter does not constitute a binding
agreement. Consummation of the transaction described herein will be subject to
the execution and delivery of documents in form and content satisfactory to the
Investment Funds, Renaissance and the Company.
If this letter agrees with your understanding and you wish to proceed as
provided above, please sign and return this letter within three (3) days or,
unless sooner withdrawn, this proposal shall terminate.
Sincerely,
/s/ Robert C. Pearson
Robert C. Pearson
Senior Vice President
Date: 29 Nov 00
Accepted as provided above
Due Diligence deposit check enclosed for $15,000 (CK #102902)
Digital Recorders, Inc.
By: /s/ David L. Turney
Title: CEO, President, Chairman
VII-5
[LOGO]
May 15, 2001
Mr. David L. Turney
Digital Recorders, Inc.
5949 Sherry Lane, Suite 1050
Dallas, TX 75225
First Amendment to
Preliminary Outline of Terms
The following shall constitute the First Amendment to the Preliminary Outline of
Terms, dated November 28, 2001, which sets forth a proposed financing for
Digital Records, Inc. (the "Company"), arranged by Renaissance Capital
Group, Inc. ("Renaissance") from one or more of its investment funds ("Invested
Funds" or "Debenture Holders").
1. Section 6(a) is hereby amended to provide that the Debentures will have an
Initial Conversion Price ("Conversion Price") of $2.00 per share.
2. Section 6(b) is hereby amended to add at the end of the second sentence the
phrase "but in any event not less than $1.50 per share."
3. Section 17 is added to provide as follows:
"17. Warrants." The Company shall issue, at closing to the Debenture
Holders five-year warrants to purchase a total of 200,000 shares exercisable
at the average closing price for the Company's common stock for the trading
day preceding the closing.
Except as amended hereby, the Preliminary Outline of Terms shall remain in
effect. If the foregoing sets forth your understanding of the First Amendment to
Preliminary Outline of Terms, please sign and return this letter within three
(3) days.
Sincerely,
/s/
Robert C. Pearson
Senior Vice President
Digital Recorders, Inc.
/s/
- ---------------------------------
By: David L. Turney, President
8080 N. Central Expressway Suite 210-LB 59 Dallas, Texas 75206-1857
214-891-8294 214-368-4629 FAX: 214-891-8291
VII-6
APPENDIX VIII
BENGT BODIN
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), made and entered into as of the
day of ____________, 2000, by and between DIGITAL RECORDERS, INC., a North
Carolina corporation having its principal office in Research Triangle Park,
North Carolina (hereinafter referred to as "Company" or "DRI") and BENGT BODIN,
a resident of Nice, France (hereinafter referred to as "Bodin").
STATEMENT OF PURPOSE
The Company has on the date hereof under a separate Stock Purchase Agreement
("Stock Purchase Agreement") acquired from Bodin and others all the shares of
Mobitec Holding AB ("Mobitec").
Bodin has a thorough knowledge of the business purchased by Company from
Mobitec, both with regard to its Swedish and foreign subsidiaries as well as its
other foreign operations (collectively all to be referred to as "the Group"). It
has been a condition to the Stock Purchase Agreement and it is important to the
future success of the Group that it have the benefit of the advice, counsel and
services of Bodin, and Bodin desires to render such advisory and consulting
services to the Group as directed by the Company on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other valuable considerations, receipt of which is hereby
acknowledged, Company and Bodin agree as follows:
1. CONSULTING SERVICES. For a period of three (3) years from the Closing
Date as defined in the Stock Purchase Agreement unless this Agreement is
terminated by either party pursuant to the specific terms set forth herein,
Bodin shall stand ready to and shall:
(a) furnish to the Group such reasonable services of an advisory or
consulting nature with respect to its business and affairs, including but
not limited to operating procedures, customers and customer relations,
products, services and sales, as Company may reasonably call upon him to
furnish and his health and other business commitments may permit; and
(b) if requested by the Board of Directors or President of Company upon
reasonable advance notice, meet with and consult with customers with respect
to their relationship to the Group and to otherwise use his reasonable best
efforts to obtain and maintain for the Group contractual relationships with
the customers;
it being understood that Bodin shall be available on reasonable notice and at
reasonable times for periodic consultations, either in person or by telephone;
provided, however, advisory and consulting services hereunder shall not require
Bodin to be active in the day-to-day operations of Company, and in furnishing
such consulting services hereunder Bodin shall not be an employee of any company
within the Group but shall act in the capacity of an independent contractor.
Bodin shall not be required to render such services during reasonable vacation
periods or during times of illness, disability or other incapacity. In the event
Bodin should leave his residence for any continuous period in excess of one
(1) week, Bodin shall use his best efforts to keep Company advised either of his
whereabouts or of the person or persons whom he will keep advised of his
whereabouts and how Company can communicate with him.
VIII-1
In addition, Bodin shall at the sole reasonable discretion of Company agree
to serve as an advisor to the Board of Directors of any company within the Group
during the term of this Agreement.
2. PAYMENT FOR CONSULTING SERVICES.
(a) In consideration of Bodin's obligations to be available to and to
render advisory and consulting services as well as other obligations
undertaken by Bodin hereunder pursuant to the provisions of paragraph 1,
Company shall pay to Bodin compensation determined in accordance with
paragraph 2(b) below. In addition, Company shall reimburse Bodin for travel
expenses and other business expenses reasonably incurred by Bodin at the
request of Company (and properly documented and within guidelines approved
by the Board of Directors or as pre-approved by the President).
(b) In consideration of Bodin's obligations as defined herein, Company
through Digital Recorders, Inc. shall pay to Bodin the sum of One Hundred
Twenty Thousand U.S. Dollars ($120,000.00) the first year, One Hundred Sixty
Thousand U.S. Dollars ($160,000.00) the second year, and Two Hundred
Thousand U.S. Dollars ($200,000.00) the third year, payable by Company in
equal quarterly installments at the end of each quarter.
3. NONSOLICITATION OF EMPLOYEES. Bodin undertakes and agrees that during
the term of this Agreement and for a period of twenty-four (24) months after
this Agreement shall be terminated, whether voluntarily or involuntarily, he
will not, without the prior written approval of the Company solicit any
employees with regard to working for a competitor or to be employed by him, his
company or any affiliate thereof.
In the event Company shall establish to the satisfaction of a court of
competent jurisdiction the existence of a breach or threatened breach by Bodin
of this section, the Company, in addition to any other rights and remedies it
may have (including a monetary judgment/penalty pursuant to the Stock Purchase
Agreement), shall be entitled to an injunction restraining Bodin from doing or
continuing to do any such act in violation of this section, as well as
attorney's fees and costs of prosecution to enforce this Agreement, if the
Company ultimately prevails on the merits.
4. DISCLOSURE OF CONFIDENTIAL INFORMATION:
(a) NON-DISCLOSURE. Except as required in his duties to the Group,
Bodin will never, directly or indirectly, use, disseminate, disclose,
lecture upon, or publish articles concerning any Confidential Information.
Confidential Information shall be defined as information developed by or
disclosed to Bodin or known by Bodin as a consequence of or through his
employment or consultation by any company of the Group, not generally known in
the industry in which the Group is or may become engaged, about the Group's
products, processes, and services, including information and trade secrets
relating to research, development, formulas and recipes, inventions,
manufacture, profitability, purchasing, accounting, engineering, marketing,
merchandising, and selling.
"Confidential Information" shall not include information that (i) at the time of
use or disclosure by Bodin, is in the public domain through no fault of, action
or failure to act by Bodin; (ii) becomes known to Bodin from a third-party
source without violation of any obligation of confidentiality or other wrongful
or tortuous act; (iii) was known by Bodin prior to disclosure of such
information by the Company to Bodin; or (iv) was independently developed by
Bodin without any use of Confidential Information.
(b) CONFIDENTIAL PAPERS. Upon termination of this Agreement with the
Company, all documents, records, notebooks, and similar repositories of or
containing Confidential Information, including copies thereof, then in
Bodin's possession, whether prepared by him or others, will be left with the
Company.
VIII-2
(c) CONFIDENTIAL INFORMATION. As part of the consideration required of
him under this Agreement, Bodin agrees that he will not, at any time either
during the term of this Agreement or thereafter, divulge to any person,
firm, or corporation any information received by him during the course of
his relationship with regard to the personnel, financial, or other affairs
of the Group and all such information shall be kept confidential and shall
not in any manner be revealed to anyone, subject to the standard exceptions
contained in the third paragraph of Section 4(a) above.
(d) CUSTOMER NAMES. As part of the consideration for the making of
this Agreement, Bodin agrees that he will not, at any time during the term
of this Agreement or thereafter, divulge to any person, firm, or corporation
any name or names of any or all of the customers or suppliers of the Group,
subject to the standard exceptions contained in the third paragraph of
Section 4(a) above.
(e) In the event the Company shall establish to the satisfaction of a
court of competent jurisdiction the existence of a breach or threatened
breach by Bodin of any of the provisions of this Section 4, the Company, in
addition to any other rights and remedies it may have, shall be entitled to
an injunction restraining Bodin from doing or continuing to do any such act
in violation of this Section 4.
(f) Notwithstanding the foregoing, Bodin may disclose Confidential
Information, if and to the extent obligated or required (by oral questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process) under order of a court of competent
jurisdiction or other similar requirement of a governmental agency, provided
Bodin shall promptly notify the Company of such request(s) so that the
Company may seek an appropriate protective order.
5. NONCOMPETE. Because of his association with the Group, Bodin shall have
access to trade secrets and confidential information about the Group, its
business plans, its business accounts, its business opportunities, its expansion
plans into other geographical areas and its methods of doing business. Bodin
agrees that at any time during the term of this Agreement he will not, directly
or indirectly carry on, be engaged in, or take part in any activities or
services identical or substantially similar to any of his duties and
responsibilities with the Group, anywhere the Group does business on the
effective date of the termination of this Agreement, for the purpose of
competing with the Group in the Group's business (whether on his own behalf or
on behalf of any other person, corporation, partnership, venture or any other
entity or form of business).
Bodin's current engagement in Klimat and Hexair shall not be deemed as
competing for the purposes of this provision.
6. TERMINATION. Company may terminate this Agreement and the obligations
hereunder if Bodin shall die or become permanently disabled so as to be
incapable of performing his duties hereunder, or if Bodin shall be convicted or
admit to fraud or gross negligence with regard to his dealings with the Group.
Bodin may terminate this Agreement prior to the expiration of the three year
term hereof if the Company is in substantial breach hereof and has not remedied
such breach within 30 days from Bodin's notice to the Company of the
breach;however, the obligations of Bodin as set forth in Sections 3 through 5
shall survive any termination.
7. NOTICES. Any notices, requests, demands or other communications under
this Agreement to a party hereto shall be in writing and shall be deemed to have
been duly given when delivered in person
VIII-3
or deposited in the United States mail, postage prepaid, by registered or
certified mail, return receipt requested, to the parties hereto at the following
addresses:
(a) As to Bodin: Bengt Bodin
---------------------------------
---------------------------------
(b) As to Company: Digital Recorders, Inc.
P.O. Box 14068
Research Triangle Park,
NC 27709-4068
With Copy to: David M. Furr
Gray, Layton, Kersh, Solomon,
Sigmon, Furr & Smith, P.A.
P. O. Box 2636
Gastonia, NC 28053-2636
Either party hereto may change his or its address to which notices or other
communications hereunder are to be directed by giving notice thereto to the
other party hereto as hereinabove provided. Provided, however, payments
hereunder need not be sent by registered or certified mail.
8. ENTIRE AGREEMENT. This Agreement contains the entire agreement between
Company and Bodin with respect to the subject matter hereof, and no amendment,
modification or cancellation hereof shall be effective unless the same is in
writing and executed by the parties hereto (or by their respective duly
authorized representatives).
9. APPLICABLE LAW. This Agreement shall be enforced, interpreted and
construed under the laws of North Carolina.
10. ARBITRATION. Any controversy, dispute or claim arising out of, or
relating to, this Agreement and/or its interpretation shall, unless resolved by
agreement of the parties, be settled by binding arbitration in Raleigh, Wake
County, North Carolina, in accordance with the Rules of the American Arbitration
Association then existing. This Agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law of the State of North Carolina.
The award rendered by the arbitrators shall be final and judgment may be entered
upon the award in any court of the State of North Carolina having jurisdiction
of the matter and Bodin agrees that such shall be enforceable in any
jurisdiction that Bodin might reside or have property.
11. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns, if any.
12. CAPTIONS. The captions and headings set forth in this Agreement are
for convenience of reference only and shall not be construed as a part of this
Agreement.
13. DUPLICATE ORIGINALS. This Agreement is executed in duplicate
originals, each of which shall be deemed an original hereof.
VIII-4
IN WITNESS WHEREOF, Company and Bodin have caused this Agreement to be
executed under seal, all as of the day and year first above written.
DIGITAL RECORDERS, INC.
By
-----------------------------------------
President
(SEAL)
BENGT BODIN
VIII-5
APPENDIX IX
INVESTEC ERNST & COMPANY
INVESTMENT BANKING
One Battery Park Plaza
New York, NY 10004
Telephone (212) 898 6200
Facsimile (212) 898 6293
[LOGO] www.investecernst.com
May 8, 2001
Board of Directors
Digital Recorders, Inc.
4018 Patriot Drive
Durham, NC 27713
Attn: David Turney, Chairman and CEO
Dear Members of the Board:
You have requested Investec Ernst & Company ("Investec") render its written
opinion to the holders of common stock of Digital Recorders, Inc. ("Digital" or
the "Company") regarding the fairness, from a financial point of view, of the
aggregate consideration to be paid to the shareholders of Mobitec Holding AB, a
Swedish corporation ("Mobitec"), in connection with the Amended Option Agreement
dated March 13, 2001 (the "Option Agreement"), the Stock Purchase Agreement (the
"Stock Purchase Agreement"), and the agreements contemplated thereby, each among
the Company, DRI Europa AB, a wholly-owned subsidiary of Digital ("DRI"), and
Bengt Bodin, Annacarin Bodin, ET. AL., (the "Selling Shareholders") pursuant to
which Digital will acquire all of the outstanding shares of Mobitec and Mobitec
will become a wholly owned subsidiary of Digital (the "Acquisition").
Capitalized terms used but not otherwise defined herein shall have the
respective meanings assigned to them in the Company's Preliminary Proxy
Statement dated April 2, 2001 relating to the annual meeting of its shareholders
to be held May 31, 2001.
