-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SaHKsC/zhrmlxWvsmc3t96opJWulbG9BcpK7m/5IMsWtLHMj3A6Krkrua7ZjKBE4 dLG8hdGBmhlytD/0MPkX7A== 0000912057-01-523710.txt : 20010716 0000912057-01-523710.hdr.sgml : 20010716 ACCESSION NUMBER: 0000912057-01-523710 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20010628 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL RECORDERS INC CENTRAL INDEX KEY: 0000853695 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 561362926 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13408 FILM NUMBER: 1680519 BUSINESS ADDRESS: STREET 1: 4018 PATRIOT DRIVE STREET 2: SUITE 100 CITY: DURHAM STATE: NC ZIP: 27703 BUSINESS PHONE: 9193612155 MAIL ADDRESS: STREET 1: 4018 PATRIOT DRIVE STREET 2: SUITE 100 CITY: DURHAM STATE: NC ZIP: 27703 8-K 1 a2053907z8-k.txt 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K ---------------------- CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): Commission File Number: JUNE 28, 2001 01-13408 ---------------------- DIGITAL RECORDERS , INC. (Exact name of Registrant as specified in its charter) NORTH CAROLINA 56-1362926 (State of incorporation) (I.R.S. Employer Identification Number) 4018 PATRIOT DRIVE, SUITE 100 DURHAM, NORTH CAROLINA 27703 (919) 361-2155 (Address of principal executive offices and telephone number) ---------------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On June 28, 2001, Digital Recorders, Inc. (the "Company") and its wholly-owned subsidiary, DRI Europa AB ("DRI Europa"), acquired all of the outstanding stock of Mobitec Holding AB ("Mobitec"), a corporation organized under the laws of Sweden, from the five shareholders of Mobitec. The acquisition of the Mobitec shares was made pursuant to an Amended Option Agreement, dated March 13, 2001, and a Stock Purchase Agreement, dated June 27, 2001. Both agreements were between the Company and DRI Europa, as the purchasers, and Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin and Bertil Lindqvist, the five individual Mobitec shareholders, as the sellers. The purchase price for the Mobitec shares consisted of a combination of cash, notes, stock and warrants to purchase stock, subject to certain possible adjustments, which adjustments are more fully described below. Specifically, the total purchase price was $7,089,000, consisting of (i) $4,210,000 in cash, (ii) promissory notes issued by DRI Europa to the sellers aggregating $2,000,000, (iii) 430,000 restricted shares of the Company's common stock (valued at $817,000 or $1.90 per share) issued to two of the sellers, and (iv) warrants to purchase in the aggregate of 100,000 shares of the Company's common stock at an exercise price of $4.00 per share for a period of five years (valued at a total of $62,000) issued to one of the sellers. Pursuant to the Stock Purchase Agreement, the possible adjustments to the purchase price are to be determined after the closing of the Mobitec acquisition. Such final determinations have not been made but will be reported when the Company files an amended Form 8-K within 60 days of this report. Fifteen days after closing, Mobitec and its subsidiaries are to provide the Company and DRI Europa their financial statements, including balance sheet, individually and on a consolidated basis, for the period from January 1, 2001 through March 31, 2001. If the net equity appearing on the balance sheet of such financial statements is greater or less than SEK 10,867,000 ($1,010,435), by more than SEK 100,000 ($9,298), the purchase price will be increased or decreased by the full amount of the difference. The Company and DRI Europa have 15 days from receipt of the closing financial statements from Mobitec to accept the seller's calculation of any difference in net equity. In the event that the sellers and purchasers are not able to agree on the amount of the adjustments, the Stock Purchase Agreement provides that the dispute shall be submitted to binding arbitration. If any adjustment of the purchase price is required, the adjustment would be made only to the promissory notes forming part of the purchase price. The Company believes that, to the extent there are adjustments to the purchase price, they will not be material. The cash portion of the purchase price was provided by two separate sources: (1) the authorization and issuance of up to $3 million in convertible debentures by the Company to certain investment funds associated with Renaissance Capital Group, Inc. of Dallas, Texas (the "Convertible Debentures"); 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"). The 8% Convertible Debentures were issued by the Company in the amounts of $1,500,000 each to Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC in accordance with the Convertible Loan Agreement, dated June 22, 2001, between Digital 2 Recorders, Inc., Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc., and related documents. Unless sooner redeemed or converted, the debentures mature on June 27, 2008. The debentures are convertible into the Company's common stock at an initial conversion price equal to $2.00 per share. However, the conversion price is subject to an automatic adjustment if (i) the Company does not achieve certain operating income for the fiscal year 2001 and (ii) the market price of the Company's common stock is below the conversion price at the time of publication of the Company'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 the Company's common stock over a ten day trading period following the Company's public release of the fiscal 2001 financial results, but in no event will the conversion price be less than $1.50 per share. The conversion price can also be adjusted in the event of certain events, including the issuance of common stock for a consideration per share less than the conversion price, stock splits, mergers and consolidations and distributions. The issuance of the 430,000 restricted shares, the 100,000 shares of common stock underlying the warrants issued to the sellers, the up to 1,500,000 shares of common stock underlying the convertible debentures and the 200,000 shares of the Company's common stock that underlies the warrants granted to the convertible debenture holders, required approval of the Company's shareholders, pursuant to Nasdaq marketplace rules. The Company's shareholder's approved the issuance of these shares at the annual meeting of shareholders held on June 25, 2001. After closing of the Stock Purchase Agreement and related transactions, the 430,000 restricted shares, the 100,000 shares underlying the warrants issued to the sellers, the up to 1,500,000 shares underlying the convertible debentures and the 200,000 shares underlying the warrants granted to the debenture holders (collectively, 2,230,000 shares), would together constitute approximately 68% of Company's common stock outstanding on April 18, 2001 (the record date for the annual meeting) and would constitute approximately 41% of the Company's common stock after exercise and conversion. Accordingly, on June 25, 2001, the Company's board voted to exempt the collective issuance of shares of the Company's common stock in connection with the Mobitec acquisition from the application of the Rights Agreement, effective December 14, 1999. The Rights Agreement generally grants rights to holders of the Company's common stock at a certain record date to purchase certain preferred stock in the event that a person or group publicly announces that it has acquired 15% or more of the Company's common stock or intends to make or makes a tender offer for 15% or more of the Company's common stock. This exemption from the Rights Agreement is the only such exemption that has been granted by the Company. The Company has no intention at this time of granting any further exemptions to the Rights Agreement. As a result of the acquisition, Mobitec has become a wholly-owned subsidiary of the Company. For more information concerning the acquisition of Mobitec, see the Proxy Statement filed by the Company with the Securities and Exchange Commission on June 6, 2001 and the appendices thereto. FORWARD-LOOKING STATEMENTS IN THIS REPORT. This report contains certain forward-looking statements. When used in this report, 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 the Company (including its subsidiaries) participates and the general economy; competitive factors, such as the entry of new competitors into any of the markets in which the Company participates; price pressures and increased competition in those markets; inventory risks due to shifts in market demand and/or price erosion of purchased components; changes in product mix; that the Company'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 the Company'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. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. 3 (a) FINANCIAL STATEMENTS OF THE BUSINESSES ACQUIRED. To be filed by amendment within 60 days. (b) PRO FORMA FINANCIAL INFORMATION. To be filed by amendment within 60 days. (c) EXHIBITS. The exhibits to this report are listed in the Index to Exhibits. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DIGITAL RECORDERS, INC. Date: July 13, 2001 By: /s/ David L. Turney --------------------------------------- David L. Turney Chairman of the Board, President and Chief Executive Officer INDEX TO EXHIBITS
Exhibit No. Document - ----------- -------- 2.1 Stock Purchase Agreement between the Company, DRI-Europa AB, and Bengt Bodin, et al., dated June 27, 2001 *2.6 Amended Option Agreement, dated March 13, 2001, between the Company, DRI-Europa AB and Bengt Bodin, et al. *10.1 Bodin Warrant Agreement between the Company and Bengt Bodin. *10.11 Registration Rights Agreement between the Company and Bengt Bodin et al. *10.12 Form of Promissory Note from DRI-Europa AB. *10.13 Consulting Agreement between the Company and Bengt Bodin. *10.34 Preliminary Outline of Terms, dated November 28, 2000, from Renaissance Capital Group, Inc. to the Company, with First Amendment dated May 15, 2001. 4 10.35 Convertible Loan Agreement, dated June 22, 2001, between Digital Recorders, Inc., Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. 10.36 Digital Recorders, Inc. 8% Convertible Debenture, $1,500,000, issued on June 27, 2001 to Renaissance US Growth & Income Trust PLC. 10.37 Digital Recorders, Inc. 8% Convertible Debenture, $1,500,000, issued on June 27, 2001 to HSBC Global Custody Nominee (U.K.) Limited. 10.38 Stock Purchase Warrant, dated June 27, 2001, issued to Renaissance US Growth & Income Trust PLC. 10.39 Stock Purchase Warrant, dated June 27, 2001, issued to HSBC Global Custody Nominee (U.K.) Limited. 10.40 Security Agreement, dated June 27, 2001, between the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. 10.41 Subsidiary Security Agreement, dated June 27, 2001, between Twin Vision of North America, Inc., Digital Audio Corporation, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. 10.42 Subsidiary Guaranty, dated June 27, 2001, between Twin Vision of North America, Inc., Digital Audio Corporation, Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC. 10.43 Form of Lock Up Agreement, dated June 27, 2001. 10.44 Pledge Agreement, between the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. *99.1 Fairness Opinion of Investec Ernst & Company, dated May 8, 2001. 99.2 Press Release, dated June 28, 2001.