The consideration consists of:
i. SEK 5,700,000 (at an assumed exchange rate such that SEK 5,700,00 is
equal to US $530,000) to be paid to Bertil Lindqvist for his shares of
Mobitec;
ii. subject to adjustment following the Closing Date, based upon a
comparison of Mobitec's net equity as set forth in the Closing Financial
Statement as of March 31, 2001 and the net equity as of March 31, 2000:
a. US $3,680,000 to be paid to the Bodin Sellers; and
b. Promissory Notes totaling approximately US $2,000,000 to be issued to
the Bodin Sellers on the Closing Date;
iii. 430,000 Restricted Shares of Digital to be transferred to the Bodin
Sellers on the Closing Date valued at $3 per share; and
iv. warrants to purchase in the aggregate 100,000 shares of Digital's
common stock at a price of US $4.00 per share for a period of five years
issued to the Bodin Sellers pursuant to the Bodin Warrant Agreement.
The Option Agreement amends certain provisions of the Stock Purchase Agreement,
which provides for a Preliminary Purchase Price, and which after any adjustments
made pursuant to (ii) (a) and (b) above, becomes the Final Purchase Price.
A member of the Investec Group. Members New York Stock Exchange and other
principal exchanges. Member NASD & SIPC
IX-1
[LOGO]
Board of Directors
Digital Recorders, Inc.
Page 2
Through Royce Investment Group, Inc. ("Royce"), certain of the assets of which
were acquired by Investec in 1999, we are familiar with the Company. Royce acted
as a financial advisor to Digital in connection with an earlier acquisition by
the Company. Royce has also provided certain other investment banking services
to the Company from time to time and acted as lead manager of its initial public
offering. In addition, Investec has been and continues to be an active market
maker on the Nasdaq market in the shares of Digital. Investec may from time to
time effect transactions for its own account or the account of customers and
others and hold positions in securities of the Company. One of our employees,
John Higgins, in addition to owning approximately 4.9% of Digital's common
stock, is a member of the Board of Directors of Digital and, with your
permission, has participated in the due diligence relating to and the
preparation of this opinion.
In connection with our opinion, we have examined the Preliminary Proxy Statement
of Digital dated April 2, 2001 and related documents, the Annual Reports on
Form 10-K of the Company for the three years ended December 31, 2000, as well as
certain publicly available and other material relating to the business,
financial condition and operations of Digital and Mobitec. Further, we have
reviewed:
i) the Stock Purchase Agreement;
ii) the Option Agreement as amended;
iii) the Bodin Warrant Agreement;
iv) the Form of the Promissory Note;
v) the Registration Rights Agreement; and
vi) the Consulting Agreement.
We have also reviewed certain financial and other information furnished to us by
Digital and Mobitec including projections and financial analyses prepared by
their respective managements and certain historical combined financial
statements of Mobitec. In addition, we have reviewed and considered such other
information that we deemed relevant. Moreover, with your consent, Mr. Higgins
met in Sweden and in the United States with certain senior officers of Digital
and Mobitec and had discussions regarding their operations, financial condition,
corporate histories, strategic rationale for and the potential benefits of the
Acquisition and with regard to the preparation of this opinion.
In reaching our opinion, we have considered various factors deemed relevant
including, among others, the following:
i. the terms of the Stock Purchase Agreement and related documents;
ii. Mobitec's historical operating performance and financial position;
iii. the impact on Digital's historical and forecasted earnings per share
giving effect to combining its operations with those of Mobitec assuming
the terms of the transaction at the date hereof; and
iv. the pro forma balance sheet of Digital at December 31, 2000, giving
effect to the transactions contemplated by the Stock Purchase Agreement.
Our opinion is expressly subject to and limited by the foregoing and the
following assumptions and limitations, among others:
1. We have relied upon the accuracy and completeness of all the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In this regard, we
have assumed, with your consent, that the internal financial forecasts
performed by the management of the Company have been reasonably prepared
on a basis reflecting the best currently available estimates and
judgements of the Company.
IX-2
[LOGO]
Board of Directors
Digital Recorders, Inc.
Page 3
2. We have assumed that Digital's and Mobitec's financial statements
provided to us fairly present the financial position and results of their
operations as of the dates and for the periods indicated. Further, we
have assumed that the balance sheets and the notes thereto associated
with all of the documents and information examined by us make full and
appropriate provisions for all obligations and liabilities of the
companies as of the dates indicated for which provisions are required
under generally accepted accounting principles or otherwise to be so
made.
3. The pro-forma financial statements and forecasts prepared by Digital and
Mobitec have been developed internally by each company. We express no
opinion on the reasonableness of achievability of such forecasts or the
accuracy of the pro-forma statements provided to us and which were used
by us in preparing this opinion.
4. We have made no independent verification of the financial or operating
data contained in Mobitec's annual audit reports or its unaudited interim
reports or other data provided to us. Furthermore, we assume all
unaudited financial statements received by us have been prepared on a
basis in conformity with prior year's audited financial statements and
that the forecasts provided accurately reflect management's reasonable
good faith estimates.
5. We express no opinion as to the tax or accounting consequences of any
aspect of the transaction to Digital or its shareholders.
6. With your consent, we have neither made nor reviewed any appraisal or
similar valuation report regarding the assets of Mobitec.
7. Our opinion necessarily is based upon economic, monetary, exchange rate,
market and other conditions as they existed and could be evaluated on the
date of the opinion, and does not predict or take into account any
changes which may have occurred, or information which may have become
available, after the date of such opinion. Our opinion does not
constitute an opinion as to any price at which Digital common stock will
actually trade at any time.
It is understood that, other than its inclusion in the Company's definitive
Proxy Statement, should Digital desire to use this opinion or utilize the fact
that Investec was engaged to render this opinion you will, prior to so doing,
secure our written consent as to the use of this opinion and the specific
language to be employed.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transactions contemplated by the Stock
Purchase Agreement and related documents and such opinion does not constitute a
recommendation as to how any holder of Digital's common stock should vote with
respect to any aspect of the subject transaction.
Subject to the foregoing and other factors and analyses evaluated by us as we
deemed relevant, we are of the opinion that the aggregate consideration paid by
Digital in connection with the Acquisition is fair to the holders of Digital's
common stock from a financial point of view.
Sincerely,
INVESTEC ERNST & COMPANY
By: /s/ ANTHONY SARKIS
----------------------------------------------
Anthony Sarkis
Vice President Investment Banking
IX-3
APPENDIX X
MOBITEC HOLDING AB
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2000
X-1
CONTENTS
FINANCIAL STATEMENTS
Consolidated balance sheets............................... 3
Consolidated statements of income......................... 4
Consolidated statements of stockholders' equity........... 5
Consolidated statements of cash flows..................... 6
Notes to consolidated financial statements................ 7 - 12
X-2
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(EXCEPT FOR SHARE AND PER SHARE
INFORMATION)
2000 2000 1999
----------- -------- -----------
ASSETS (NOTE 4)
Current Assets
Cash and cash equivalents................................ SEK 2,077 $ 221 SEK 6,222
Trade accounts receivable (Note 8)....................... 19,494 2,071 13,028
Other receivables........................................ 2,694 286 2,048
Inventories (Note 2)..................................... 15,630 1,660 9,861
Prepaid expenses and other assets........................ 487 52 408
---------- ------ ----------
TOTAL CURRENT ASSETS................................. 40,382 4,290 31,567
Property and equipment, net of accumulated depreciation
(Note 3)............................................... 4,094 435 3,622
Other assets (Note 7).................................... 1,221 130 270
---------- ------ ----------
TOTAL ASSETS SEK 45,697 $4,855 SEK 35,459
========== ====== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Lines of credit (Note 4)................................. SEK 10,061 $1,069 SEK 4,531
Accounts payable......................................... 10,459 1,111 8,613
Accrued expenses......................................... 6,017 639 5,434
Income tax payable....................................... 646 69 135
Other current liabilities (Note 4)....................... 2,522 269 2,028
---------- ------ ----------
TOTAL CURRENT LIABILITIES............................ 29,705 3,157 20,741
Long Term Liabilities
Deferred income taxes (Note 6)........................... 145 15 334
Deferred compensation benefits (Note 7).................. 911 97 --
---------- ------ ----------
TOTAL LONG TERM LIABILITIES.......................... 1,056 112 334
---------- ------ ----------
TOTAL LIABILITIES.................................... 30,761 3,269 21,075
---------- ------ ----------
Minority interest in consolidated subsidiary............... 1,819 193 1,009
---------- ------ ----------
Stockholders' Equity
Share capital, par value $1.00 per share, 100,000 shares
authorized and outstanding............................. 100 12 100
Legal reserve............................................ 2,653 299 2,653
Accumulated other comprehensive income, foreign
translation adjustment................................. 564 41 112
Retained earnings........................................ 9,800 1,041 10,510
---------- ------ ----------
TOTAL STOCKHOLDERS' EQUITY........................... 13,117 1,393 13,375
---------- ------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... SEK 45,697 $4,855 SEK 35,459
========== ====== ==========
See Notes to Consolidated Financial Statements.
X-3
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(EXCEPT FOR SHARE AND PER SHARE INFORMATION)
--------------------------------------------
2000 2000 1999
-------------- ---------- --------------
Net sales (Note 8)..................................... SEK 114,031 $ 12,438 SEK 96,093
Cost of sales.......................................... 67,961 7,413 65,747
----------- -------- -----------
GROSS PROFIT..................................... 46,070 5,025 30,346
----------- -------- -----------
Operating expenses:
Selling, general and administrative.................. 37,781 4,121 24,014
Research and development............................. 6,821 744 4,742
Other................................................ 146 16 373
----------- -------- -----------
Total operating expenses........................... 44,748 4,881 29,129
----------- -------- -----------
OPERATING INCOME................................. 1,322 144 1,217
----------- -------- -----------
Nonoperating income (expense):
Other income (expense)............................... 219 24 (288)
Interest (expense)................................... (434) (47) (243)
----------- -------- -----------
Total nonoperating income (expense)................ (215) (23) (531)
----------- -------- -----------
INCOME BEFORE INCOME TAXES....................... 1,107 121 686
Income tax expense (Note 6)............................ 491 54 274
----------- -------- -----------
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY........................ 616 67 412
Minority interest in net income of consolidated
subsidiary........................................... 807 88 175
----------- -------- -----------
NET INCOME (LOSS)................................ SEK (191) (21) SEK 237
=========== ======== ===========
EARNINGS PER SHARE:
Earnings (loss) per common share..................... SEK (1.91) $ (0.21) SEK 2.37
=========== ======== ===========
Weighted average shares outstanding.................. 100,000 100,000 100,000
=========== ======== ===========
See Notes to Consolidated Financial Statements.
X-4
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS SEK)
------------------------------------------------------------------------------
ACCUMULATED OTHER TOTAL
SHARE LEGAL RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
CAPITAL RESERVE EARNINGS INCOME INCOME EQUITY
-------- -------- -------- ------------- ------------- -------------
Balance, January 1, 1999............. 100 2,653 10,273 -- 13,026
Net income......................... -- -- 237 -- 237 237
Changes in cumulative translation
adjustments...................... -- -- -- 112 112 112
----
Total comprehensive income....... 349
--- ----- ------ --- ==== ------
Balance, December 31, 1999........... 100 2,653 10,510 112 13,375
Net (loss)......................... -- -- (191) -- (191) (191)
Changes in cumulative translation
adjustments...................... -- -- -- 452 452 452
----
Total comprehensive income....... 261
====
Dividends.......................... -- -- (519) -- (519)
--- ----- ------ --- ------
Balance, December 31, 2000 100 2,653 9,800 564 13,117
=== ===== ====== === ======
See Notes to Consolidated Financial Statements.
X-5
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
-----------------------
2000 1999
---------- ----------
Cash Flows From Operating Activities
Net income (loss)......................................... SEK (191) SEK 237
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest in net income of consolidated
subsidiary.......................................... 807 175
Depreciation and amortization......................... 1,600 1,348
Deferred income taxes................................. (189) 26
Gain on sale of property and equipment................ (183) --
Deferred compensation expense......................... 1,046 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable............... (6,466) (5,643)
(Increase) in other receivables....................... (646) (663)
(Increase) decrease in inventories.................... (5,769) 814
(Increase) decrease in prepaid expenses and other
current assets...................................... (79) 36
Decrease in other assets.............................. (7) --
Increase in accounts payable.......................... 1,846 2,354
Increase in accrued expenses.......................... 583 2,267
(Decrease) increase in income tax payable............. 511 (156)
Increase in other current liabilities................. 494 1,628
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ (6,643) 2,423
---------- ----------
Cash Flows From Investing Activities
Proceeds from sales of property and equipment............. 461 --
Purchases of property and equipment....................... (2,254) (1,732)
Purchase of insurance to fund deferred compensation....... (1,046) --
Purchase of other assets.................................. (146) (338)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES............... (2,985) (2,070)
---------- ----------
Cash Flows From Financing Activities
Dividends................................................. (519) --
Net proceeds from bank borrowings......................... 5,530 1,741
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 5,011 1,741
---------- ----------
Effect of exchange rate change.............................. 472 105
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (4,145) 2,199
Cash and cash equivalents at beginning of year.............. 6,222 4,023
---------- ----------
Cash and cash equivalents at end of year.................... SEK 2,077 SEK 6,222
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest................................................ SEK 434 SEK 243
========== ==========
Income taxes............................................ SEK 167 SEK 93
========== ==========
See Notes to Consolidated Financial Statements.
X-6
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company develops, manufactures, and distributes
information systems primarily for buses used in public transportation. Customers
are primarily bus manufacturers located in Australia, Brazil, Germany, and
Scandinavia.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION: These consolidated financial statements have been
prepared in Swedish Krona (SEK), the Company's functional currency. The 2000
consolidated balance sheet and statement of income reflect amounts in US dollars
in a "convenience translation" column. The consolidated financial statements
have also been prepared in accordance with US generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Mobitec AB. The
consolidated financial statements also include the accounts of Mobitec AB's
wholly owned subsidiaries (Mobitec GmbH, Mobitec Australia, Pty Ltd., Mobitec
Klimat AB and Mobitec Hexair AB) and the accounts of its 50% owned subsidiary,
Mobitec Brazil LTDA (which has been consolidated due to control of the Board of
Directors). Mobitec Hexair AB was sold during the year ended December 31, 2000;
however, the results of its operations are included in the statements of income.
All significant inter-company accounts and transactions have been eliminated in
consolidation.
INVENTORIES: Inventories are stated at the lower of cost (average cost) or
market.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost, less
accumulated depreciation. If facts and circumstances suggest that the property
and equipment will not be recoverable, as determined, based on the undiscounted
cash flows over the remaining depreciable period, the Company will review for
impairment. To the extent that there is an impairment, analysis is performed
based on several criteria, including but not limited to, revenue trends,
discounted operation cash flows and other factors to determine the impairment
amount. The Company computes depreciation on its equipment using the
straight-line method over the following estimated useful lives:
YEARS
--------
Buildings................................................... 50
Leasehold improvements...................................... 5
Machinery and equipment..................................... 3 to 10
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES: The Company reports deferred tax assets and liabilities
attributable to temporary differences between the book value of assets and
liabilities and their tax value. The accumulated deferred tax liability is
adjusted each year by applying the current tax rate in each country and is
reported in the balance sheet as deferred income taxes.
X-7
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates prevailing at the end of
the year. Revenue and expense transactions are translated at the average of
exchange rates in effect during the period. Translations gains and losses are
recorded directly to stockholders' equity. Realized gains and losses on foreign
currency translation, if any, are included in operations.
REVENUE RECOGNITION: The Company recognizes operating revenues upon
shipment of goods to customers.
RESEARCH AND DEVELOPMENT: The Company expenses all research and development
costs at the time expenses are incurred.
ADVERTISING: The Company expenses advertising costs at the time the
expenses are incurred.
EARNINGS PER SHARE AMOUNTS: Earnings (loss) per share has been computed
based upon the weighted average number of shares of share capital outstanding.
NOTE 2. INVENTORIES
The components of inventories consist of the following:
2000 1999
----------- ---------
Raw materials....................................... SEK 13,479 SEK 7,194
Work-in-process..................................... 197 148
Finished goods...................................... 1,264 802
Supplies............................................ 690 1,717
----------- ---------
SEK 15,630 SEK 9,861
=========== =========
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
2000 1999
----------- -----------
Land............................................... SEK -- SEK 95
Buildings.......................................... -- 194
Machinery and equipment............................ 8,454 6,373
Leasehold improvements............................. 797 797
----------- -----------
9,251 7,459
Less accumulated depreciation...................... 5,157 3,837
----------- -----------
SEK 4,094 SEK 3,622
=========== ===========
Depreciation expense was 1,504 SEK and 1,280 SEK for 2000 and 1999,
respectively.
X-8
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4. LOAN AGREEMENTS
The Company has an agreement with a bank in which the Company may currently
borrow up to a maximum of 4,500 SEK. At December 31, 2000 and 1999, 4,406 SEK
and 4,531 SEK, respectively, was outstanding. Advances under the agreement are
subject to a borrowing base of 75% of eligible accounts receivable. The line of
credit bears interest at 5.1% and is collateralized by accounts receivable. This
line of credit agreement expires on July 31, 2001.
The Company also has an agreement with a bank in which it may borrow up to
6,000 SEK of which 5,655 SEK was outstanding at December 31, 2000. The terms of
this agreement require the payment of an unused credit line fee equal to 0.5% of
the unused portion and interest at 5% of the outstanding balance. This agreement
is secured by a mortgage on substantially all assets of the Company. This
agreement expires on July 31, 2001.
The Company also has convertible loans of 99 SEK at December 31, 2000 from
employees that can be converted into share capital of the Company. These loans
are reflected in "other current liabilities" at December 31, 2000. These loans
are to be repaid by the Company in April 2001.
NOTE 5. LEASE COMMITMENTS
The Company has lease commitments under operating leases for vehicles.
Rental expense for 2000 and 1999 was 1,800 SEK and 1,040 SEK, respectively.
At December 31, 2000, the future minimum lease commitments under
non-cancelable operating leases are as follows:
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- ------------ ----------
2001........................................................ SEK 1,600
2002........................................................ 975
2003........................................................ 450
----------
Total minimum lease payments................................ SEK 3,025
==========
NOTE 6. INCOME TAXES
The components of income tax expense for the years ended December 31, 2000
and 1999 consisted of the following:
2000 1999
--------- --------
Current expense........................................ SEK 680 SEK 248
Deferred expense (benefit)............................. (189) 26
--------- --------
SEK 491 SEK 274
========= ========
X-9
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 6. INCOME TAXES (CONTINUED)
At December 31, 2000 and 1999, the Company has net deferred tax liabilities
that consist of the following:
2000 1999
--------- ---------
Deferred tax assets:
Property and equipment.............................. SEK 130 SEK 87
Inventories......................................... 6 --
-------- --------
136 87
-------- --------
Deferred tax liabilities:
Untaxed reserves.................................... 281 281
Inventories......................................... -- 50
Other............................................... -- 90
-------- --------
281 421
-------- --------
Net deferred tax liabilities.......................... SEK (145) SEK (334)
======== ========
The deferred tax amounts above have been classified on the consolidated
balance sheets as follows:
2000 1999
--------- ---------
Current assets........................................ SEK -- SEK --
Noncurrent assets..................................... -- --
Noncurrent liabilities................................ (145) (334)
-------- --------
SEK (145) SEK (334)
======== ========
The income tax provision differs from the amount of income tax determined by
applying the applicable Swedish income tax rate to pretax income for 2000 and
1999 due to the following:
2000 1999
------------------- -------------------
AMOUNT PERCENT AMOUNT %
-------- -------- -------- --------
Computed "expected" tax expense.......................... SEK 310 28.0% SEK 192 28.0%
Increase in income taxes resulting from:
Nontaxable items....................................... 173 15.6% 68 9.9%
Other.................................................. 8 0.8% 14 2.0%
------- --- ------- ---
SEK 491 44.4% SEK 274 39.9%
======= === ======= ===
NOTE 7. RETIREMENT PLAN
The Company has a deferred compensation plan agreement with a former key
employee which permitted the employee to retire at age 60. In March 2000, the
employee retired and the Company paid approximately 1,046 SEK to fund an
insurance contract. The Company also recorded a corresponding liability to cover
the estimated present value of the liability to be paid to the recipient. Each
month, the recipient will receive approximately 17 SEK over a 60-month term. At
December 31, 2000, the related asset and liability associated with this plan is
911 SEK and is included in the accompanying balance sheet as "other assets" and
as "deferred compensation benefits."
The amount of the expense associated with this plan for the year ended
December 31, 2000 was approximately 1,046 SEK.
X-10
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 8. MAJOR CUSTOMERS
Sales to major customers during the year ended December 31, 2000 and 1999
are as follows:
AMOUNT OF NET SALES
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Customer A*........................................ SEK 31,261 SEK 25,788
---------- ----------
SEK 31,261 SEK 25,788
========== ==========
TRADE ACCOUNTS RECEIVABLE
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Customer A......................................... SEK 2,839 SEK 4,819
---------- ----------
SEK 2,839 SEK 4,819
========== ==========
Because of the nature of the Company's business, the major customers may vary
between years.
- ------------------------
* Customer A consists of six wholly-owned subsidiaries of a Scandinavian and
European bus and truck manufacturing company.
NOTE 9. OTHER COMPREHENSIVE INCOME
The following is a summary of the tax effects of the components of other
comprehensive income, consisting solely of foreign currency translation
adjustments, reported in the statements of stockholders' equity for the years
ended December 31, 2000 and 1999:
PRE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
-------- -------- ----------
Year ended December 31, 2000:
Foreign currency translation adjustment..................... SEK 628 SEK 176 SEK 452
======= ======= =======
Year ended December 31, 1999:
Foreign currency translation adjustment..................... SEK 155 SEK 43 SEK 112
======= ======= =======
NOTE 10. FOREIGN OPERATIONS
The Company has one business segment in which it develops, manufactures, and
distributes information systems primarily for buses used in public
transportation. Customers are primarily bus manufacturers located in
Scandinavia, Germany, Australia, and Brazil.
X-11
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 10. FOREIGN OPERATIONS (CONTINUED)
Summarized financial information for the Company's foreign sales (attributed
to countries based on the location of the subsidiary) for the year ended
December 31, 2000 and 1999 is as follows:
2000 1999
------------ -----------
Sweden............................................ SEK 99,761 SEK 96,277
Germany........................................... 11,925 7,727
Australia......................................... 6,770 --
Brazil............................................ 13,850 1,594
Elimination of inter-company sales................ (18,275) (9,505)
----------- ----------
SEK 114,031 SEK 96,093
=========== ==========
The following table presents information about the Company's operating
income by geographic area for the year ended December 31, 2000 and 1999 as
follows:
2000 1999
---------- ----------
Sweden.............................................. SEK (647) SEK 1,302
Germany............................................. (1,013) (252)
Australia........................................... 770 --
Brazil.............................................. 1,767 328
Elimination of inter-company income (loss).......... 445 (161)
---------- ---------
SEK 1,322 SEK 1,217
========== =========
The following table presents information about the Company's identifiable
assets by geographic area as of December 31, 2000 and 1999 as follows:
2000 1999
----------- -----------
Sweden........................................... SEK 43,365 SEK 37,387
Germany.......................................... 3,730 4,624
Australia........................................ 5,311 --
Brazil........................................... 6,297 3,772
Elimination of inter-company receivables and
payables....................................... (13,006) (10,324)
----------- -----------
SEK 45,697 SEK 35,459
=========== ===========
X-12
MOBITEC HOLDING AB
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
X-13
CONTENTS
FINANCIAL STATEMENTS
Consolidated balance sheets............................... 15
Consolidated statements of income......................... 16
Consolidated statements of cash flows..................... 17
Notes to consolidated financial statements................ 18- 20
X-14
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
(EXCEPT FOR SHARE AND PER SHARE INFORMATION)
MARCH 31, MARCH 31, DECEMBER 31,
2001 2001 2000
------------ --------- ------------
ASSETS
Current Assets
Cash and cash equivalents............................. SEK 2,182 $ 210 SEK 2,077
Trade accounts receivable............................. 21,966 2,112 19,494
Other receivables..................................... 4,777 459 2,694
Inventories........................................... 15,557 1,496 15,630
Prepaid expenses and other assets..................... 558 54 487
---------- ------ ----------
TOTAL CURRENT ASSETS................................ 45,040 4,331 40,382
Property and equipment, net of accumulated
depreciation.......................................... 2,950 284 4,094
Other assets............................................ 867 83 1,221
---------- ------ ----------
TOTAL ASSETS........................................ SEK 48,857 $4,698 SEK 45,697
========== ====== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Lines of credit....................................... SEK 11,544 $1,110 SEK 10,061
Accounts payable...................................... 10,614 1,020 10,459
Accrued expenses...................................... 6,323 608 6,017
Income tax payable.................................... 1,019 98 646
Other current liabilities............................. 1,411 136 2,522
---------- ------ ----------
TOTAL CURRENT LIABILITIES........................... 30,911 2,972 29,705
---------- ------ ----------
Long Term Liabilities
Deferred income taxes................................. 389 37 145
Deferred compensation benefits........................ 860 83 911
---------- ------ ----------
TOTAL LONG TERM LIABILITIES......................... 1,249 120 1,056
---------- ------ ----------
TOTAL LIABILITIES................................... 32,160 3,092 30,761
---------- ------ ----------
Minority interest in consolidated subsidiary............ 2,163 208 1,819
---------- ------ ----------
Stockholders' Equity
Share capital, par value $1.00 per share, 100,000
shares authorized and outstanding................... 100 12 100
Legal reserve......................................... 2,106 266 2,653
Accumulated other comprehensive income, foreign
translation adjustment.............................. (348) (98) 564
Retained earnings..................................... 12,676 1,218 9,800
---------- ------ ----------
TOTAL STOCKHOLDERS' EQUITY.......................... 14,534 1,398 13,117
---------- ------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... SEK 48,857 $4,698 SEK 45,697
========== ====== ==========
See Notes to Consolidated Financial Statements.
X-15
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
(EXCEPT FOR SHARE AND PER SHARE INFORMATION)
2001 2001 2000
-------------- ---------- --------------
Net sales.............................................. SEK 34,207 $ 3,511 SEK 26,148
Cost of sales.......................................... 18,306 1,879 15,076
----------- -------- -----------
GROSS PROFIT..................................... 15,901 1,632 11,072
----------- -------- -----------
Operating expenses:
Selling, general and administrative.................. 10,113 1,038 8,178
Research and development............................. 1,500 154 1,705
----------- -------- -----------
Total operating expenses........................... 11,613 1,192 9,883
----------- -------- -----------
OPERATING INCOME................................. 4,288 440 1,189
----------- -------- -----------
Nonoperating income (expense):
Other income (expense)............................... (139) (14) (28)
Interest (expense)................................... (9) (1) (17)
----------- -------- -----------
Total nonoperating income (expense)................ (148) (15) (45)
----------- -------- -----------
INCOME BEFORE INCOME TAXES....................... 4,140 425 1,144
Income tax expense..................................... 920 94 534
----------- -------- -----------
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY........................ 3,220 331 610
Minority interest in net income of consolidated
subsidiary........................................... 344 35 99
----------- -------- -----------
NET INCOME....................................... SEK 2,876 $ 296 SEK 511
=========== ======== ===========
EARNINGS PER SHARE:
Earnings per common share............................ SEK 28.76 $ 2.96 SEK 5.11
=========== ======== ===========
Weighted average shares outstanding.................. 100,000 100,000 100,000
=========== ======== ===========
See Notes to Consolidated Financial Statements.
X-16
MOBITEC HOLDING AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
2001 2000
---------- ----------
Cash Flows From Operating Activities
Net income................................................ SEK 2,876 SEK 511
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Minority interest in net income of consolidated
subsidiary............................................ 344 99
Depreciation and amortization........................... 224 368
Deferred income taxes................................... 244 (9)
Book value of property and equipment and other assets
disposed.............................................. 2,290 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable................. (2,472) (889)
(Increase) decrease in other receivables................ (2,083) 33
(Increase) decrease in inventories...................... 73 (2,654)
(Increase) in prepaid expenses and other current
assets................................................ (71) (328)
Increase in accounts payable............................ 155 2,547
(Decrease) increase in accrued expenses................. 306 (916)
Increase in income tax payable.......................... 373 341
(Decrease) in other current liabilities................. (1,111) (824)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ 1,148 (1,721)
---------- ----------
Cash Flows From Investing Activities
Proceeds from sales of property and equipment........... 1 --
Purchases of property and equipment..................... (1,050) (653)
Other................................................... 33 16
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES............... (1,016) (637)
---------- ----------
Cash Flows From Financing Activities
Payment of deferred compensation benefits............... (51) --
Net proceeds from bank borrowings....................... 1,483 244
Change in legal reserve................................. (547) 363
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 885 607
---------- ----------
Effect of exchange rate change............................ (912) (29)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 105 (1,780)
Cash and cash equivalents at beginning of period.......... 2,077 6,222
---------- ----------
Cash and cash equivalents at end of period................ SEK 2,182 SEK 4,442
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest................................................ SEK 9 SEK 17
========== ==========
Income taxes............................................ SEK 303 SEK 202
========== ==========
See Notes to Consolidated Financial Statements.
X-17
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Company develops, manufactures, and distributes
information systems primarily for buses used in public transportation. Customers
are primarily bus manufacturers located in Australia, Brazil, Germany, and
Scandinavia.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION: In the opinion of management, the accompanying
unaudited consolidated financial statements include all adjustments (consisting
only of normal adjustments) necessary for a fair presentation of the financial
position of Mobitec Holding AB and subsidiaries (the "Company") at March 31,
2001 and December 31, 2000, the results of operations for the three months ended
March 31, 2001 and 2000, and cash flows for the three months ended March 31,
2001 and 2000. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's annual 2000 financial statements.