- ------------------ * Incorporated by reference from the Company's Proxy Statement for its annual meeting of shareholders, filed with the Securities and Exchange Commission on June 6, 2001. 5 EX-2.1 2 a2053907zex-2_1.txt EXHIBIT 2.1 STOCK PURCHASE AGREEMENT BETWEEN BENGT BODIN, ANNACARIN BODIN, MATTIAS BODIN, TOBIAS BODIN, BERTIL LINDQVIST, AND DRI EUROPA AB, AND DIGITAL RECORDERS, INC., DATED 27 JUNE 2001 2 TABLE OF CONTENTS 1. DEFINITIONS...................................................... 7 2. SALE AND PURCHASE OF THE SHARES..................................13 3. PURCHASE PRICE...................................................13 4. CONDITIONS PRECEDENT TO THE PURCHASERS' OBLIGATIONS..............19 5. CLOSING..........................................................20 6. REPRESENTATIONS AND WARRANTIES OF ALL THE SELLERS................22 7. REPRESENTATIONS AND WARRANTIES OF THE BODIN SELLERS..............23 8. COVENANTS........................................................39 9. INDEMNIFICATION..................................................45 10. REPRESENTATIONS AND WARRANTIES OF DRI EUROPA.....................49 11. CLOSING DATE.....................................................50 12. GENERAL PROVISIONS...............................................50
3
APPENDICES 1.9 a - c Consolidated Financial Statements 1.14 a - c Financial Statements 1.19 Interim Financial Statements 2 Shares to be sold 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 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
4 THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of 27 June 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 having its principal office in Gothenburg, ("DRI Europa") 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"). 5 (DRI Europa and DRI are hereinafter collectively referred to as the "Purchasers".) 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. DRI Europa is a wholly owned subsidiary of Digital Recorders, Inc. 6 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 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. G. The Sellers are willing to sell the Shares to DRI Europa and/or to DRI on the terms and conditions set forth herein subject to the exercise by DRI Europa 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 Purchasers 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. 7 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 Purchasers, 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. 8 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 period 1 January - 31 March 2001. 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, 1999 and 2000, APPENDIX 1.9a)-c) 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. 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, 1999 and 2000, APPENDIX 1.14a)-c) 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. 9 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 10 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, DRI Europa 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. 1.26 Option Agreement shall mean the agreement entered into between the Sellers, DRI Europa and DRI under which the Sellers have granted DRI Europa and DRI options to acquire the Shares. 11 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 DRI Europa 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. 12 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 - 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. 13 1.37 Purchasers shall mean the aforesaid DRI Europa AB and Digital Recorder, Inc. and Purchaser shall mean any of them. 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 Purchasers and the Purchasers agree to purchase from the Sellers the Shares, as described in APPENDIX 2 hereto. 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 an account to be specified by Bertil Lindqvist not later than ten days prior to Closing. 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 Purchasers inter alia on the basis of the balance sheet forming part of the Interim Financial Statement for Mobitec AB, Mobitec GmbH and Mobitec Brazil Ltda on a consolidated basis as per 31 March 2000, APPENDIX 1.19 hereto. 14 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 Purchasers of the Bodin Shares: 3.2.1.1 The Sellers shall notify DRI Europa 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 DRI Europa 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 Bodin Sellers' bank accounts to be notified by the Bodin Sellers to the Purchaser and DRI in writing not later than ten days prior to Closing. 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 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: 15 (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 16 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, 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. 17 (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 determined in accordance with sub-section 3.2.1.1 above, 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 Bengt Bodin. As set forth in the Bodin Warrant Agreement, DRI will grant to Bengt Bodin 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 18 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 Purchasers within 15 days from the Closing Date 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 Purchasers 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. 3.2.2.5 The Purchasers 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 19 whether the Purchasers accept 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 Purchasers have not agreed in writing within 15 days from the date of the Bodin Sellers' receipt of the Purchasers' 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 Purchasers agree in writing on an extension of the 15 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 PURCHASERS' OBLIGATIONS 4.1 The obligation of the Purchasers to consummate this Agreement is subject to the satisfaction of the Purchasers 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 Purchasers. 20 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, DRI Europa, 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 Purchasers. At the Closing each of the Sellers and the Purchasers 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 Purchasers the share certificates evidencing 90.800 of the Shares (class B shares) - representing 49,7 percent of the votes of the Shares and 90,8 percent of the share capital - duly endorsed in favour of DRI Europa, and share certificates evidencing the remaining 9.200 of the Shares (class A shares) - representing 50,3 percent of the votes of the Shares and 9,2 percent of the share capital - duly endorsed in favour of DRI. 21 5.2 The Bodin Sellers shall present to the Purchasers the share ledger of the Company evidencing that DRI Europa as per the Closing Date has been registered as owner of 90.800 of the Shares and evidencing that DRI as per the Closing Date has been registered as owner of the remaining 9.200 of the Shares. The Bodin Sellers shall further present to the Purchasers 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 100.000 100% held by the Company shares Mobitec GmbH 100% held by Mobitec AB Mobitec Ltda total of 360.000 180.000 quotas or 50% held by Mobitec AB quotas Mobitec Australia total of one share held by Mobitec AB Pty Ltd
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 22 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 in accordance with sub-section 3.2.1.31 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 23 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 Purchasers in accordance with the terms of this Agreement, free and clear of all Encumbrances and there are no outstanding 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, 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 24 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. 25 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. 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 26 (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. 27 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 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. 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. 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 Purchasers 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 28 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 29 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. 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. 30 (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. 31 (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. 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. 32 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 33 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. 34 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. 35 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 Purchasers. 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 36 Closing Date without any cost or other negative financial effect of any kind to the Company or any Subsidiary or DRI Europa or DRI in excess of what appears from the Closing Financial Statement and neither the Company nor any 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. 37 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. 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 38 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 Purchasers 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. 39 8. COVENANTS 8.1 CONDUCT OF BUSINESS PENDING CLOSING After the date of the Sellers' and the Purchasers' 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 Purchasers are 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. 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 40 severally - in addition to any other remedy that may be available to the Purchasers - shall be liable to pay to the Purchasers 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 Purchasers. 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 Purchasers 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. 41 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 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 42 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 Purchasers 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 Purchasers' rights against the Sellers under this Agreement. 8.8 DIVIDENDS The Purchasers 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 except for the dividend of SEK 500.000 mentioned in sub-section 7.6 above. 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. 43 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 Purchasers 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. 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 44 for in the balance sheet forming part of the Annual Report for the financial year 2000. 