These consolidated financial statements have been prepared in Swedish Krona
(SEK), the Company's functional currency. The 2001 consolidated balance sheet
and statement of income reflect amounts in US dollars in a "convenience
translation" column. The consolidated financial statements have also been
prepared in accordance with US generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Mobitec AB. The
consolidated financial statements also include the accounts of Mobitec AB's
wholly owned subsidiaries (Mobitec GmbH, Mobitec Australia, Pty Ltd., Mobitec
Klimat AB and Mobitec Hexair AB) and the accounts of its 50% owned subsidiary,
Mobitec Brazil LTD (which has been consolidated due to control of the Board of
Directors). Mobitec Hexair AB was sold on December 31, 2000 and Mobitec Klimat
AB was sold on January 1, 2001. All significant inter-company accounts and
transactions have been eliminated in consolidation.
INVENTORIES: Inventories are stated at the lower of cost (average cost) or
market.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost, less
accumulated depreciation. If facts and circumstances suggest that the property
and equipment will not be recoverable, as determined, based on the undiscounted
cash flows over the remaining depreciable period, the Company will review for
impairment. To the extent that there is an impairment, analysis is performed
based on several criteria, including but not limited to, revenue trends,
discounted operation cash flows and other factors to determine the impairment
amount. The Company computes depreciation on its equipment using the
straight-line method over the following estimated useful lives:
YEARS
--------
Buildings................................................... 50
Leasehold improvements...................................... 5
Machinery and equipment..................................... 3 to 10
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
X-18
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The Company reports deferred tax assets and liabilities
attributable to temporary differences between the book value of assets and
liabilities and their tax value. The accumulated deferred tax liability is
adjusted each year by applying the current tax rate in each country and is
reported in the balance sheet as deferred income taxes.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the Company's
foreign subsidiaries are translated at exchange rates prevailing at the end of
the period. Revenue and expense transactions are translated at the average of
exchange rates in effect during the period. Translations gains and losses are
recorded directly to stockholders' equity. Realized gains and losses on foreign
currency translation, if any, are included in operations.
REVENUE RECOGNITION: The Company recognizes operating revenues upon
shipment of goods to customers.
RESEARCH AND DEVELOPMENT: The Company expenses all research and development
costs at the time expenses are incurred.
ADVERTISING: The Company expenses advertising costs at the time the
expenses are incurred.
EARNINGS PER SHARE AMOUNTS: Earnings per share has been computed based upon
the weighted average number of shares of share capital outstanding.
NOTE 2. OTHER COMPREHENSIVE INCOME
The following is a summary of the tax effects of the components of other
comprehensive income, consisting solely of foreign currency translation
adjustments, reported in the statements of stockholders' equity for the three
months ended March 31, 2001 and 2000:
PRE-TAX NET-OF-TAX
AMOUNT TAX (BENEFIT) AMOUNT
----------------- ----------------- -----------------
Three months ended March 31, 2001:
Foreign currency translation adjustment... SEK (1,266) SEK (354) SEK (912)
=== ======= === ===== === =====
Three months ended March 31, 2000:
Foreign currency translation adjustment... SEK (40) SEK (11) SEK (29)
=== ======= === ===== === =====
Comprehensive income was SEK 1,964 and SEK 482 for the three months ended
March 31, 2001 and 2000, respectively.
NOTE 3. FOREIGN OPERATIONS
The Company has one business segment in which it develops, manufactures, and
distributes information systems primarily for buses used in public
transportation. Customers are primarily bus manufacturers located in
Scandinavia, Germany, Australia, and Brazil.
X-19
MOBITEC HOLDING AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3. FOREIGN OPERATIONS (CONTINUED)
Summarized financial information for the Company's foreign sales (attributed
to countries based on the location of the subsidiary) for the three months ended
March 31, 2001 and 2000 is as follows:
2001 2000
----------------- -----------------
Sweden........................................... SEK 29,414 SEK 24,978
Germany.......................................... 3,209 3,746
Australia........................................ 3,778 --
Brazil........................................... 4,106 2,197
Elimination of inter-company sales............... (6,300) (4,773)
--- -------- --- --------
SEK 34,207 SEK 26,148
=== ======== === ========
The following table presents information about the Company's operating
income (loss) by geographic area for the three months ended March 31, 2001 and
2000 as follows:
2001 2000
----------------- -----------------
Sweden........................................... SEK 2,676 SEK 726
Germany.......................................... (106) 128
Australia........................................ 279 --
Brazil........................................... 840 179
Elimination of inter-company income.............. 599 156
--- -------- --- --------
SEK 4,288 SEK 1,189
=== ======== === ========
The following table presents information about the Company's identifiable
assets by geographic area as of March 31, 2001 and December 31, 2000 as follows:
2001 2000
----------------- -----------------
Sweden........................................... SEK 43,928 SEK 43,365
Germany.......................................... 3,444 3,730
Australia........................................ 5,124 5,311
Brazil........................................... 7,012 6,297
Elimination of inter-company receivables and
payables....................................... (10,651) (13,006)
--- -------- --- --------
SEK 48,857 SEK 45,697
=== ======== === ========
X-20
APPENDIX XI
DIGITAL RECORDERS, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
These pro forma condensed financial statements reflect the proposed
acquisition of Mobitec Holding AB and Subsidiaries. The pro forma condensed
financial statements present the balance sheet as if the transaction had
occurred on March 31, 2001 and the income statement as if the transaction had
occurred at January 1, 2000 and carried through the three months ended
March 31, 2001.
The following unaudited pro forma condensed statements of operations are
derived from the audited statement of operations of Digital Recorders, Inc. (DRI
or the Company) for the year ended December 31, 2000 and the unaudited statement
of operations of Mobitec Holding AB and Subsidiaries for the year ended
December 31, 2000. The March 31, 2001 balance sheets and the statements of
operations for the three months ended March 31, 2001 are derived from their
unaudited interim financial statements. The unaudited financial information
herein reflects all adjustments, consisting only of normal recurring adjustments
which, in the opinion of management of the respective companies, are necessary
to fairly state the Company's financial position and results of its operations.
These pro forma condensed statements of operations and balance sheet do not
purport to represent what the Company's results or financial condition would
actually have been if the Acquisition had occurred on the dates indicated or to
project the Company's results or financial condition for or at any future period
or date. The pro forma adjustments, as described in the accompanying data, are
based on available information and certain assumptions that management believes
are reasonable.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements and related notes of DRI
and Mobitec Holding AB.
XI-1
DIGITAL RECORDERS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
PRO FORMA PRO FORMA
DIGITAL MOBITEC ADJUSTMENTS NOTE COMBINED
-------- -------- ----------- -------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................ $ 81 $ 210 $ 250 B1 $ 541
Trade accounts receivable--net....................... 7,067 2,112 -- 9,179
Other receivables.................................... 46 459 -- 505
Inventories.......................................... 5,557 1,496 -- 7,053
Prepaids and other current assets.................... 438 54 -- 492
------- ------ ------ -------
Total current assets............................... 13,189 4,331 250 17,770
Property and equipment--net.......................... 602 284 -- 886
Goodwill--net........................................ 1,049 -- 1,481 B2 2,530
Intangible assets--net............................... 76 -- 4,500 B2 4,576
Deferred taxes....................................... 170 -- -- 170
Other assets......................................... 522 83 -- 605
------- ------ ------ -------
Total assets....................................... $15,608 $4,698 $6,231 $26,537
======= ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit and current maturities................ $ 4,163 $1,110 $ 350 B3 $ 5,623
Accounts payable..................................... 2,347 1,020 -- 3,367
Accounts payable, related party...................... 2,685 -- -- 2,685
Accrued expenses..................................... 938 608 -- 1,546
Income tax payable................................... -- 98 -- 98
Other current liabilities............................ -- 136 -- 136
Preferred stock dividends payable.................... 44 -- -- 44
------- ------ ------ -------
Total current liabilities.......................... 10,177 2,972 350 13,499
------- ------ ------ -------
LONG TERM LIABILITIES
Other liabilities.................................... -- 37 -- 37
Long term liabilities................................ -- 83 6,220 B3, B4 6,303
------- ------ ------ -------
Total long term liabilities........................ -- 120 6,220 6,340
------- ------ ------ -------
Total liabilities.................................. 10,177 3,092 6,570 19,839
------- ------ ------ -------
SERIES AAA REDEEMABLE, CONVERTIBLE, NONVOTING PREFERRED
STOCK................................................. 1,770 -- -- 1,770
------- ------ ------ -------
Minority interest in consolidated subsidiary........... -- 208 -- 208
------- ------ ------ -------
Stockholders' Equity:
Share capital........................................ -- 12 (12) B2 --
Legal reserve........................................ -- 266 (266) B2 --
Common stock......................................... 327 -- 43 B4 370
Additional paid-in-capital........................... 11,115 -- 1,016 B4 12,131
Accumulated other comprehensive income (loss)........ (407) (98) 98 B2 (407)
Accumulated earnings (deficit)....................... (7,374) 1,218 (1,218) B2 (7,374)
------- ------ ------ -------
Total stockholders' equity......................... 3,661 1,398 (339) 4,720
------- ------ ------ -------
Total liabilities and stockholders' equity......... $15,608 $4,698 $6,231 $26,537
======= ====== ====== =======
The accompanying notes are an integral part of these financial statements.
XI-2
DIGITAL RECORDERS, INC
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
(UNAUDITED)
PRO FORMA PRO FORMA
DIGITAL MOBITEC ADJUSTMENTS NOTE COMBINED
---------- -------- ----------- -------- ----------
Net sales............................................ $ 6,981 $3,511 $ -- $ 10,492
Cost of sales........................................ 4,420 1,879 -- 6,299
---------- ------ ------ ----------
Gross profit..................................... 2,561 1,632 -- 4,193
---------- ------ ------ ----------
Operating expenses:
Selling, general and administrative................ 1,936 1,038 124 C-1 3,098
Research and development........................... 535 154 -- 689
Other.............................................. -- -- -- --
---------- ------ ------ ----------
Total operating expenses......................... 2,471 1,192 124 3,787
---------- ------ ------ ----------
Operating income (loss).......................... 90 440 (124) 406
Other expense........................................ (2) (14) -- (16)
Interest expense..................................... (137) (1) (188) C-2 (326)
---------- ------ ------ ----------
Total other expense and interest expense....... (139) (15) (188) (342)
---------- ------ ------ ----------
Income (loss) before income taxes................ (49) 425 (312) 64
Income tax expense................................... -- 94 -- 94
---------- ------ ------ ----------
Net income (loss)................................ (49) 331 (312) (30)
Minority interest in net income of consolidated
subsidiary......................................... -- 35 -- 35
Preferred stock dividend requirements................ 44 -- -- 44
---------- ------ ------ ----------
Net income (loss) applicable to common
shareholders................................... $ (93) $ 296 $ (312) $ (109)
========== ====== ====== ==========
Earnings per share:
Net loss per share--basic and diluted............ $ (0.03) $ (0.03)
========== ==========
Weighted average number of common shares
outstanding........................................ 3,274,475 3,704,475
========== ==========
The accompanying notes are an integral part of these financial statements.
XI-3
DIGITAL RECORDERS, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION
(UNAUDITED)
PRO FORMA PRO FORMA
DIGITAL MOBITEC ADJUSTMENTS NOTE COMBINED
--------- -------- ----------- -------- ---------
Net sales.................................... $ 29,886 $12,438 $(716) C3 $ 41,608
Cost of sales................................ 18,980 7,413 (562) C3 25,831
--------- ------- ----- ---------
Gross profit............................. 10,906 5,025 (154) 15,777
--------- ------- ----- ---------
Operating expenses:
Selling, general and administrative........ 8,378 4,121 150 C1, C3 12,649
Research and development................... 2,295 744 -- 3,039
Other...................................... -- 16 -- 16
--------- ------- ----- ---------
Total operating expenses................. 10,673 4,881 150 15,704
--------- ------- ----- ---------
Operating income (loss).................. 233 144 (304) 73
Other expense................................ (2) 24 -- 22
Interest expense............................. (510) (47) (551) C2 (1,108)
--------- ------- ----- ---------
Total other expense and interest
expense.............................. (512) (23) (551) (1,086)
--------- ------- ----- ---------
Income (loss) before income taxes........ (279) 121 (855) (1,013)
Income tax expense........................... -- 54 56 C3 110
--------- ------- ----- ---------
Net income (loss)........................ (279) 67 (911) (1,123)
Minority interest in net income of
consolidated subsidiary.................... -- 88 -- 88
Preferred stock dividend requirements........ 177 -- -- 177
--------- ------- ----- ---------
Net income (loss) applicable to common
shareholders........................... $ (456) $ (21) $(911) $ (1,388)
========= ======= ===== =========
Earnings per share:
Net loss per share--basic and diluted.... $ (0.14) $ (0.37)
========= =========
Weighted average number of common shares
outstanding............................ 3,274,475 3,704,475
========= =========
The accompanying notes are an integral part of these financial statements.
XI-4
DIGITAL RECORDERS, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE A--ACQUISITION:
On March 13, 2001, DRI Europa AB and Digital entered into an Amended Option
Agreement (the Option Agreement) with Bengt Bodin, Annacarin Bodin, Mattias
Bodin, Tobias Bodin, and Bertil Lindqvist (collectively, the "Sellers"), which
amended and superseded an Option Agreement between the same parties dated
December 7, 2000. Pursuant to the Option Agreement, the Offerors granted to
Digital and DRI Europa AB an irrevocable right of option to purchase the
Offerors' shares of Mobitec Holding AB for the period from March 13, 2001 to
June 16, 2001, based upon the occurrence of certain events. The option may be
exercised such that either DRI Europa AB, solely, or DRI Europa AB and Digital,
jointly, will be the Purchaser under that Stock Purchase Agreement. The Stock
Purchase Agreement, which will be executed after exercise of one of the options,
provides for the purchase of the Offerors' shares of Mobitec Holding AB for a
total purchase price of $7,089,000, consisting of (i) $4,210,000 in cash,
(ii) seller financed debt to the Bodin Sellers of $2,000,000, (iii) 430,000
Restricted Shares of the Digital's Common Stock which are valued at $817,000,
and (iv) warrants to purchase in the aggregate of 100,000 shares of Digital's
Common Stock at an exercise price of $4.00 per share for a period of five years,
which are valued at $62,000.