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 45 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 Purchasers 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 Purchasers 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 Purchasers 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 Purchasers 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. 46 In calculating the value of each Restricted Share it shall be valued at USD 3 (three). The Purchasers 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. 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 Purchasers 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 Purchasers 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 47 the said amount, the Purchasers are 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 Purchasers, their 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 Purchasers have approved the annual report for the financial year 2000 48 or that the Annual General Shareholders' Meeting of the Company or any of the Subsidiaries - at which the Shares have been represented by the Purchasers - has adopted the aforesaid annual report; or - by the fact that the Purchasers have agreed to the adjustment of the Preliminary Purchase Price into the Final Purchase Price as set forth in sub-section 3.2.2 above. 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 and 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 Purchasers 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. 49 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 any of the Purchasers shall demand indemnification hereunder, that 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. 9.12 DRI shall, notwithstanding sub-section 12.8 below, have the right to assign any claim regarding payment for Losses or other forms of compensation under this Agreement to DRI Europa. DRI Europa shall after such assignment have the right to receive full payment for such claims as if DRI Europa was the sole purchaser of all the Shares under this Agreement. 10. REPRESENTATIONS AND WARRANTIES OF DRI EUROPA 10.1 DRI Europa 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 DRI Europa 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 50 breach of any agreement to which any of DRI Europa or DRI is a party nor the Articles of Association of DRI Europa. 10.1.3 DRI Europa 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. 11. CLOSING DATE The Closing Date shall occur within 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. 51 12.2 DRI LIABILITY DRI shall be jointly and severally liable with the Purchaser with regard to the fulfilment of any liability resting on the Purchaser according to or as a result of this Agreement. 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 Purchasers to the Purchasers or their 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 52 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, SE-114 39 STOCKHOLM, Sweden Fax: +46 8661 8126 If to DRI Europa: 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 53 Each Seller and each 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 TRANSFER OF SHARES 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. The Purchasers undertake not to transfer the Shares or cause any other changes in respect of their shareholding in the Company prior to the expiry of year 2001. 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 54 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 any of the Purchasers 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 each 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. 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 55 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. ------------ 56 IN WITNESS WHEREOF, the parties hereto have executed this Agreement in seven 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 EX-10.35 3 a2053907zex-10_35.txt EXHIBIT 10.35 CONVERTIBLE LOAN AGREEMENT DATED JUNE 22, 2001 BY AND AMONG DIGITAL RECORDERS, INC. AS BORROWER AND RENAISSANCE US GROWTH & INCOME TRUST PLC AND BFSUS SPECIAL OPPORTUNITIES TRUST PLC AS LENDER AND RENAISSANCE CAPITAL GROUP, INC. AS AGENT FOR THE LENDER TABLE OF CONTENTS
Page ARTICLE I. - DEFINITION OF TERMS.................................................................................. 1 SECTION 1.01 DEFINITIONS....................................................................................... 1 SECTION 1.02 OTHER DEFINITION PROVISIONS....................................................................... 8 ARTICLE II. - LOAN PROVISIONS..................................................................................... 8 SECTION 2.01 THE LOAN.......................................................................................... 8 SECTION 2.02 USE OF PROCEEDS................................................................................... 8 SECTION 2.03 INTEREST RATE AND INTEREST PAYMENTS............................................................... 9 SECTION 2.04 MATURITY.......................................................................................... 9 SECTION 2.05 MANDATORY PRINCIPAL REPAYMENT..................................................................... 9 SECTION 2.06 REDEMPTION........................................................................................ 9 SECTION 2.07 CONVERSION........................................................................................ 9 SECTION 2.08 FEES AND EXPENSES................................................................................. 9 SECTION 2.09 FINDER'S FEES..................................................................................... 9 SECTION 2.10 TAXES.............................................................................................10 SECTION 2.11 SUBSIDIARY GUARANTY, SECURITY AGREEMENTS AND PLEDGE AGREEMENT.....................................10 ARTICLE III. - CONDITIONS PRECEDENT...............................................................................11 SECTION 3.01 DOCUMENT REQUIREMENTS.............................................................................11 SECTION 3.02 ACQUISITION OF MOBITEC HOLDING AB.................................................................12 ARTICLE IV. - REPRESENTATIONS AND WARRANTIES OF BORROWER..........................................................12 SECTION 4.01 ORGANIZATION AND GOOD STANDING....................................................................12 SECTION 4.02 AUTHORIZATION AND POWER...........................................................................12 SECTION 4.03 NO CONFLICTS OR CONSENTS..........................................................................13 SECTION 4.04 ENFORCEABLE OBLIGATIONS...........................................................................13 SECTION 4.05 NO LIENS..........................................................................................13 SECTION 4.06 FINANCIAL CONDITION...............................................................................13 SECTION 4.07 NO DEFAULT........................................................................................14 SECTION 4.08 MATERIAL AGREEMENTS...............................................................................14 SECTION 4.09 NO LITIGATION.....................................................................................14 SECTION 4.10 TAXES.............................................................................................14 SECTION 4.11 CAPITALIZATION....................................................................................15 SECTION 4.12 USE OF PROCEEDS...................................................................................15 SECTION 4.13 EMPLOYEE MATTERS..................................................................................15 SECTION 4.14 EMPLOYEE BENEFIT PLANS............................................................................16 SECTION 4.15 COMPLIANCE WITH LAWS..............................................................................16 SECTION 4.16 LICENSES AND PERMITS..............................................................................17 SECTION 4.17 CONTRACTS.........................................................................................17 SECTION 4.18 SHARES ISSUABLE UPON CONVERSION...................................................................17 SECTION 4.19 INSIDER...........................................................................................17 SECTION 4.20 SUBSIDIARIES......................................................................................17 SECTION 4.21 CASUALTIES........................................................................................18 SECTION 4.22 INVESTMENT COMPANY ACT............................................................................18 SECTION 4.23 SUFFICIENCY OF CAPITAL............................................................................18 SECTION 4.24 CORPORATE NAMES...................................................................................18 i SECTION 4.25 INSURANCE.........................................................................................18 SECTION 4.26 INTELLECTUAL PROPERTY.............................................................................18 SECTION 4.27 REAL PROPERTY.....................................................................................19 SECTION 4.28 ENVIRONMENTAL.....................................................................................20 SECTION 4.29 SURVIVAL OF REPRESENTATIONS AND WARRANTIES........................................................21 SECTION 4.30 FULL DISCLOSURE...................................................................................22 ARTICLE V. - AFFIRMATIVE COVENANTS OF BORROWER....................................................................22 SECTION 5.01 FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.......................................................22 SECTION 5.02 PREPARATION OF BUDGETS............................................................................23 SECTION 5.03 PAYMENT OF TAXES AND OTHER INDEBTEDNESS...........................................................23 SECTION 5.04 MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS..........................................24 SECTION 5.05 SEC FILINGS.......................................................................................24 SECTION 5.06 NOTICE............................................................................................24 SECTION 5.07 COMPLIANCE WITH LOAN DOCUMENTS....................................................................24 SECTION 5.08 COMPLIANCE WITH MATERIAL AGREEMENTS...............................................................24 SECTION 5.09 OPERATIONS AND