NOTE B--PRO FORMA ADJUSTMENTS--BALANCE SHEET:
(1) Represents the cash received from (i) the issuance of $3,000,000 of
convertible debentures (including $180,000 assigned to the 200,000
warrants) which are convertible to up to 1,500,000 shares of the
Company's common stock, which funds will be used to fund part of the
Stock Purchase Agreement, and (ii) the borrowing of $1,750,000 from
Svenska Handelsbaken AB, less (i) the cash consideration of $4,210,000
paid as part of the Acquisition and (ii) $290,000 in professional fees
related to the Acquisition.
(2) Represents the fair value of goodwill and intangible assets (customer
lists, product designs and non-compete agreements) acquired and recorded
in connection with the Acquisition and the elimination of Mobitec's
stockholders' equity. The total purchase price has been allocated, on a
preliminary basis, to goodwill and intangible assets as follows:
Goodwill.................................................... $1,481,000
==========
Intangible assets:
Customer lists............................................ $2,900,000
Product designs........................................... 1,500,000
Non-compete agreements.................................... 100,000
----------
$4,500,000
==========
(3) Represents the borrowings incurred related to the financing of the
Acquisition of (i) $2,820,000 of convertible debentures which are
convertible into up to 1,500,000 shares of the Company's common stock,
and (ii) $1,750,000 in a term loan from Svenska Handelsbaken AB, and
(iii) $2,000,000 in seller financed debt issued to the Bodin Sellers. All
borrowings are reflected as long-term obligations except for $350,000 of
the term loan which is due within one year.
(4) Represents the issuance of 430,000 Restricted Shares of the Company's
common stock as part of the consideration for the Acquisition using a
fair market value of $1.90, the value as of the date of announcement of
the proposed acquisition and the issuance of 100,000 warrants
XI-5
DIGITAL RECORDERS, INC.
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--PRO FORMA ADJUSTMENTS--BALANCE SHEET: (CONTINUED)
valued at $62,000. Also represents an allocation, on a preliminary basis,
to additional paid-in capital of $180,000, the value of the 200,000
warrants attached to the convertible debentures.
NOTE C--PRO FORMA ADJUSTMENTS--STATEMENTS OF OPERATIONS:
(1) Represents the amortization of recorded goodwill and intangible assets
over the following estimated lives:
YEARS
--------
Goodwill.................................................... 15
Customer lists.............................................. 15
Product designs............................................. 5 - 10
Non-compete agreements...................................... 3
(2) Represents the interest expense for the year ended December 31, 2000 and
the three months ended March 31, 2001 associated with the issuance of the
convertible debentures of $2,820,000 (8%), the seller financed notes of
$2,000,000 (9%) and the borrowings in connection with the Svenska
Handelsbaken AB term loan of $1,750,000 (5.35%). Also represents the
interest expense for the year ended December 31, 2000 and the three
months ended March 31, 2001 associated with the amortization of the
$180,000 amount of the discounted convertible debentures.
(3) Represents the removal of the income and expenses of Mobitec Klimat AB,
a subsidiary sold on January 1, 2001, which is not part of the
Acquisition. No adjustment is required for the statements of operations
for the three months ended March 31, 2001.
XI-6
APPENDIX XII
CHARTER
AUDIT COMMITTEE
OF THE
BOARD OF DIRECTORS
OF
DIGITAL RECORDERS, INC.
RESPONSIBILITY, AUTHORITY, AND GUIDELINES
NOTE
It is the specific intent of this charter to establish long-term conformity with
the "REPORT AND RECOMMENDATIONS OF THE BLUE RIBBON COMMITTEE ("BRC") ON
IMPROVING THE EFFECTIVENESS OF CORPORATE AUDIT COMMITTEES". DRI's Board of
Directors believes that certain of those recommendations cannot realistically be
applied in strict and absolute terms to relatively new and small public
companies such as DRI, in the near term, without risk of compromise of
shareholder best interest. Therefore, recognizing the ultimate long term goal is
full compliance with the BRC Report and its recommendations, matters of this
charter, and conduct of the Board of Directors and its Audit Committee, will be
such as to progress the company toward that ultimate long term goal. Further,
adherence to policies and procedures consistent with the spirit and intent of
that Report and its recommendations will be current and ongoing.
Company Management has full and total responsibility for un-compromised
compliance with all accounting standards, reporting requirements, and
disclosures. Nothing in this charter is to be construed as supplanting that
responsibility of management nor as substituting the Audit Committee in such
responsibilities. The responsibility of the Audit Committee is one of oversight
based on the assumption management has fully carried-out all reporting
requirements.
GENERAL STATEMENT OF PURPOSE: The Audit Committee serves...
- to oversee that management has devised, implemented, and maintained the
reliability and integrity of accounting policies, financial reporting, and
disclosure practices of the Company
- to oversee that management has established and maintained processes to
assure that an adequate system of internal control is functioning within
the Company
- to oversee that management has established and maintained processes to
assure compliance by the Company with applicable domestic and
international laws and regulations of financial nature
- to recommend to the Board of Directors the appointment of, changes in, and
compensation of, the Company's independent public audit firm
- as the primary interface and relationship point with the Company's
officially appointed independent public audit firm
- as an independent, direct, and open channel of communications between the
Board of Directors and the independent public audit firm
- as an extension of the Board in discharge of the Board's fudiciary
responsibility
XII-1
MEMBERSHIP: The Audit Committee shall consist of not less than three
members all of which are to be outside directors. At least one member of the
committee, and its Chair, shall be "Independent" as defined in the Blue Ribbon
Committee report and Recommendations"(1). All members of the Audit committee not
in compliance with this definition of Independence will be so noted in at least
one public disclosure each year together with a clear statement, based on annual
formal resolution of the Board of Directors, as to why the best interest of the
Company's shareholders is served in waiver of compliance. All members shall
possess working knowledge of financial statements as typically employed by the
Company in its industry, be current shareholders(2) in the company, and maintain
up-to-date knowledge (through continuing education or otherwise) related to the
duties herein, and have attended at least 75% of all meetings of the Board of
Directors in the preceding year. The Board of Directors may alter Audit
Committee membership from time to time, subject to these requirements. The
company CFO and CEO serve as ex-officio (non-voting) members of the Audit
Committee.
DUTIES AND RESPONSIBILITIES: The duties and responsibilities of the Audit
Committee shall include the following:
1. Any relevant task specifically delegated by the Board of Directors
2. Provide an open avenue of communication between the Company's independent
public audit firm, Company financial management, and the Board of Directors
3. Meet at least three times per year, or more frequently as circumstances
require, asking members of management or others to attend meetings to
provide information as deemed necessary to fully discharge it's
responsibility to the shareholders
4. Screen, select, and recommend, in consultation with company management, to
the Board of Directors, the Company's Independent Auditors
5. Confirm and assure the independence and objectivity of the Independent
Auditor
6. Inquire of management, and the Independent Auditor about the existence of,
or potential for existence of significant business risks or financial
exposures and assess steps management has taken to minimize such risks
7. Review and fully investigate results of audits, the previous year's audit,
the independent auditor's management letter, and any difficulties
encountered in the course of audit work, including any restrictions on the
scope of activities or access to required information
- ------------------------
(1) For each of the preceding five years including the current year, not
employed by, nor accepting compensation from (other than as a director), the
Company or any of its affiliates; and, not a relative or immediate family
member of any individual who is (or in the past five years has been), an
employee of the Company or its affiliates; and, not a director, partner, or
officer, in any for- profit business making significant payments to or
receiving significant payments from, the Company; and, is not employed as an
executive of another company where any of the Company executives serves on
that company's compensation committee. "Significant" is defined as having
the meaning stipulated for this purpose in the Blue Ribbon Committee"
Report.
(2) The intent of this requirement is beneficial ownership of voting
securities of the company purchased in the open NASDAQ market. However, the
Board of Directors may waive this requirement for up to one year provided
the individual is holder of options or warrants to purchase such securities
and provided there is significant reason to believe the best interest of
shareholders is served by such waiver.
XII-2
8. Meet periodically with the Independent Auditor and management, both together
and in separate sessions, to discuss any matters that the Committee,
Independent Auditors or management believes should be discussed with the
Audit Committee.
9. Advise financial management and the Independent Auditor they are expected to
provide full, complete, and accurate financial statements, reporting, and
analysis on a timely basis denoting the true and accurate financial
condition of the company
10. Provide that management and the Independent Auditor discuss with the Audit
Committee their qualitative judgments about the appropriateness (not just
the accept-ability) and effectiveness of accounting principles and financial
disclosure practices used, or proposed to be adopted, by the Company and,
particularly, about the degree of aggressiveness or conservatism of its
accounting principles and estimates
11. Inquire as to the Independent Auditor's independent qualitative judgments
about the appropriateness (not just the acceptability) and effectiveness of
the accounting principles and the clarity of the financial disclosure
practices used or proposed to be adopted by the Company
12. Inquire as to the Independent Auditor's views about whether management's
choices of accounting principles are conservative, moderate, or aggressive
from the perspective of income, asset, and liability recognition, and
whether those principles are common practices or are minority practices
13. Determine, as regards disclosures, transactions, events, accounting
principles, and changes in accounting principles, the reasoning of
management and the Independent Auditors about the appropriateness of same
14. Consider, set, and approve, in consultation with management, the scope,
cost, and schedule of the annual (and any interim) audit
15. 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.
16. Arrange for the Independent Auditor to be available to the Board of
Directors at least annually to provide a basis for the Board to recommend to
Shareholders the appointment of the Auditor
17. Review and concur in the appointment, replacement, reassignment, or
dismissal of the CFO and any senior financial management personnel of the
Company under the direction of the CFO
18. Review and approve any consulting engagement (including that related to M&A
activity of the company and the independent auditors participation in work
related to same) to be performed by the Company's Independent Auditor and be
advised of any other study under taken at the request of management that is
beyond the scope of the audit engagement
19. Periodically consult with Corporate legal counsel on matters that may have a
material impact on the Company or its compliance with relevant public
company regulations, policies, and programs or constitute significant risk
or expense to the company
20. Conduct or authorize investigations into any matters within the Committee's
scope of responsibilities including, if deemed appropriate by the Board of
Directors, retaining independent counsel and other professionals to assist
21. Review, under SAS71, together with pertinent related communication with the
independent auditors of the company, prior to filing or publication, all
financial information and accompanying text (both annual and quarterly as
well as all other) to be filed with the SEC (excluding Public and
Shareholder Relations News Releases not a part of quarterly or annual SEC
reporting of the company)
XII-3
22. Prepare a letter for inclusion in the annual report that describes the
committee's composition, responsibilities, charter, how responsibilities
were discharged, and degree/extent of compliance with the BRC
recommendations.
23. Review and update the Committee's Charter annually
24. Establish with management guidelines for the company to follow with respect
to any proposed financial activities by the company in securities
25. Establish with management guidelines for term of employment of the
independent audit firm
MEETINGS, ACCOUNTABILITY, AND RECORDS: The Audit Committee will conduct at
least three scheduled meetings each year. Meetings can be called by any member
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.
Minutes of all meetings will be maintained by the Committee Chair, or designee
of the Chair, and presented to the Board of Directors its next regularly
scheduled or special meeting.
Reviewed and Adopted by:
The Audit Committee & Board of Directors on _____________
XII-4
APPENDIX XIII
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF
DIGITAL RECORDERS, INC.
The undersigned Corporation hereby executes these Articles of Amendment for
the purpose of amending its Articles of Incorporation.
1. The name of the Corporation is Digital Recorders, Inc.
2. The following amendment to the Articles of Incorporation of the
Corporation was adopted by its Shareholders in the manner prescribed by law:
Article VIII of the Articles of Incorporation shall be deleted in its
entirety and the following substituted in lieu thereof:
"The number of directors shall not be less than three, nor more than twelve,
and the number of directors may be increased or decreased from time to time,
within such minimum and maximum, by resolution of the Board of Directors. If
the number of directors is fixed at six or more directors by the Board of
Directors, the director's terms of office shall be staggered by dividing the
total number of directors into two or three groups, with each group
containing one-half or one-third of the total, as near as may be. In that
event, the terms of directors in the first group expire at the first annual
shareholders' meeting after their election, the terms of the second group
expire at the second annual shareholders' meeting after their election, and
the terms of the third group, if any, expire at the third annual
shareholders' meeting after their election. At each annual shareholder
meeting held thereafter, directors shall be chosen for a term of two years
or three years, as the case may be, to succeed those whose terms expire."
2. The date of the adoption of these Articles of Amendment by the Common
Stock Shareholders was May 1, 2000.
3. These Articles of Amendment do not effect an exchange, reclassification
or cancellation of issued shares of the Corporation.
Dated this the ______ day of ____________, 2000.
DIGITAL RECORDERS, INC.
By /s/ DAVID L. TURNEY
-----------------------------------------
David L. Turney
CHAIRMAN OF THE BOARD
XIII-1
AMENDED TO BYLAWS
OF
DIGITAL RECORDERS, INC.
The Bylaws of Digital Recorders, Inc. are hereby amended in accordance with
the amendment to the Articles of Incorporation approved by the shareholders on
May 1, 2000.
Article III, Sections 2, 3 and 4 of the Bylaws are deleted in their entirety
and in lieu thereof the following is substituted:
Section 2. Number. The number of directors of the corporation shall be fixed
from time to time by the board of directors, within a range of no less than
three or more than twelve. If the number of directors is fixed at six or more
directors by the Board of Directors, the directors' terms of office shall be
staggered by dividing the total number of directors into two or three groups,
with each group containing one-half or one-third of the total, as near as may
be. In that event, the terms of office of directors in the first group expire at
the first annual shareholders' meeting after their election, and the terms of
office of the third group, if any, expire at the third annual shareholders'
meeting after their election. At each annual shareholder meeting held
thereafter, directors shall be chosen for a term of two years or three years, as
the case may be, to succeed those whose terms expire.
Effective this 1st day of May, 2000.
______________________________________
Secretary
XIII-2
APPENDIX XIV
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, entered into as of April 20, 1998 to be effective as
of January 1, 1998, by and between DIGITAL RECORDERS, INC., a North Carolina
corporation (the "Company") and DAVID TURNEY (the "Employee").
WHEREAS, the Company desires to employ the Employee on a full-time basis as
the Company's Chief Executive Officer (as of April 20, 1998) and President
(after May 15, 1998);
WHEREAS, Employee desires to be so employed by the Company, from and after
the date of this Agreement;
WHEREAS, this Employment Agreement contains nondisclosure, noncompetition
and other significant secrecy agreements; and
WHEREAS, Employee agrees that the compensation given herein along with the
stock option grant approved as of April 20, 1998 is significant consideration
for the provisions of this Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:
ARTICLE I
EMPLOYMENT DUTIES AND BENEFITS
SECTION 1.1 EMPLOYMENT. The Company hereby employs the Employee in the
position described on Schedule 1 hereto as an executive officer of the Company.
The Employee accepts such employment and agrees to perform the duties and
responsibilities assigned to him pursuant to this Agreement upon the terms and
conditions set forth in this Agreement.