PROPERTIES.........................................................................24 SECTION 5.10 BOOKS AND RECORDS; ACCESS.........................................................................25 SECTION 5.11 COMPLIANCE WITH LAW...............................................................................25 SECTION 5.12 INSURANCE.........................................................................................25 SECTION 5.13 AUTHORIZATIONS AND APPROVALS......................................................................25 SECTION 5.14 ERISA COMPLIANCE..................................................................................25 SECTION 5.15 FURTHER ASSURANCES................................................................................26 SECTION 5.16 INDEMNITY BY BORROWER.............................................................................26 SECTION 5.17 RESERVATION OF SHARES; SHAREHOLDER APPROVAL.......................................................27 SECTION 5.18 OWNERSHIP OF SUBSIDIARIES.........................................................................27 SECTION 5.19 RETENTION OF STOCK OWNERSHIP......................................................................27 SECTION 5.20 SUBSEQUENTLY FORMED U.S. SUBSIDIARIES.............................................................27 SECTION 5.21 QUARTERLY PAYMENT OF FUNDS BY EUROPEAN SUBSIDIARIES...............................................27 ARTICLE VI. - NEGATIVE COVENANTS OF BORROWER......................................................................28 SECTION 6.01 LIMITATION ON INDEBTEDNESS........................................................................28 SECTION 6.02 LIMITATION ON LIENS...............................................................................28 SECTION 6.03 LIMITATION ON INVESTMENTS.........................................................................28 SECTION 6.04 ALTERATION OF MATERIAL AGREEMENTS.................................................................28 SECTION 6.05 TRANSACTIONS WITH AFFILIATES......................................................................28 SECTION 6.06 LIMITATIONS ON ACQUISITION OF NONRELATED BUSINESS.................................................29 SECTION 6.07 LIMITATION ON SALE OF PROPERTIES..................................................................29 SECTION 6.08 FISCAL YEAR AND ACCOUNTING METHOD.................................................................29 SECTION 6.09 LIQUIDATION.......................................................................................29 SECTION 6.10 MATERIAL AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS........................................29 SECTION 6.11 EXECUTIVE COMPENSATION............................................................................29 SECTION 6.12 RESTRICTED PAYMENTS...............................................................................30 SECTION 6.13 PROHIBITION ON TRANSFER OF FUNDS TO EUROPEAN SUBSIDIARIES.........................................30 SECTION 6.14 CONSOLIDATION OR MERGER...........................................................................30 ARTICLE VII. - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS....................................................30 SECTION 7.01 FINANCIAL RATIOS..................................................................................30 ARTICLE VIII. - EVENTS OF DEFAULT.................................................................................30 ii SECTION 8.01 EVENTS OF DEFAULT.................................................................................30 SECTION 8.02 REMEDIES UPON EVENT OF DEFAULT....................................................................32 SECTION 8.03 PERFORMANCE BY THE LENDER.........................................................................32 SECTION 8.04 PAYMENT OF EXPENSES INCURRED BY THE LENDER........................................................33 ARTICLE IX. - REGISTRATION RIGHTS.................................................................................33 SECTION 9.01 DEMAND REGISTRATION...............................................................................33 SECTION 9.02 "PIGGY-BACK" REGISTRATION.........................................................................34 SECTION 9.03 SHELF REGISTRATION................................................................................35 SECTION 9.04 OBLIGATIONS OF BORROWER...........................................................................35 SECTION 9.05 FURNISH INFORMATION...............................................................................36 SECTION 9.06 EXPENSES OF REGISTRATION..........................................................................37 SECTION 9.07 INDEMNIFICATION REGARDING REGISTRATION RIGHTS.....................................................37 SECTION 9.08 REPORTS UNDER THE 1934 ACT........................................................................39 SECTION 9.09 ASSIGNMENT OF REGISTRATION RIGHTS.................................................................40 SECTION 9.10 OTHER MATTERS.....................................................................................40 ARTICLE X. - BOARD OF DIRECTORS...................................................................................40 SECTION 10.01 BOARD REPRESENTATION OR ATTENDANCE BY OBSERVER...................................................40 SECTION 10.02 LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A DIRECTOR NOMINEE..............................41 SECTION 10.03 NONLIABILITY OF THE LENDER.......................................................................41 ARTICLE XI. - AGENCY PROVISIONS...................................................................................41 SECTION 11.01 THE LENDER'S REPRESENTATIONS AND WARRANTIES TO AGENT.............................................41 SECTION 11.02 WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS......................................42 SECTION 11.03 AGENCY...........................................................................................42 ARTICLE XII. - MISCELLANEOUS......................................................................................44 SECTION 12.01 STRICT COMPLIANCE................................................................................44 SECTION 12.02 WAIVERS AND MODIFICATIONS........................................................................44 SECTION 12.03 LIMITATION ON LIABILITY..........................................................................44 SECTION 12.04 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION..................................44 SECTION 12.05 INVALID PROVISIONS...............................................................................45 SECTION 12.06 MAXIMUM INTEREST RATE............................................................................45 SECTION 12.07 PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES.................................................46 SECTION 12.08 CONFIDENTIALITY..................................................................................46 SECTION 12.09 BINDING EFFECT...................................................................................46 SECTION 12.10 NO THIRD PARTY BENEFICIARY.......................................................................47 SECTION 12.11 ENTIRETY.........................................................................................47 SECTION 12.12 HEADINGS.........................................................................................47 SECTION 12.13 SURVIVAL.........................................................................................47 SECTION 12.14 MULTIPLE COUNTERPARTS............................................................................47 SECTION 12.15 KNOWLEDGE OF BORROWER............................................................................47 SECTION 12.16 NOTICES..........................................................................................47 SECTION 12.17 GOVERNING LAW....................................................................................49
iii Agreement - -------------------------------------------------------------------------------- THIS AGREEMENT, dated as of June 22, 2001, by and among Digital Recorders, Inc., a North Carolina corporation ("Borrower"), and Renaissance US Growth & Income Trust PLC, a public limited company registered in England and Wales (individually referred to as "Renaissance PLC") and BFSUS Special Opportunities Trust PLC, a public limited company registered in England and Wales ("BFSUS") (Renaissance PLC and BFSUS, together with any permitted assignees or successors in interest referred to as the "Lender") and Renaissance Capital Group, Inc., a Texas corporation, as agent for the Lender (the "Agent"). All references herein to Borrower shall include the Subsidiaries, unless the context otherwise requires. WITNESSETH: WHEREAS, Borrower seeks to borrow a total of Three Million Dollars ($3,000,000) from the Lender; and WHEREAS, Borrower has requested that the Lender provide such loan as herein provided, and that the Lender is willing to furnish such to Borrower upon the terms and subject to the conditions and for the considerations hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises herein contained and for other valuable consideration, receipt and sufficiency of which is acknowledged, the parties hereto agree as follows: ARTICLE I. - DEFINITION OF TERMS SECTION 1.01 DEFINITIONS. For the purposes of this Agreement, the following terms shall have the respective meanings assigned to them in this Article I or in the section or recital referred to below: "Acquisition Indebtedness" shall mean Indebtedness of Borrower or a Subsidiary incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by Borrower. "Affiliate" with respect to any Person shall mean a person that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person. "BFSUS" shall mean BFSUS Special Opportunities Trust PLC, a public limited company registered in England and Wales. "Capital Expenditure" shall mean an expenditure for assets that is properly classifiable as a capital expenditure in accordance with GAAP. "Capital Lease" shall mean any lease of property, real or personal, which would be properly classifiable as a capital lease in accordance with GAAP. 1 Agreement (Continued) - -------------------------------------------------------------------------------- "Common Stock" shall mean Borrower's common stock, $.10 per share. "Consolidated Trailing Twelve Months Free Cash Flow" shall mean for any Person, for the immediately preceding twelve-month period on such date, Net Income of such Person for such twelve-month period, plus (a) all deferred income tax expense of such Person and its Subsidiaries for such twelve-month period, (b) all depreciation expense of such Person and its Subsidiaries for such twelve-month period, and (c) all amortization expense of such Person and its Subsidiaries for such twelve-month period, less capital expenditures of such Person and its Subsidiaries for such twelve-month period. "Conversion" or "Conversion Rights" shall mean exchange of, or the rights to exchange, the Principal Amount of the Loan, or any part thereof, for fully paid and nonassessable Common Stock on the terms and conditions provided in the Debentures. "Current Assets" shall mean, for any Person as of any date, the assets of such Person and its consolidated Subsidiaries which would be reflected as current assets on a consolidated balance sheet for such Person and its Subsidiaries prepared as of such date in accordance with GAAP. "Current Liabilities" shall mean, for any Person as of any date, the liabilities of such Person and its consolidated Subsidiaries which would be reflected as current liabilities on a consolidated balance sheet for such Person and its subsidiaries prepared as of such date in accordance with GAAP. For purposes of calculating compliance with any covenant contained in this Agreement or any other Loan Document, the principal amount of Current Liabilities shall include any balance under any revolving credit facility of the Borrower, regardless of whether such revolving credit facility would be reflected as a current liability in accordance with GAAP. "Current Ratio" shall mean, for any Person as of any date, the ratio of such Person's current assets to current liabilities as of such date. "Debentures" shall mean the Debentures executed by Borrower and delivered pursuant to the terms of this Agreement, together with any renewals, extensions or modifications thereof. "Debtor Laws" shall mean all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or similar laws from time to time in effect affecting the rights of creditors or debtors generally. "Default" or "Event of Default" shall mean any of the events specified in Article VIII. "Dividends," in respect of any corporation, shall mean (i) cash distributions or any other distributions on, or in respect of, any class of capital stock of such corporation, except for distributions made solely in shares of stock of the same class, and (ii) any and all funds, cash and other payments made in respect of the redemption, repurchase or acquisition of such stock, unless such stock shall be redeemed or acquired through the exchange of such stock with stock of the same class. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, together with all rules and regulations issued pursuant thereto. 2 Agreement (Continued) - -------------------------------------------------------------------------------- "GAAP" shall mean United States generally accepted accounting principles applied on a consistent basis, set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or the Financial Accounting Standards Board or their successors, which are applicable in the circumstances as of the date in question. The requirement that such principles be applied on a consistent basis shall mean that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. "Governmental Authority" shall mean any government (or any political subdivision or jurisdiction thereof), court, bureau, agency or other governmental authority having jurisdiction over Borrower or a Subsidiary or any of its or their businesses, operations or properties. "Guaranty" of any Person shall mean any contract, agreement or understanding of such Person pursuant to which such Person in effect guarantees the payment of any Indebtedness of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, including, without limitation, agreements: (i) to purchase such Indebtedness or any property constituting security therefor; (ii) to advance or supply funds primarily for the purpose of assuring the holder of such Indebtedness of the ability of the Primary Obligor to make payment; or (iii) otherwise to assure the holder of the Indebtedness of the Primary Obligor against loss in respect thereof, except that "Guaranty" shall not include the endorsement by Borrower or a Subsidiary in the ordinary course of business of negotiable instruments or documents for deposit or collection. "Holder" shall mean the owner of Registrable Securities. "Indebtedness" shall mean, with respect to any Person, without duplication, the following indebtedness, obligations and liabilities of such Person: (i) indebtedness for borrowed money; (ii) all obligations of such Person in respect of any Guaranty; (iii) all obligations of such Person in respect of any Capital Lease, (iv) all obligations, indebtedness and liabilities secured by any lien or any security interest on any property or assets of such Person, but only to the extent so secured; and (v) all preferred stock of such Person which is subject, at the time of calculation of Indebtedness, to a mandatory redemption requirement, valued at the greater of its involuntary redemption price or liquidation preference plus accrued and unpaid dividends, and all extensions, renewals, modifications and amendments thereto. "Intercreditor Agreement" shall mean the Intercreditor Agreement, dated as of the date hereof, among the Borrower, Lender, TwinVision Corp. of North America, Inc., a North Carolina corporation, Digital Audio Corporation, a North Carolina corporation, Renaissance Group, in its capacity as agent, and Guaranty Business Credit Corporation, a Delaware corporation. "Interest Coverage Ratio" means for any period, the ratio of (a) Borrower's consolidated net income after taxes for such period (excluding Borrower's after tax gains or losses on the sale of assets (other than the sale of Inventory in the ordinary course of business) and excluding other after tax extraordinary gains or losses), PLUS depreciation and amortization deducted in determining net income for such period, PLUS interest expense for such period to (b) interest expense for such period, all as determined on a consolidated basis in accordance with GAAP. "Investment" in any Person shall mean any investment, whether by means of share purchase, loan, advance, capital contribution or otherwise, in or to such Person, the Guaranty of any Indebtedness of such Person, or the subordination of any claim against such Person to other Indebtedness of such Person; provided however, that "Investment" shall not include (i) any demand deposits in a duly 3 Agreement (Continued) - -------------------------------------------------------------------------------- chartered state or national bank or other cash equivalent investments, (ii) any loans permitted by Section 6.12, or (iii) any acquisitions of equity in any other Person. "IRS Code" shall mean the Internal Revenue Code of 1986, as amended, together with all rules and regulations issued thereunder. "Lien" shall mean any lien, mortgage, security interest, tax lien, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property designed to secure the repayment of Indebtedness, whether arising by agreement or under any statute or law, or otherwise. "Loan" shall mean the money lent to Borrower pursuant to this Agreement, along with any accrued, unpaid interest thereon. "Loan Closing" or "Loan Closing Date" shall mean the disbursement of Loan funds, which shall occur within ten (10) days of the execution and delivery of this Agreement. "Loan Documents" shall mean this Agreement, the Debentures and any other agreements or documents required to be executed or delivered by Borrower pursuant to the terms of this Agreement (and any amendments or supplements hereto or modifications hereof). "Lock-Up Agreement" shall mean the "lock-up" agreements to be executed by the executive officers, directors and principal shareholders of Borrower pursuant to Section 5.19 of this Agreement. "Material Adverse Effect" or "Material Adverse Change" shall mean (i) any change, factor or event that shall (a) have a material adverse effect upon the validity or enforceability of any Loan Documents, (b) have a material adverse effect upon the financial condition, results of operations, business, properties, operations or assets of Borrower or its Subsidiaries taken as a whole, or (c) have a material adverse effect upon the ability of Borrower to fulfill its obligations under the Loan Documents, or (ii) any event that causes an Event of Default or which, with notice or lapse of time or both, could reasonably be expected to become an Event of Default. "Net Excess Working Capital" shall be defined as net cash held by Mobitec AB, Transit Media gmbh, and DRI Europa (the "Group"), computed on a quarterly basis. Net cash held by the Group shall be defined as after-tax operating income of the Group, plus non-cash financial items such as depreciation and amortization; and less (i) cash retained for pre-approved capital expenditure acquisitions or working capital in excess of (iv) below; (ii) ordinary repayment of current third party financings; (iii) any financial effect caused by foreign currency exchange rate differences; and (iv) minimum available Group cash working capital of $100,000 US. "Net Income" shall mean, for any Person for any period, consolidated net income of such Person and its consolidated Subsidiaries for such period which would be reflected in accordance with GAAP, but excluding (a) any gain or loss arising from the sale of capital assets, (b) any gain or loss arising from any write-up or write-down of assets, (c) income or loss of any Person, substantially all of the assets of which have been acquired by such Person in any manner, to the extent that such earnings or losses were realized by such other Person prior to the date of such acquisition, (d) income or loss of any Person in which the Person has any ownership interests (other than consolidated subsidiaries of such Person), unless such earnings have actually been received or paid by the Person or its consolidated 4 Agreement (Continued) - -------------------------------------------------------------------------------- Subsidiaries in the form of cash distributions or additional cash calls, (e) income or loss of any Person to which assets of the Person or its consolidated subsidiaries shall have been sold, transferred or disposed of, or into which the Person shall have merged, to the extent that such earnings or losses of any other Person arise prior to the date of such transaction, (f) any gain or loss arising from the acquisition of any securities of the Person or any of its consolidated subsidiaries, and (g) any extraordinary gain or loss realized by such Person or any of its consolidated subsidiaries during such period. "Obligation" shall mean: (i) all present and future Indebtedness, obligations and liabilities of Borrower to the Lender arising pursuant to this