SECTION 1.2 DUTIES AND RESPONSIBILITIES. The Employee shall hold the
position with the Company which is specified on Schedule 1, which is attached
hereto and incorporated herein by reference. The Employee is employed pursuant
to the terms of this Agreement and agrees to devote full-time to the business of
the Company. The Employee shall perform the duties set forth on Schedule 1, and
such further duties consistent with Employee's position as defined herein as may
be determined and assigned to him from time-to-time by the Board of Directors of
the Company. Further, Employee shall be nominated during the term hereunder for
a seat on the Board of Directors and his annual re-election shall be recommended
to the shareholders for their approval so long as this Agreement is in effect.
SECTION 1.3 WORKING FACILITIES. The Employee shall be furnished with
facilities and services suitable to the position and adequate for the
performance of Employee's duties under this Agreement.
SECTION 1.4 VACATIONS. The Employee shall be entitled each year to a
reasonable vacation of not less than three (3) weeks in accordance with the
established practices of the Company now or hereafter in effect for executive
personnel, during which time the Employee's compensation shall be paid in full.
Employee shall be permitted to carryover up to six (6) weeks of accrued but
unused vacation.
SECTION 1.5 TERM. The term of this Agreement is for a period of four
(4) years commencing on the effective date specified above, unless otherwise
terminated as provided in this Agreement.
SECTION 1.6 EXPENSES. The Employee is authorized to incur reasonable
expenses for promoting the domestic and international business of the Company in
all respects, including expenses for entertainment, travel and similar items.
The Company will pay, within the budget established by the Board of Directors,
all reasonable expenses incurred by Employee in the conduct of Company business
XIV-1
and discharge of duties hereunder, including but not limited to, dues and fees
of business, civic, social, and professional societies and organizations, the
expense of attending business and professional meetings, conventions, and
institutions, and the cost of all business and professional books and
periodicals. The Company will reimburse the Employee for all such expenses upon
the presentation by the Employee, from time-to-time, of an itemized account of
such expenditures. In addition, Company shall reimburse Employee for all
ordinary and necessary expenses incurred in travel to and from Dallas area home
base and transitory living quarters in the Research Triangle Park area.
SECTION 1.7 AUTOMOBILE. The Company will purchase or lease in its own name
every three (3) years, or more frequently at Employer's option, a new
automobile. The vehicle will be furnished to the Employee for business use and
limited personal use not to exceed thirty percent (30%) of the total use.
SECTION 1.8 EMPLOYEE'S OTHER BUSINESS. Employee shall be allowed to
participate in outside business activities provided (i) such activities do not
interfere with Employee's performance of his duties as a full-time employee of
the Company; and (ii) the outside business is not a "Business Opportunity" of
the Company, as defined herein. A Business Opportunity of the Company shall be a
product, service, investment, venture or other opportunity which is either:
(a) directly related to or within the scope of the existing business of the
Company; or
(b) Within the logical scope of the business of the Company, as such scope
may be expanded or altered from time-to-time by the Board of Directors.
ARTICLE II
COMPENSATION
SECTION 2.1 BASE SALARY. The Company shall pay to the Employee a base
salary of not less than the amount specified on Schedule 1, such salary to be
paid in equal amounts on or before the last day of each month. This amount will
be reviewed annually for consideration of increase in the discretion of the
Compensation Committee for approval by the Board of Directors on the basis of
the value of such Employee's services to the Company.
SECTION 2.2 BONUS. In addition to the basic compensation described in
Section 2.1 above, the Company may pay to the Employee an additional sum during
each year of employment as a bonus as proposed in the discretion of the
Compensation Committee and approved by the Board of Directors and may
discretionarily grant additional stock options. As an alternative to a
discretionary bonus, Employee may present for approval a formula bonus provision
which is tied to such factors, to include but not be limited to, RONA and
Operating Profit with a cap of 100% of base salary.
SECTION 2.3 OPTION GRANTS. Employee shall receive the Option Grants set
forth on Schedule 1, subject to approval by the shareholders as may be needed,
and shall also be eligible for future grants as provided by the Compensation
Committee.
ARTICLE III
TERM OF EMPLOYMENT AND TERMINATION
SECTION 3.1 TERM. This Agreement shall be for a term which is specified on
Schedule 1, commencing on its effective date, subject, however, to termination
during such period as provided in this Article. After the term, this Agreement
shall be renewed automatically for succeeding periods of one (1) year each on
the same terms and conditions as contained in this Agreement unless either the
Company or the Employee shall, at least 180 days prior to the expiration of the
initial term or of any renewal term, give written notice of the intention not to
renew this Agreement. Such renewals shall be effective in subsequent years on
the same day of the same month as the original effective date of this Agreement.
XIV-2
SECTION 3.2 TERMINATION BY EITHER COMPANY OR EMPLOYEE WITHOUT CAUSE. The
Company or Employee, without cause, may terminate this Agreement upon ninety
(90) days' written notice to the other. In either event, the Employee shall not
be required to render the services required under this Agreement during the
ninety (90) day period; however, normal salary and benefits shall continue.
Compensation for vacation time not taken by Employee shall be paid to the
Employee at the date of termination.
SECTION 3.3 TERMINATION BY THE COMPANY WITH CAUSE. The Company may
terminate the Employee, at any time, upon 30 days' written notice and
opportunity for Employee to remedy any non-compliance with the terms of this
Agreement, by reason of the willful misconduct of the Employee which results in
a material financial loss or other detriment to the Company, as expressed in the
written opinion of the Board of Directors. Termination for cause shall result in
immediate forfeiture of Employee's right to receive future salary, accrued bonus
and other future benefits as may be granted herein. Employee shall receive any
accrued vacation, earned salary, and any reimbursements or payments pursuant to
Section 1.6 supra.
SECTION 3.4 TERMINATION BY THE EMPLOYEE WITH CAUSE. The Employee may
terminate his employment with the Company at any time, upon 30 day's written
notice and opportunity for the Company to remedy any non-compliance, by reason
of (i) the Company's material failure to perform its duties pursuant to this
Agreement, or (ii) any material change in the duties and responsibilities,
working facilities, or benefits as described in Article I of this Agreement.
SECTION 3.5 TERMINATION UPON DEATH OF EMPLOYEE. In addition to any other
provision relating to termination, this Agreement shall terminate upon the
Employee's death. No severance allowance or compensation for vacation time not
taken by Employee shall be paid to the Employee's estate.
SECTION 3.6 LUMP SUM COMPENSATION AND CONTINUATION OF BENEFITS. In the
event the Employee shall terminate this Agreement pursuant to Section 3.4 of
this Agreement, or in the event the Company or Employee shall terminate this
Agreement under Section 3.2 hereof then, in such event, the Employee shall be
entitled to receive the following on the date of such termination or, as the
case may be, as specified below:
(i) The Employee shall receive lump sum compensation equal to 180 days worth
of Base Salary.
(ii) For a period of 6 months from the date of the Employee's termination or
resignation, the Employee shall be entitled to continue to participate, at the
Company's cost, in all existing benefit plans provided to the Company's
executive employees at the time of the Employee's termination or resignation,
unless specifically prohibited by said plan. Such plans shall include, but are
not limited to, then-existing medical, health, disability, life insurance and
death benefit plans.
(iii) Within 90 days of the Employee's termination or resignation, the
Employee shall have the right, but not the obligation, to purchase any life
insurance policy now maintained by the Company on the life of the Employee. The
purchase price of such life insurance policy shall be equivalent to 105% of the
cash surrender value of such life insurance policy. The Employee, at his option,
shall have the right to pay such purchase price in the form of Common Shares of
the Company which shall be valued at the bid price of such Common Shares on the
date of purchase of such life insurance policy.
(v) Notwithstanding any language to the contrary above, the Company shall
not be obligated to pay Employee any compensation specified in this Section 3.6
in the event termination is a direct result of liquidation of the Company by
action of the Board of Directors or shareholders of the Company.
(vi) In the event of the occurrence of a "Triggering Event" which shall be
defined to include a (i) change in ownership in one or a series of transactions
of 50% or more of the outstanding shares of the Company, or (ii) merger,
consolidation, re-organization or liquidation of the Company, and following such
Triggering Event the Employee's services are terminated by the Company or the
XIV-3
Employee or the Employee's duties, authority or responsibilities are
substantially changed, or the Employee is unable to negotiate a satisfactory new
employment agreement, the Employee shall receive lump sum compensation equal to
2.9 times his annual salary and incentive or bonus payments, if any, as shall
have been paid to the Employee during the Company's most recent 12-month period
ending within 30 days of the Triggering Event (annualized if 12 months
employment has not occurred). If the total amount of the change of control
compensation were to exceed three (3) times the Employee's base amount (the
average annual taxable compensation of the Employee for the five (5) years
preceding the year in which the change of control occurs), the Company and the
Employee may agree to reduce the lump sum compensation to be received by
Employee in order to avoid the imposition of the golden parachute tax as
provided in the Tax Reform Act of 1984, as amended by the Tax Reform Act of
1986.
In the event the Employee is required to hire counsel to negotiate on his
behalf in connection with his termination or resignation from the Company upon
the occurrence of a Triggering Event, or in order to enforce the rights and
obligations of the Company as provided in this Paragraph, the Company shall
reimburse to the Employee all reasonable attorneys' fees which may be expended
by the Employee in seeking to enforce the terms hereof. Such reimbursement shall
be paid every 30 days after the Employee provides copies of invoices from the
Employee's counsel to the Company. However, such invoices may be redated to
preserve the attorney-client privilege, client confidentiality or work product.
ARTICLE IV
DISABILITY INSURANCE
SECTION 4.1 DISABILITY INSURANCE. During the term of this Agreement, the
Company agrees that it shall provide disability coverage consistent with that
offered to the other executive employees.
ARTICLE V
CONFIDENTIALITY
SECTION 5.1 CONFIDENTIALITY. Employee acknowledges that (i) the Company is
in the business of selling and distributing highly technical and proprietary
work products, information and technology developed or acquired by the Company
(hereinafter collectively referred to as "Technology"), (ii) certain of the
Technology is a trade secret, is confidential and proprietary, and (iii) the
secret, confidential and proprietary nature of the Technology is essential to
the Company. The Technology which constitutes trade secrets shall be kept
confidential by the Employee and shall not be used or disclosed by the Employee
to any third party unless written permission to disclose such information is
provided by the Company to the Employee. Employee agrees to secure and protect
the Technology in a manner consistent with the Company's rights in the
Technology. Employee shall not use the Technology to develop or to aid in the
development by any third party of competing Technology. Upon termination of
Employee, the Company shall provide Employee a detailed listing stating the
scope of any Technology, which may not include items in the public domain or
known to third parties having no obligation with confidentiality. Provided,
however, this Section 5.1 shall not apply if a "triggering event" occurs
pursuant to Section 3.6(vi) supra and Employee is not paid pursuant to the terms
thereunder.
SECTION 5.2 COVENANT OF NON-DISCLOSURE. Employee agrees that during the
term of this Agreement or thereafter, Employee will neither disclose any
confidential information as to the Company nor at any time remove for purposes
other than the conduct of Company business or retain without the Company's
express consent any figures, calculations, letters, papers or other confidential
information of any type or description. Employee also warrants and covenants not
to disclose, to reveal, to divulge or to make known to any person, firm,
corporation or entity or use for any purpose outside Company's business,
Company's clientele lists, contents of any process, data, consulting
information, methods, office procedures, filing systems, computer software
systems, subsystems, routines and subroutines, proprietary rights, work product
developed for or on behalf of the Company (except
XIV-4
information within the public domain) or any information regarding any trade
secrets or confidential information reposed in him by the Company or any
information regarding the transactions of the Company with its clients or the
state of the accounts of the individuals, firms, corporation, or others with
whom the Company does business, without the prior written permission of the
Company. Anything in this Section to the contrary notwithstanding, Employee may
use or disclose those portions of the confidential information which: (1) are or
become part of the public domain (other than as a result of a breach by
Employee); (2) were known to Employee or obtained by Employee from a third
party; or (3) Employee is ordered by a court to produce; provided Employee
promptly notifies the Company of receipt of any order or motion to require the
production of any portion of the confidential information.
SECTION 5.3 SHOP RIGHT. With respect to Inventions made or conceived by
the Employee, whether or not during the hours of his employment or with the use
of the Company facilities, materials, or personnel, either solely or jointly
with others during his employment by the Company or within one year after
termination of such employment if based on or related to Confidential
Information, and without royalty or any other consideration, the following shall
apply:
(i) INVENTIONS. "Inventions" means discoveries, concepts, and ideas,
whether patentable or not, including, but not limited to, processes, methods,
formulas, programs, and techniques, as well as improvements or know-how,
concerning any present or prospective activities of the Company with which the
Employee becomes acquainted as a result of his employment by the Company.
(ii) REPORTS. The Employee shall inform the Company promptly and fully of
such Inventions by a written report, setting forth in detail the procedures
employed and the results achieved. A report will be submitted by the Employee
upon completion of any studies or research projects undertaken on the Company's
behalf, whether or not in the Employee's opinion a given project has resulted in
an Invention.
(iii) PATENTS. The Employee shall apply, at the Company's request and
expense, for United States and foreign letter patent either in the Employee's
name or otherwise as the Company shall desire.
(iv) ASSIGNMENT. The Employee hereby assigns and agrees to assign to the
Company all of this rights to such Inventions, and to applications for United
States and/or foreign letters patent and to United States and/or foreign letters
patent granted upon such Inventions.
(v) COOPERATION. The Employee shall acknowledge and deliver promptly to the
Company, without charge to the Company but at its expense, such written
instruments and do such other reasonable acts, such as giving testimony in
support of the Employee's inventorship, as may be necessary in the opinion of
the Company to obtain and maintain United States and/or foreign letters patent
and to vest the entire right and title thereto in the Company.
(vi) USE. The Company shall also have the royalty-free right to the
business, and to make, use, and sell products, processes, and/or services
derived from any inventions, discoveries, concepts, and ideas, whether or not
patentable, including, but not limited to, processes, methods, formulas, and
techniques, as well as improvements or know-how, whether or not within the scope
of inventions, but which are conceived or made by the Employee during the hours
which he is employed by the Company or with the use or assistance of the
Company's facilities, materials, or personnel, or within the period set forth in
this Section 5.3.
SECTION 5.4 ENFORCEMENT BY INJUNCTIVE RELIEF. The Employee acknowledges
and agrees that any breach of this Article V by Employee would cause immediate
irreparable harm to the Company and monetary damages would be difficult if not
impossible to ascertain. Employee agrees that should he violate any of the terms
and conditions of this Article V, the Company shall be entitled to seek and
obtain immediate injunctive relief and enjoin further and future violations of
this Agreement. Nothing contained herein shall affect the right of the Company
to seek and obtain monetary damages in addition to or in substitution for such
equitable relief.