Agreement, regardless of whether such Indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, joint, several, or joint and several; (ii) all present and future Indebtedness, obligations and liabilities of Borrower to the Lender arising pursuant to or represented by the Debentures and all interest accruing thereon, and reasonable attorneys' fees incurred in the enforcement or collection thereof; (iii) all present and future Indebtedness, obligations and liabilities of Borrower and any Subsidiary evidenced by or arising pursuant to any of the Loan Documents; (iv) all costs incurred by the Lender or Agent including, but not limited to, reasonable attorneys' fees and legal expenses related to this transaction; and (v) all renewals, extensions and modifications of the indebtedness referred to in the foregoing clauses, or any part thereof. "Permits" shall have the meaning set forth in Section 4.16. "Permitted Indebtedness" shall mean Indebtedness outstanding as of the date hereof or incurred in compliance with Section 6.01 and the other terms of this Agreement that constitutes (i) Senior Obligations, (ii) obligations under Capital Leases, (iii) Subordinated Debt, (iv) purchase money Indebtedness, (v) intercompany Indebtedness, (vi) Indebtedness under this Agreement or the Debentures, and (vii) any refunding, refinancing or extension of any of the above. "Permitted Liens" shall mean: (i) Liens (if any) granted for the benefit of the Lender; (ii) Liens to secure the Permitted Indebtedness; (iii) pledges or deposits made to secure payment of worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs; (iv) Liens imposed by mandatory provisions of law such as for carriers', landlord's, materialmen's, mechanics', warehousemen's, vendors' and other like Liens arising in the ordinary course of business, securing Indebtedness whose payment is made within 30 days of the date such Lien arises, or that are being contested in good faith by appropriate proceedings as to which adequate reserves have been established to the extent required by GAAP; (v) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate cash reserves have been provided; (vi) Liens arising from good faith deposits in connection with tenders, leases, bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations and deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges; (vii) encumbrances consisting of zoning restrictions, easements, reservations, licenses, covenants and other minor irregularities of title or other restrictions on the use of real property (whether owned or leased), provided that such items do not materially impair the intended use of such property, and none of which is violated by Borrower's existing structures or land use; (viii) mortgages, financing statements, equipment leases or other encumbrances incurred in connection with the acquisition of property or equipment or the replacement of existing property or equipment, provided that such liens shall be limited to the property or equipment then being acquired; and (ix) Liens which secure Senior Obligations. 5 Agreement (Continued) - -------------------------------------------------------------------------------- "Person" shall include an individual, a corporation, a joint venture, a general or limited partnership, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "Plan" shall mean an employee benefit plan or other plan maintained by Borrower for employees of Borrower and/or any Subsidiaries and covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the IRS Code. "Principal Amount" shall mean, as of any time, the then aggregate outstanding face amount of the Debentures after any conversions or redemptions and after giving effect to any installment payments received by the Lender. "Registrable Securities" shall mean (i) the Common Stock issuable upon Conversion of the Debentures, and (ii) any Common Stock issuable upon exercise of the Warrants, or (iii) any warrant, right or other security that is issued with respect to the Common Stock by way of (a) a stock dividend; (b) any other distribution with respect to, or in exchange for, or in replacement of Common Stock; (c) a stock split; and (d) in connection with a combination of shares, recapitalization, merger or consolidation excluding in all cases, however, any Common Stock that is not a Restricted Security and any Registrable Securities sold or transferred by a Person in a transaction in which the rights under this Agreement are not assigned. "Registrable Securities Then Outstanding" shall mean the Registrable Securities then outstanding. "Renaissance PLC" shall mean Renaissance US Growth & Income Trust PLC, a public limited company registered in England and Wales. "Renaissance Group" shall mean Renaissance Capital Group, Inc., a Texas corporation. "Restricted Security" shall mean a security that has not been (i) registered under the 1933 Act or (ii) distributed to the public pursuant to Rule 144 (or any similar provisions that are in force) under the 1933 Act. "SEC" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the 1933 Act and the 1934 Act. "1933 Act" shall refer to the Securities Act of 1933, as amended, or any similar federal statute and rules and regulations promulgated thereunder, all as the same may be in effect from time to time. "1934 Act" shall refer to the Securities Exchange Act of 1934, as amended, or any similar federal statute and rules and regulations promulgated thereunder, all as the same may be in effect from time to time. "1940 Act" shall refer to the Investment Company Act of 1940, as amended, or any similar federal statute and rules and regulations promulgated thereunder, all as the same may be in effect from time to time. 6 Agreement (Continued) - -------------------------------------------------------------------------------- "Senior Documents" shall mean all loan documents evidencing the Senior Obligations, as each may now or hereafter be amended, modified, supplemented, renewed or extended from time to time. "Senior Obligations" shall mean one or more senior debt facilities (including loans and other extensions of credit under the Senior Documents) with banks or other institutional lenders providing for revolving credit loans, term loans, asset-based secured loans, capital expenditure loans, or letters of credit, or any other indebtedness senior to the Loan, as now existing or hereafter incurred, and, in each case, as amended, restated, modified, renewed or extended from time to time. "Solvent" shall mean, with respect to any Person on a particular date, that on such date: (i) the fair value of the assets of such Person is greater than the total amount of liabilities of such Person; (ii) the estimated present fair salable value, in the ordinary course of business, of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business; (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Debt" shall mean any unsecured indebtedness of Borrower or any Subsidiaries, now existing or hereafter incurred, which indebtedness is, by its terms, junior in right of repayment to the payment of the Debentures. "Subsidiary" or "Subsidiaries" shall mean any or all corporations or entities, whether now existing or hereafter acquired, of which over 50% the Voting Shares or equity interests are owned, directly or indirectly, by Borrower. "Subsidiary Documents" shall mean the Subsidiaries' Guaranty and Subsidiaries' Security Agreement and any other agreements or documents required to be executed or delivered by any Subsidiary pursuant to the terms of this Agreement (and any amendments or supplements hereto or modifications hereof). "Voting Shares" of any corporation shall mean shares of any class or classes (however designated) having ordinary voting power for the election of at least a majority of the members of the Board of Directors (or other governing bodies) of such corporation, other than shares having such power only by reason of the happening of a contingency. "Warrants" shall mean the Warrants executed by the Borrower and delivered to the Lender pursuant to this Agreement. 7 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 1.02 OTHER DEFINITION PROVISIONS. (a) All terms defined in this Agreement shall have the above-defined meanings when used in the Debentures or any other Loan Documents, certificate, report or other document made or delivered pursuant to this Agreement, unless the context therein shall otherwise require. (b) Defined terms used herein in the singular shall import the plural and vice versa. (c) The words "hereof," "herein," "hereunder" and similar terms, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (d) References to financial statements and reports shall be deemed to be a reference to such statements and reports prepared in accordance with GAAP. (e) Accounting terms not specifically defined above in this Agreement shall be construed in accordance with GAAP. ARTICLE II. - LOAN PROVISIONS SECTION 2.01 THE LOAN. (a) Subject to the terms and conditions of this Agreement, and the compliance with such terms and conditions by all parties, Lender agrees to lend to Borrower, and Borrower agrees to borrow from the Lender, the total Principal Amount of Three Million Dollars ($3,000,000). (b) The Loan shall be disbursed at Loan Closing, expected to occur on June 27, 2001, subject to the conditions provided hereunder, and shall be evidenced by the Debentures, in the Principal Amount specified above. The Debentures shall rank PARI PASSU with all Indebtedness of Borrower, other than the Senior Obligations and the Subordinated Debt. (c) Unless otherwise mutually agreed, the Loan Closing shall be at the offices of Renaissance Capital Group, Inc., 8080 North Central Expressway, Suite 210, Dallas, Texas. (d) If, within 10 days of the date of this Agreement, (i) Borrower has failed to comply with the conditions precedent to the Loan Closing as specified in Article III hereof (unless compliance with such conditions in whole or in part has been waived or modified by the Lender its sole discretion) or (ii) the Loan Closing has not occurred (unless the date of such Loan Closing has been mutually extended), other than as a result of any failure of Lender to comply with the terms of this Agreement, then, in either such case, the obligations of the Lender under this Agreement shall terminate; provided, however, that Borrower shall be obligated for payment of the fees and expenses provided in Section 2.07 due and payable as of such date of termination. SECTION 2.02 USE OF PROCEEDS. (a) Borrower intends to use the Loan proceeds for general corporate purposes, including the acquisition of Mobitec Holding AB. 8 Agreement (Continued) - -------------------------------------------------------------------------------- (b) Borrower hereby acknowledges that the proceeds from the Loan shall be of benefit to Borrower for the growth of its business by providing capital which will provide additional opportunities for Borrower. SECTION 2.03 INTEREST RATE AND INTEREST PAYMENTS. Interest on the Principal Amount outstanding from time to time shall accrue at the rate of 8.00% per annum, with the first installment of accrued, unpaid interest being due and payable on AUGUST 1, 2001 and subsequent payments of accrued, unpaid interest being due and payable on the first day of each month thereafter. Overdue principal and interest on the Debentures shall bear interest at the maximum rate permitted by applicable law. Interest on the Principal Amount of the Debentures shall be calculated, from time to time, on the basis of the actual days elapsed in a year consisting of 365 days. SECTION 2.04 MATURITY. If not sooner redeemed or converted, the Debentures shall mature on JUNE 27, 2008, at which time all the remaining unpaid principal, interest and any other charges then due under this Agreement shall be due and payable in full. The Debentures shall be prepaid PRO RATA with any prepayments of Indebtedness, other than Senior Obligations. SECTION 2.05 MANDATORY PRINCIPAL REPAYMENT. The Debentures shall be subject to mandatory principal repayment as provided in the Debentures. SECTION 2.06 REDEMPTION. The Debentures shall be subject to redemption as provided in the Debentures. SECTION 2.07 CONVERSION. The Debentures shall be subject to conversion as provided in the Debentures. SECTION 2.08 FEES AND EXPENSES. Upon Loan Closing, Borrower shall pay at Loan Closing to Agent, or at its direction, a Closing Fee equal to 1.0% of the Loan proceeds as well as any unpaid portion of the Commitment Fee, Closing Expense Fee and Due Diligence Fee, all as set forth in the preliminary terms letter dated November 28, 2000 between the Borrower and Renaissance Group. SECTION 2.09 FINDER'S FEES. Borrower represents to the Lender that, except as set forth in Schedule 2.08, no placement fees, commissions, brokerage or finder's fees were incurred by Borrower in connection with this Agreement or the Debentures. Borrower shall be responsible for the payment of all such placement fees, commissions, brokerage or finder's fees. 9 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 2.10 TAXES. (a) The Debentures shall be convertible into shares of Common Stock and on such terms as are stated in the Debentures. Such conversion shall be made without deduction for any present or future taxes, duties, charges or withholdings, (excluding, in the case of the Lender, any foreign taxes, any federal, state or local income taxes and any franchise taxes or taxes imposed upon it by the jurisdiction, or any political subdivision thereof, under which the Lender is organized or are qualified to do business), and all liabilities with respect thereto (herein "Taxes") shall be paid by Borrower. If Borrower shall be required by law to deduct any Taxes for which Borrower is responsible under the preceding sentence from any sum payable hereunder to the Lender: (i) the sum payable shall be increased so that after making all required deductions, the Lender shall receive an amount equal to the sum it would have received had no such deductions been made; (ii) Borrower shall make such deductions; and (iii) Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law. Borrower shall be entitled to any refunds or returns from any such taxing authority. (b) Except as otherwise set forth in this Agreement or the other Loan Documents, Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Loan Documents or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the other Loan Documents (hereinafter referred to as "Other Taxes"). (c) Borrower shall indemnify the Lender for the full amount of Taxes and Other Taxes reasonably paid by the Lender or any liability (including any penalties or interest assessed because of Borrower's defaults) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days from the date the Lender makes written demand therefor. The Lender shall subrogate any and all rights and claims relating to such Taxes and Other Taxes to Borrower upon payment of said indemnification. (d) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower in this Section 2.09 shall survive the payment in full of the Obligation. (e) Borrower shall have no liability or obligation with respect to taxes on income recognized by the Lender with respect to the Debentures. SECTION 2.11 SUBSIDIARY GUARANTY, SECURITY AGREEMENTS AND PLEDGE AGREEMENT. The due and prompt performance of the obligations of Borrower to the Lender under the Loan Agreement and the Debentures shall be guaranteed by certain of the Subsidiaries and secured by all tangible and intangible assets of Borrower and certain of the Subsidiaries (exclusive of mortgages on real property) and shall be evidenced by Security Agreements executed by and between the Lender, the Borrower and certain of the Subsidiaries. Financing statements shall be executed in favor of the Lender by Borrower and certain of the Subsidiaries. Borrower shall enter into a Pledge Agreement with the Lender pledging all of the capital stock of certain of the Subsidiaries. There shall be no prior security interests on any such U.S. subsidiary capital stock assets, except to secure certain Senior Obligations, and all such prior security interests shall be subject to the Intercreditor Agreement. 10 Agreement (Continued) - -------------------------------------------------------------------------------- ARTICLE III. - CONDITIONS PRECEDENT SECTION 3.01 DOCUMENT REQUIREMENTS. The obligation of the Lender to advance funds at the Loan Closing Date hereof is subject to the condition precedent that, on or before the date of such advance, the Lenders shall have received the following: (a) DEBENTURES. Duly executed Debentures from Borrower each in the Principal Amount of $1,500,000, styled "The Frost National Bank, Custodian FBO Renaissance US Growth and Income Trust PLC, Trust No. W00740100" and HSBC Global Custody Nominee (U.K.) Limited, Designation No. 896414, respectively, both of which shall be in form and substance acceptable to the Lender and its counsel. (b) PLEDGE AGREEMENT AND BORROWER'S SECURITY AGREEMENT. Duly executed Pledge Agreement and Security Agreement from Borrower, which shall be in form and substance acceptable to the Lender and its counsel. (c) SUBSIDIARIES' GUARANTY AND SUBSIDIARIES' SECURITY AGREEMENT. Duly executed Subsidiaries' Guaranty and Subsidiaries' Security Agreement from each of the U.S. Subsidiaries of Borrower, which shall be in form and substance acceptable to the Lender and its counsel. (d) INTERCREDITOR AGREEMENT. Duly executed Intercreditor Agreement from Borrower, its U.S. subsidiaries, the Lender, Renaissance Group, and Guaranty Business Credit Corporation, which shall be form and substance acceptable to the Lender and its counsel. (e) CEO'S CERTIFICATE. A certificate signed by the chief executive officer of Borrower, in his capacity as such, and dated as of the Loan Closing Date stating that: (i) all of the representations and warranties contained in Article IV hereof and the other Loan Documents are true and correct in all material respects as of the Loan Closing Date; and (ii) no event has occurred and is continuing, or would result from the Loan, which constitutes, or with notice or lapse of time or both would constitute, a Default or an Event of Default. (f) SECRETARY'S CERTIFICATES. A signed certificate of the Secretary of Borrower which shall certify (i) copies of the Articles of Incorporation (or other organizational document) of Borrower and each Subsidiary and all amendments thereto, certified by the Secretary of State of the state of incorporation (or other appropriate authority) and dated within ten (10) days prior to Loan Closing, a copy of the Articles of Incorporation (or other organizational document) of each Subsidiary and all amendments thereto, certified by the Secretary of Borrower as of the date of such certification; (ii) a copy of the Bylaws of Borrower and each Subsidiary and all amendments thereto certified by the Secretary of Borrower and each such Subsidiary as of the date of such certification; (iii) copies of resolutions, as adopted by Borrower's and each Subsidiary's Board of Directors, approving the execution, delivery and performance, as applicable, of this Agreement, the Debentures, the Guaranties and the other Loan Documents, including the transactions contemplated herein, stating that such resolutions have been duly adopted, are true and correct, have not been altered or repealed and are in full force and effect; (iv) certificates of good standing (or other similar instrument) for Borrower and each Subsidiary issued by the appropriate official of the state of incorporation of Borrower and each Subsidiary and certificates of qualification and good standing for Borrower and each Subsidiary issued by the appropriate official of each of the states for which 11 Agreement (Continued) - -------------------------------------------------------------------------------- Borrower and each Subsidiary is required to be qualified to do business as a foreign corporation, dated within ten (10) days prior to Loan Closing; and (v) the names of the officers of Borrower and each Subsidiary authorized to sign the Loan Documents to be executed by such officer, together with the true signatures of each such officer. It is herewith stipulated and agreed that the Lender may thereafter rely conclusively on the validity of this certificate as a representation of the officers of Borrower and each Subsidiary duly authorized to act with respect to the Loan Documents until such time as the Lender shall receive a further certificate of the Secretary or Assistant Secretary of Borrower and each Subsidiary canceling or amending the prior certificate and submitting the signatures of the officers thereupon authorized in such further certificate. (g) LEGAL OPINIONS. Legal opinions from counsel to Borrower and its U.S. subsidiaries and from counsel to Swedish and German subsidiaries in form and substance satisfactory to the Lender and its counsel. (h) "LOCK-UP" AGREEMENTS. "Lock-Up" Agreements, in form and substance satisfactory to the Lender and its counsel. (i) WARRANTS. The Borrower shall issue to the Lender five-year Warrants to purchase a total of 200,000 shares of Common Stock at an exercise price equal to the closing price on the date preceding the Loan Closing. (j) OTHER DOCUMENTS. Such other information, documents and agreements as may reasonably be required by the Lender and the Lender's counsel to substantiate Borrower's compliance with the requirements of this Agreement and the Lender's compliance with the 1940 Act. SECTION 3.02 ACQUISITION OF MOBITEC HOLDING AB. The acquisition of Mobitec Holding AB shall occur simultaneously with, and be