XIV-5
SECTION 5.5 SCOPE OF COVENANT. In the event a court of competent
jurisdiction finds any provision of this Article V to be so overboard as to be
unenforceable, then such provision shall be reduced in scope by the court, but
only to the extent deemed necessary by the court to render the provision
reasonable and enforceable, it being the Employee's intention to provide the
Company with protection to the extent provided herein.
SECTION 5.6 NON-COMPETE COVENANT. The Employee acknowledges that the
Company is presently engaged in utilizing the Technology; and the Employee
specifically agrees that he will not use the Technology in any business, other
than the business of the Company, except as provided herein. The terms "use" and
"engage" include any attempt to use or any participation in any manner in the
use of, either directly or indirectly, including without limitation, employment
by (whether as a common law employee, consultant or expert witness) or more than
a nominal ownership interest in any business which competes with the Company or
otherwise uses the Technology. The Employee agrees that he will not engage in
any competition with the Company as described in preceding sections within the
United States and Canada during the term of this Agreement and for a term of one
(1) year from and after the termination of this Agreement if termination is
initiated by Employee pursuant to Section 3.2 or is pursuant to Sections 3.3 or
3.4; however, if termination is initiated by the Company pursuant to
Section 3.2, then the term shall only be for six (6) months.
However, this provision shall not apply if a "triggering event" occurs
pursuant to Section 3.6(vi) supra and Employee is not paid pursuant to the terms
thereunder. The Employee acknowledges that the Company would suffer irreparable
harm if the Employee were to violate the provision of this Agreement. The
Employee warrants that he is now, and will in the future, be able to support
himself and his family without the need so to breach the terms hereof.
ARTICLE VI
GENERAL MATTERS
SECTION 6.1 NORTH CAROLINA LAW. This Agreement shall be governed by the
laws of the State of North Carolina and shall be construed in accordance
therewith.
SECTION 6.2 NO WAIVER. No provision of this Agreement may be waived except
by an agreement in writing signed by the waiving party. A waiver of any term or
provision shall not be construed as a waiver of any other term or provision.
SECTION 6.3 AMENDMENT. This Agreement may be amended, altered or revoked
at any time, in whole or in part, by execution of a written instrument setting
forth such changes, signed by each of the parties.
SECTION 6.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties and it may not be changed orally, but only by written agreement
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
SECTION 6.5 CONSTRUCTION. Throughout this Agreement the singular shall
include the plural, and the plural shall income the singular, and the masculine
and neuter shall include the feminine, wherever the context so requires.
SECTION 6.6 TEXT TO CONTROL. The headings of articles and sections are
included solely for convenience of reference. If any conflict between any
heading and the text of this Agreement exists, the text shall control.
SECTION 6.7 SEVERABILITY. If any provision of this Agreement is declared
by any court of competent jurisdiction to be invalid for any reason, such
invalidity shall not affect the remaining provisions. On the contrary, such
remaining provisions shall be fully severable, and this Agreement shall be
construed and enforced as if such invalid provisions had not been included in
the Agreement.
XIV-6
SECTION 6.8 AUTHORITY. The officer executing this Agreement on behalf of
the Company has been empowered and directed to do so by the Board of Directors
of the Company.
SECTION 6.9 EFFECTIVE DATE. The effective date of this Agreement shall be
January 1, 1998.
SECTION 6.10 INSURANCE. The Employee agrees that the Company, in its
discretion, may apply for and procure in its own name and for its own benefit
insurance of any kind and in any amount or amounts considered advisable and that
the Employee may have no right, title, or interest therein, excepting group term
life insurance.
SECTION 6.11 EXECUTORY RIGHTS. The Company agrees that with the exception
of Section 3.6(iii), nothing contained herein is intended, or will be deemed to
be granted to Employee in lieu of any rights or privileges to which the Employee
may be entitled as an employee of the Company under any retirement, pension,
profit sharing, insurance, hospitalization, health, or other plan or plans which
may now be in effect or which may be adopted hereafter.
SECTION 6.12 ASSIGNMENT. In the event of sale, assignment, or other
transfer of the Company's business or a substantial part of its assets or of the
Company's merger into or consolidation with another corporation, the rights and
benefits of the Company under this Agreement may be transferred and assigned,
with the written consent of the Employee, and all obligation and liability of
the Company will thereafter continue; provided that the transferee, in writing,
assumes the full performance on the Company's behalf of all the terms and
provisions hereof to be performed following the date of such assignment, with
the same force and effect as if such transferee originally had been a party to
this Agreement.
SECTION 6.13 ARBITRATION. Any controversy, dispute or claim arising out
of, or relating to, this Agreement and/or its interpretation shall, unless
resolved by agreement of the parties, be settled by binding arbitration in
Raleigh, North Carolina in accordance with the Rules of the American Arbitration
Association then existing. This Agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law of the State of North Carolina.
The award rendered by the arbitrators (or a single arbitrator that both parties
agree to) shall be final and judgment may be entered upon the award in any court
of the State of North Carolina having jurisdiction of the matter.
DIGITAL RECORDERS, INC.
By:
-----------------------------------------
Employee
-----------------------------------------
DAVID TURNEY
XIV-7
DIGITAL RECORDERS, INC.
EMPLOYMENT AGREEMENT
SCHEDULE 1
DUTIES AND COMPENSATION
Employee: David Turney
Position: President and Chief Executive Officer
Base Salary: $175,000 per year, payable monthly/$185,000 per year
(year 2)
Bonus: Discretion per Compensation Committee, unless Employee
presents
acceptable formula plan.
Term: Four (4) years
Duties and Responsibilities: Supervision and coordination of all operations of
the Company; supervision of all other operating officers of the Company.
Options: (i) 86,000 incentive stock options exercisable at $2.00 per
share.
(ii) Up to 14,000 incentive stock options which may be available
at June 1, 1998 at the price per share of that same date.
(iii) A total of 150,000 additional options shall be requested in
the 1998 Proxy and grants thereunder shall be subject to
shareholder approval of the requested increase under the
Option Plan and pursuant to other terms thereof.
Specifically, however, grants, if approved by the
shareholders' vote for increase it the Option Plan, will be
made at the stock price that exists on June 30, 1998 with
vesting to occur as follows: (a) 75,000 shares shall vest
when Company stock trades for ten (10) consecutive trading
days at or above $4.00 per share; and (b) 75,000 shares
shall vest when Company stock trades for ten
(10) consecutive trading days at or above $5.00 per share.
APPROVED:
THE COMPANY: EMPLOYEE:
By:
David Turney
Date: Date:
XIV-8
APPENDIX XV
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT effective January 1, 1999 (the "Agreement")
by and between DIGITAL RECORDS, INC. (the "Company") with principal offices at
Research Triangle Park, North Carolina, and LARRY HAGEMANN (the "Executive").
NOW THEREFORE, in consideration of the foregoing premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ the Executive and the
Executive agrees to serve the Company as its Executive Vice President.
2. POSITION AND RESPONSIBILITIES. The Executive shall exert his best
efforts and devote full time and attention to the affairs of the Company. The
Executive shall have the authority and responsibility given by the general
direction, approval and control of the Board of Directors, President, and Chief
Executive Officer of the Company, to the restrictions, limitations and
guidelines set forth by the Board of Directors in resolutions adopted in the
minutes of the Board of Directors meetings, copies of which will be provided to
the Executive from time to time and will be incorporated herein by reference.
3. TERM OF EMPLOYMENT. The term of the Executive's employment under this
Agreement shall be deemed to have commenced on January 1, 1999 and shall
continue until December 31, 1999 (the "Initial Term"), subject to extension as
hereinafter provided or termination pursuant to the provisions set forth
hereafter. Provided that Executive is in compliance with all of his obligations
hereunder, the term of Executive's employment shall be automatically extended
for an additional one-year terms upon expiration of the Initial Term unless
either party hereto receives 30 days' prior written notice from the other
electing not to extend the Executive's employment. Compensation during the term
shall be that set forth in Section 6 hereof, unless one of the termination
provisions overrides.
4. DUTIES. During the period of his employment hereunder and except for
illness, specified vacation periods and reasonable leaves of absence, the
Executive shall devote his best efforts and full attention and skill to the
business and affairs of the Company and its affiliated companies, as such
business and affairs now exist and as they may be hereinafter changed or added
to, under and pursuant to the general direction of the Board of Directors of the
Company.
5. COMPENSATION. Commencing on January 1, 1999, the Company shall pay to
the Executive as compensation for his services the sum of $____________ per
year, payable semi-monthly, or such higher salary as may be from time to time
approved by the Board of Directors. In addition, the Executive shall receive
such additional compensation and/or bonuses or stock options as may be voted to
his at the sole discretion of the Compensation Committee of the Board of
Directors.
In the event of the occurrence of a "triggering event" which shall be
defined to include a (i) change in ownership in one or a series of transactions
of 50% or more of the outstanding shares of the Company, or (ii) merger,
consolidation, reorganization or liquidation of the Company, and following such
triggering event the Executive's services are terminated by the Company or the
Executive or the Executive's duties, authority or responsibilities are
substantially diminished, the Executive shall receive lump sum compensation
equal to two (2) times his annual salary and incentive or bonus payments, if
any, as shall have been paid to the Executive during the Company's most recent
12-month period within 30 days of the triggering event. If the total amount of
the change of control compensation were to exceed three (3) times the
Executive's base amount (the average annual taxable compensation of the
Executive for the five (5) years preceding the year in which the change of
control occurs), the Company and the Executive may agree to reduce the lump sum
compensation to be
XV-1
received by Executive in order to avoid the imposition of the golden parachute
tax as provided in the Tax Reform Act of 1984, as amended by the Tax Return Act
of 1986.
In the event the Executive is required to hire counsel to negotiate on his
behalf in connection with his termination or resignation from the Company upon
the occurrence of a triggering event, or in order to enforce the rights and
obligations of the Company as provided in this paragraph, the Company shall
reimburse to the Executive all reasonable attorneys' fees which may be expended
by the Executive in seeking to enforce the terms hereof. Such reimbursement
shall be paid every 30 days after the Executive provides copies of invoices from
the Executive's counsel to the Company. However, such invoices may be redacted
to preserve the attorney-client privilege, client confidentiality or work
product.
6. STOCK OPTIONS. In addition to the compensation described above, the
Executive shall have received ____________ stock options pursuant to the Company
Stock Plan.
7. EXPENSE REIMBURSEMENT. The Company will reimburse the Executive, at
least semi-monthly, for all reasonable and necessary expenses, including without
limitation, travel expenses, and reasonable entertainment expenses, incurred by
his in carrying out his duties under this Agreement. The Executive shall present
to the Company each month an account of such expenses in such form as is
reasonably required by the Board of Directors.
8. MEDICAL AND DENTAL COVERAGE. Commencing January 1, 1999, the Executive
will be entitled to participate in the Company's employee group medical and
other group insurance programs on the same basis as other executives of the
Company.
9. MEDICAL EXAMINATION. The Executive agrees to submit himself for
physical examination on one occasion per year as requested by the Company for
the purpose of the Company's obtaining life insurance on the life of the
Executive for the benefit of the Company as may be required; provided, however,
that the Company shall bear the entire cost of such examinations and shall pay
all premiums on any key man life insurance obtained for the benefit of the
Company as beneficiary or with respect to any other designated beneficiary.
10. VACATION TIME. The Executive shall be entitled each year to a
reasonable vacation in accordance with the established practices of the Company,
now or hereafter in effect for the executive personnel, during which time the
Executive's compensation shall be paid in full.
11. BENEFITS PAYABLE ON DISABILITY. If the Executive becomes disabled from
properly performing services hereunder by reason of illness or other physical or
mental incapacity, the Company shall continue to pay the Executive his then
current salary hereunder for the first three (3) months of such continuous
disability commencing with the first date of such disability.
12. OBLIGATIONS OF EXECUTIVE DURING AND AFTER EMPLOYMENT.
(a) The Executive agrees that during the terms of his employment under
this Agreement, he will engage in no other business activities directly or
indirectly, which are competitive with or which might place his in a
competing position to that of the Company, or any affiliated company.
(b) The Executive realizes that during the course of his employment,
Executive will have produced and/or have access to confidential business
plans, information, business opportunity records, notebooks, data, formula,
specifications, trade secrets, customer lists, account lists and secret
inventions and processes of the Company and its affiliated companies.
Therefore, during or subsequent to his employment by the Company, or by an
affiliated company, the Executive agrees to hold in confidence and not to
directly or indirectly disclose or use or copy or make lists of any such
information, except to the extent authorized by the Company in writing. All
records, files, business plans, documents, equipment and the like, or copies
thereof, relating to Company's business, or the business of an affiliated
company, which Executive shall prepare, or use, or come
XV-2
into contact with, shall remain the sole property of the Company, or of an
affiliated company, and shall not be removed from the Company's or the
affiliated company's premises without its written consent, and shall be
promptly returned to the Company upon termination of employment with the
Company and its affiliated companies. The restrictions and obligations of
Executive set forth in this Section 12(b) shall not apply to
(i) information that is or becomes generally available and known to the
industry (other than as a result of a disclosure directly or indirectly by
Executive); or (ii) information that was known to Executive prior to
Executive's employment by the Company or its predecessor.
(c) Because of his employment by the Company, Executive shall have
access to trade secrets and confidential information about the Company, its
business plans, its business accounts, its business opportunities, its
expansion plans into other geographical areas and its methods of doing
business. Executive agrees that for a period of two (2) years after
termination or expiration of his employment, he will not, directly or
indirectly, compete with the Company in its then present business or
anticipated lines of business.
(d) In the event a court of competent jurisdiction finds any provision
of this Section 12 to be so overbroad as to be unenforceable, then such
provision shall be reduced in scope by the court, but only to the extent
deemed necessary by the court to render the provision reasonable and
enforceable, it being the Executive's intention to provide the Company with
the broadest protection possible against harmful competition.
13. TERMINATION FOR CAUSE BY THE COMPANY. The Company may, without
liability, terminate the Executive's employment hereunder for cause at any time
upon written notice from the Board of Directors specifying such cause, and
thereafter the Company's obligations hereunder shall cease and terminate;
provided, however, that such written notice shall not be delivered until after
the Board of Directors shall have given the Executive written notice specifying
the conduct alleged to have constituted such cause and the Executive has failed
to cure such conduct, if curable, within fifteen (15) days following receipt of
such notice.
Grounds for termination "for cause" are one or more of the following:
(a) A willful breach of a material duty by the Executive during the
course of his employment;
(b) Habitual neglect of a material duty by the Executive;
(c) Action or inaction by the Executive which places the Company in
circumstances of financial peril; and
(d) Fraud on the Company or conviction of a felony involving or against
the Company.
14. TERMINATION BY THE EXECUTIVE OR THE COMPANY WITHOUT CAUSE.
(a) The Executive, without cause, may terminate this Agreement upon
90 days prior written notice to the Company. In such event, the Executive
shall be required to render the services required under this Agreement
during such 90-day period unless otherwise directed by the Board of
Directors. Compensation for vacation time not taken by Executive shall be
paid to the Executive at the date of termination. Executive shall be paid
for only the ninety (90) day period pursuant to normal pay practices and
then all obligations regarding pay shall cease.
(b) The Company, without cause, may terminate this Agreement. In such
event, the Company shall pay a severance allowance equal to three hundred
sixty-five (365) days salary to the Executive. No other benefits will be
provided once this Agreement is terminated.
15. TERMINATION UPON DEATH OF EXECUTIVE. In addition to any other provision
relating to the termination, this Agreement shall terminate upon the Executive's
death. In such event, the Company shall pay a severance allowance equal to
ninety (90) days' salary to the Executive's estate.
XV-3
16. ARBITRATION. Any controversy, dispute or claim arising out of, or
relating to, this Agreement and/or its interpretation shall, unless resolved by
agreement of the parties, be settled by binding arbitration in Charlotte, North
Carolina in accordance with the Rules of the American Arbitration Association
then existing. This Agreement to arbitrate shall be specifically enforceable
under the prevailing arbitration law of the State of North Carolina. The award
rendered by the arbitrators shall be final and judgment may be entered upon the
award in any court of the State of North Carolina having jurisdiction of the
matter.
17. GENERAL PROVISIONS.
(a) The Executive's rights and obligations under this Agreement shall
not be transferrable by assignment or otherwise, nor shall Executive's
rights be subject to encumbrance or to the claims of the Company's
creditors. Nothing in this Agreement shall prevent the consolidation of the
Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its property or assets.
(b) This Agreement and the rights of Executive with respect to the
benefits of employment referred to herein constitute the entire Agreement
between the parties hereto in respect of the employment of the Executive by
the Company and supersede any and all other agreements either oral or in
writing between the parties hereto with respect to the employment of the
Executive.
(c) The provisions of this Agreement shall be regarded as divisible, and
if any of said provisions or any part thereof are declared invalid or
unenforceable by a court of competent jurisdiction or in an arbitration
proceeding, the validity and enforceability of the remainder of such
provisions or parts thereof and the applicability thereof shall not be
affected thereby.
(d) This Agreement may not be amended or modified except by a written
instrument executed by Company and Executive.
(e) This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of North
Carolina.
18. CONSTRUCTION. Throughout this Agreement the singular shall include the
plural, and the plural shall include the singular, and the masculine and neuter
shall include the feminine, wherever the context so requires.
19. TEXT TO CONTROL. The headings of paragraphs and sections are included
solely for convenience of reference. If any conflict between any heading and the
text of this Agreement exists, the text shall control.
20. AUTHORITY. The officer executing this agreement on behalf of the
Company has been empowered and directed to do so by the Board of Directors of
the Company.
XV-4
21. EFFECTIVE DATE. This Agreement shall be effective on the dates noted
below.
FOR THE COMPANY: DIGITAL RECORDERS, INC.
Dated: By:
Title:
FOR THE EXECUTIVE:
Dated: (SEAL)
LARRY HAGEMANN
XV-5
APPENDIX XVI
EXECUTIVE EMPLOYMENT AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT effective January 1, 1999 (the "Agreement")
by and between DIGITAL RECORDS, INC. (the "Company") with principal offices at
Research Triangle Park, North Carolina, and LARRY TAYLOR (the "Executive").
NOW THEREFORE, in consideration of the foregoing premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ the Executive and the
Executive agrees to serve the Company as its Chief Financial Officer.
2. POSITION AND RESPONSIBILITIES. The Executive shall exert his best
efforts and devote full time and attention to the affairs of the Company. The
Executive shall have the authority and responsibility given by the general
direction, approval and control of the Board of Directors, President, and Chief
Executive Officer of the Company, to the restrictions, limitations and
guidelines set forth by the Board of Directors in resolutions adopted in the
minutes of the Board of Directors meetings, copies of which will be provided to
the Executive from time to time and will be incorporated herein by reference.
3. TERM OF EMPLOYMENT. The term of the Executive's employment under this
Agreement shall be deemed to have commenced on January 1, 1999 and shall
continue until December 31, 1999 (the "Initial Term"), subject to extension as
hereinafter provided or termination pursuant to the provisions set forth
hereafter. Provided that Executive is in compliance with all of his obligations
hereunder, the term of Executive's employment shall be automatically extended
for an additional one-year terms upon expiration of the Initial Term unless
either party hereto receives 30 days' prior written notice from the other
electing not to extend the Executive's employment. Compensation during the term
shall be that set forth in Section 6 hereof, unless one of the termination
provisions overrides.
4. DUTIES. During the period of his employment hereunder and except for
illness, specified vacation periods and reasonable leaves of absence, the
Executive shall devote his best efforts and full attention and skill to the
business and affairs of the Company and its affiliated companies, as such
business and affairs now exist and as they may be hereinafter changed or added
to, under and pursuant to the general direction of the Board of Directors of the
Company.
5. COMPENSATION. Commencing on January 1, 1999, the Company shall pay to
the Executive as compensation for his services the sum of $____________ per
year, payable semi-monthly, or such higher salary as may be from time to time
approved by the Board of Directors. In addition, the Executive shall receive
such additional compensation and/or bonuses or stock options as may be voted to
his at the sole discretion of the Compensation Committee of the Board of
Directors.
In the event of the occurrence of a "triggering event" which shall be
defined to include a (i) change in ownership in one or a series of transactions
of 50% or more of the outstanding shares of the Company, or (ii) merger,
consolidation, reorganization or liquidation of the Company, and following such
triggering event the Executive's services are terminated by the Company or the
Executive or the Executive's duties, authority or responsibilities are
substantially diminished, the Executive shall receive lump sum compensation
equal to two (2) times his annual salary and incentive or bonus payments, if
any, as shall have been paid to the Executive during the Company's most recent
12-month period within 30 days of the triggering event. If the total amount of
the change of control compensation were to exceed three (3) times the
Executive's base amount (the average annual taxable compensation of the
Executive for the five (5) years preceding the year in which the change of
control occurs), the Company and the Executive may agree to reduce the lump sum
compensation to be received by Executive in order to avoid the imposition of the
golden parachute tax as provided in the Tax Reform Act of 1984, as amended by
the Tax Return Act of 1986.
XVI-1
In the event the Executive is required to hire counsel to negotiate on his
behalf in connection with his termination or resignation from the Company upon
the occurrence of a triggering event, or in order to enforce the rights and
obligations of the Company as provided in this paragraph, the Company shall
reimburse to the Executive all reasonable attorneys' fees which may be expended
by the Executive in seeking to enforce the terms hereof. Such reimbursement
shall be paid every 30 days after the Executive provides copies of invoices from
the Executive's counsel to the Company. However, such invoices may be redacted
to preserve the attorney-client privilege, client confidentiality or work
product.
6. STOCK OPTIONS. In addition to the compensation described above, the
Executive shall have received ____________ stock options pursuant to the Company
Stock Plan.
7. EXPENSE REIMBURSEMENT. The Company will reimburse the Executive, at
least semi-monthly, for all reasonable and necessary expenses, including without
limitation, travel expenses, and reasonable entertainment expenses, incurred by
his in carrying out his duties under this Agreement. The Executive shall present
to the Company each month an account of such expenses in such form as is
reasonably required by the Board of Directors.
8. MEDICAL AND DENTAL COVERAGE. Commencing January 1, 1999, the Executive
will be entitled to participate in the Company's employee group medical and
other group insurance programs on the same basis as other executives of the
Company.
9. MEDICAL EXAMINATION. The Executive agrees to submit himself for
physical examination on one occasion per year as requested by the Company for
the purpose of the Company's obtaining life insurance on the life of the
Executive for the benefit of the Company as may be required; provided, however,
that the Company shall bear the entire cost of such examinations and shall pay
all premiums on any key man life insurance obtained for the benefit of the
Company as beneficiary or with respect to any other designated beneficiary.
10. VACATION TIME. The Executive shall be entitled each year to a
reasonable vacation in accordance with the established practices of the Company,
now or hereafter in effect for the executive personnel, during which time the
Executive's compensation shall be paid in full.
11. BENEFITS PAYABLE ON DISABILITY. If the Executive becomes disabled from
properly performing services hereunder by reason of illness or other physical or
mental incapacity, the Company shall continue to pay the Executive his then
current salary hereunder for the first three (3) months of such continuous
disability commencing with the first date of such disability.
12. OBLIGATIONS OF EXECUTIVE DURING AND AFTER EMPLOYMENT.
(a) The Executive agrees that during the terms of his employment under
this Agreement, he will engage in no other business activities directly or
indirectly, which are competitive with or which might place his in a
competing position to that of the Company, or any affiliated company.
(b) The Executive realizes that during the course of his employment,
Executive will have produced and/or have access to confidential business
plans, information, business opportunity records, notebooks, data, formula,
specifications, trade secrets, customer lists, account lists and secret
inventions and processes of the Company and its affiliated companies.
Therefore, during or subsequent to his employment by the Company, or by an
affiliated company, the Executive agrees to hold in confidence and not to
directly or indirectly disclose or use or copy or make lists of any such
information, except to the extent authorized by the Company in writing. All
records, files, business plans, documents, equipment and the like, or copies
thereof, relating to Company's business, or the business of an affiliated
company, which Executive shall prepare, or use, or come into contact with,
shall remain the sole property of the Company, or of an affiliated company,
and shall not be removed from the Company's or the affiliated company's
premises without its written
XVI-2
consent, and shall be promptly returned to the Company upon termination of
employment with the Company and its affiliated companies. The restrictions
and obligations of Executive set forth in this Section 12(b) shall not apply
to (i) information that is or becomes generally available and known to the
industry (other than as a result of a disclosure directly or indirectly by
Executive); or (ii) information that was known to Executive prior to
Executive's employment by the Company or its predecessor.
(c) Because of his employment by the Company, Executive shall have
access to trade secrets and confidential information about the Company, its
business plans, its business accounts, its business opportunities, its
expansion plans into other geographical areas and its methods of doing
business. Executive agrees that for a period of two (2) years after
termination or expiration of his employment, he will not, directly or
indirectly, compete with the Company in its then present business or
anticipated lines of business.
(d) In the event a court of competent jurisdiction finds any provision
of this Section 12 to be so overbroad as to be unenforceable, then such
provision shall be reduced in scope by the court, but only to the extent
deemed necessary by the court to render the provision reasonable and
enforceable, it being the Executive's intention to provide the Company with
the broadest protection possible against harmful competition.
13. TERMINATION FOR CAUSE BY THE COMPANY. The Company may, without
liability, terminate the Executive's employment hereunder for cause at any time
upon written notice from the Board of Directors specifying such cause, and
thereafter the Company's obligations hereunder shall cease and terminate;
provided, however, that such written notice shall not be delivered until after
the Board of Directors shall have given the Executive written notice specifying
the conduct alleged to have constituted such cause and the Executive has failed
to cure such conduct, if curable, within fifteen (15) days following receipt of
such notice.
Grounds for termination "for cause" are one or more of the following:
(a) A willful breach of a material duty by the Executive during the
course of his employment;
(b) Habitual neglect of a material duty by the Executive;
(c) Action or inaction by the Executive which places the Company in
circumstances of financial peril; and
(d) Fraud on the Company or conviction of a felony involving or against
the Company.
14. TERMINATION BY THE EXECUTIVE OR THE COMPANY WITHOUT CAUSE.
(a) The Executive, without cause, may terminate this Agreement upon
90 days prior written notice to the Company. In such event, the Executive
shall be required to render the services required under this Agreement
during such 90-day period unless otherwise directed by the Board of
Directors. Compensation for vacation time not taken by Executive shall be
paid to the Executive at the date of termination. Executive shall be paid
for only the ninety (90) day period pursuant to normal pay practices and
then all obligations regarding pay shall cease.
(b) The Company, without cause, may terminate this Agreement. In such
event, the Company shall pay a severance allowance equal to three hundred
sixty-five (365) days salary to the Executive. No other benefits will be
provided once this Agreement is terminated.
15. TERMINATION UPON DEATH OF EXECUTIVE. In addition to any other provision
relating to the termination, this Agreement shall terminate upon the Executive's
death. In such event, the Company shall pay a severance allowance equal to
ninety (90) days' salary to the Executive's estate.
XVI-3
16. ARBITRATION. Any controversy, dispute or claim arising out of, or
relating to, this Agreement and/or its interpretation shall, unless resolved by
agreement of the parties, be settled by binding arbitration in Charlotte, North
Carolina in accordance with the Rules of the American Arbitration Association
then existing. This Agreement to arbitrate shall be specifically enforceable
under the prevailing arbitration law of the State of North Carolina. The award
rendered by the arbitrators shall be final and judgment may be entered upon the
award in any court of the State of North Carolina having jurisdiction of the
matter.
17. GENERAL PROVISIONS.
(a) The Executive's rights and obligations under this Agreement shall
not be transferrable by assignment or otherwise, nor shall Executive's
rights be subject to encumbrance or to the claims of the Company's
creditors. Nothing in this Agreement shall prevent the consolidation of the
Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its property or assets.
(b) This Agreement and the rights of Executive with respect to the
benefits of employment referred to herein constitute the entire Agreement
between the parties hereto in respect of the employment of the Executive by
the Company and supersede any and all other agreements either oral or in
writing between the parties hereto with respect to the employment of the
Executive.
(c) The provisions of this Agreement shall be regarded as divisible, and
if any of said provisions or any part thereof are declared invalid or
unenforceable by a court of competent jurisdiction or in an arbitration
proceeding, the validity and enforceability of the remainder of such
provisions or parts thereof and the applicability thereof shall not be
affected thereby.
(d) This Agreement may not be amended or modified except by a written
instrument executed by Company and Executive.
(e) This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of North
Carolina.
18. CONSTRUCTION. Throughout this Agreement the singular shall include the
plural, and the plural shall include the singular, and the masculine and neuter
shall include the feminine, wherever the context so requires.
19. TEXT TO CONTROL. The headings of paragraphs and sections are included
solely for convenience of reference. If any conflict between any heading and the
text of this Agreement exists, the text shall control.
20. AUTHORITY. The officer executing this agreement on behalf of the
Company has been empowered and directed to do so by the Board of Directors of
the Company.
XVI-4
21. EFFECTIVE DATE. This Agreement shall be effective on the dates noted
below.
FOR THE COMPANY: DIGITAL RECORDERS, INC.
Dated: By:
Title:
FOR THE EXECUTIVE:
Dated: (SEAL)
LARRY TAYLOR
XVI-5