a concurrent condition to, the Loan Closing. ARTICLE IV. - REPRESENTATIONS AND WARRANTIES OF BORROWER All references in this Article to Borrower shall include the Subsidiaries, unless the context otherwise requires. To induce the Lender to make the Loan hereunder, Borrower represents and warrants to the Lender that: SECTION 4.01 ORGANIZATION AND GOOD STANDING. Borrower is duly organized and existing in good standing under the laws of the state of its incorporation, is duly qualified as a foreign corporation and in good standing in all states in which failure to qualify would have a Material Adverse Effect, and has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged and is or will be qualified in those states wherein it proposes to transact material business operations in the future. SECTION 4.02 AUTHORIZATION AND POWER. Borrower has the corporate power and requisite authority to execute, deliver and perform the Loan Documents to be executed by Borrower. Borrower is duly authorized to, and has taken all corporate 12 Agreement (Continued) - -------------------------------------------------------------------------------- action necessary to authorize, execute, deliver and perform the Loan Documents executed by Borrower. Borrower is and will continue to be duly authorized to perform the Loan Documents executed by Borrower. SECTION 4.03 NO CONFLICTS OR CONSENTS. Except as disclosed on Schedule 4.03, neither the execution and delivery of the Loan Documents, nor the consummation of any of the transactions therein contemplated, nor compliance with the terms and provisions thereof, will contravene or materially conflict with any judgment, license, order or permit applicable to Borrower, or any indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument to which Borrower is a party or by which Borrower is or may become bound, or to which Borrower is or may become subject, or violate any provision of the charter or bylaws of Borrower or trigger any preemptive rights or rights of first refusal of any third party. No consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by Borrower of the Loan Documents or to consummate the transactions contemplated hereby or thereby except those that have been obtained. SECTION 4.04 ENFORCEABLE OBLIGATIONS. The Loan Documents have been duly executed and delivered by Borrower and are the legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms. SECTION 4.05 NO LIENS. Except for Permitted Liens, all of the properties and assets owned or leased by Borrower are free and clear of all Liens and other adverse claims of any nature, and Borrower has good and marketable title to such properties and assets. A true and complete list of all known or recorded liens for borrowed money is disclosed on Schedule 4.05. SECTION 4.06 FINANCIAL CONDITION. Borrower has delivered to the Lender the balance sheet of Borrower as of December 31, 2000, and the related statement of income, stockholders' equity and statement of cash flow for the year then ended, audited by its independent certified public accountant. Borrower has also delivered to the Lender the unaudited balance sheet of Borrower as of March 31, 2001 and the related unaudited statement of income, stockholders' equity and statement of cash flow for the three (3) months then ended. Such financial statements fairly present the financial condition of Borrower as of such dates and have been prepared in accordance with GAAP (except that unaudited financial statements omit certain footnotes); and as of the date hereof, there are no obligations, liabilities or Indebtedness (including contingent and indirect liabilities and obligations) of Borrower which are (separately or in the aggregate) material and are not reflected in such financial statements or otherwise disclosed herein or in the Schedules. Since the date of the above-referenced year end financial statements, there have not been, except as disclosed in Schedule 4.06: (i) any Material Adverse Change; (ii) any Dividend declared or paid or distribution made on the capital stock of Borrower or any capital stock thereof redeemed or repurchased; (iii) any incurrence of long-term debt by Borrower; (iv) any salary, bonus or compensation increases to any officers, key employees or agents of Borrower, other than in the ordinary course of business and consistent with past practice; or (v) any other material transaction entered into by Borrower, except in the ordinary course of business and consistent with past practice. 13 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 4.07 NO DEFAULT. No event has occurred and is continuing which constitutes, or, with notice or lapse of time or both, would constitute, a Default or an Event of Default under this Agreement. SECTION 4.08 MATERIAL AGREEMENTS. Neither Borrower nor any Subsidiary nor any other party is in default, and no event has occurred and is continuing which, with notice or lapse of time or both, would constitute a default, under any contract, lease, loan agreement, indenture, mortgage, security agreement, license agreement or other agreement or obligation to which it is a party or by which any of its properties is subject which could reasonably be expected to have a Material Adverse Effect, except as described on Schedule 4.08. To the best knowledge of Borrower, it is not a party to, or bound by, any contract or agreement, the faithful performance of which is so onerous so as to create, or to likely create, a Material Adverse Effect on the business, operations or financial condition of Borrower. SECTION 4.09 NO LITIGATION. Except as disclosed on Schedule 4.09, there are no actions, suits, investigations, arbitrations or administrative proceedings pending or, to the best knowledge of Borrower, threatened, against Borrower, and there has been no change in the status of any of the actions, suits, investigations, litigation or proceedings disclosed to the Lender which could reasonably be expected to have a Material Adverse Effect on Borrower or on any transactions contemplated by any Loan Document. Borrower has not received any claim that Borrower currently violates any federal, state or local law, ordinance, rule or regulation, which could have an adverse effect on its business and, to the best of Borrower's knowledge, no such claim is or has been threatened; and, except as disclosed on Schedule 4.09, there have been no developments adverse to Borrower with respect to any pending or threatened claim, action or proceeding of an administrative or judicial nature. SECTION 4.10 TAXES. All tax returns required to be filed by Borrower in any jurisdiction have been filed and all taxes (including mortgage recording taxes), assessments, fees and other governmental charges upon Borrower or upon any of its properties, income or franchises now due have been paid, in each case, except where the same are being contested in good faith by appropriate proceedings, as disclosed on Schedule 4.10. Except as disclosed on Schedule 4.10, Borrower has not received any notice of deficiency or other adjustment from any taxing authority that is unresolved as of the Loan Closing. No audit or examination, claim or proposed assessment by any taxing authority is pending or, to the best knowledge of Borrower, threatened against Borrower or any of its properties. All ad valorem and other property taxes imposed on Borrower, or that may become a lien on Borrower's assets and that are due and payable, have been paid in full. Borrower has withheld or collected from each payment made to each of its U.S. employees the amount of all taxes (including federal income taxes, Federal Insurance Contributions Act ("FICA") taxes, and state and local income, payroll, and wage taxes, among others) required to be withheld or collected. 14 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 4.11 CAPITALIZATION. The authorized capital stock of Borrower consists of 1,000,000 shares of Preferred Stock, $.10 par value, of which 354 shares are issued and outstanding as of the date hereof, and 10,000,000 shares of Common Stock, $.10 par value, of which 3,274,475 shares of Common Stock are issued and outstanding as of the date hereof. All of such outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable, and were not issued in violation of the preemptive rights or rights of first refusal of any person. Schedule 4.11 sets forth all stock options, warrants, conversion rights, subscription rights, preemptive rights, rights of first refusal and other rights or agreements to acquire securities of Borrower and any shares held in treasury or reserved for issuance upon exercise of such stock options, warrants or conversion rights, subscription rights and other rights or agreements to acquire securities, including the 430,000 shares of Common Stock to be issued in connection with the acquisition of Mobitec Holding AB, the date of termination of such rights and the consideration therefor. As of the Loan Closing Date, Borrower does not have class of securities with respect to which a member of a national securities exchange, broker or dealer may extend or maintain credit to or for a customer pursuant to rules or regulations adopted by the Board of Governors of the Federal Reserve System under Section 7 of the 1934 Act. Borrower has, and will continue to have as long as the Debentures remains outstanding, authorized and reserved an adequate number of shares of Common Stock to permit Conversion of the Debentures. SECTION 4.12 USE OF PROCEEDS. Borrower intends to use proceeds from the Loan as disclosed in Section 2.02 hereof. SECTION 4.13 EMPLOYEE MATTERS. (a) Except as set forth on Schedule 4.13, Borrower is not a party to any collective bargaining agreement and is not aware of any activities of any labor union that is currently seeking to represent or organize its employees; (b) Borrower is in compliance with all federal, state and municipal laws respecting employment and employment practices, occupational health and safety, and wages and hours, and is not engaged in any unfair labor practice, and there are no arrears in the payment of wages or social security taxes; (c) there is no unfair labor practice complaint against Borrower pending before the National Labor Relations Board or any state or local agency; (d) to the best knowledge of Borrower, there is no pending labor strike or other material labor trouble affecting Borrower (including, without limitation, any organizational drive); (e) to the best knowledge of Borrower, there is no material labor grievance pending against Borrower; (f) there is no pending representation question respecting the employees of Borrower before any local, state or federal agency; 15 Agreement (Continued) - -------------------------------------------------------------------------------- (g) except as set forth on Schedule 4.13, there are no pending proceedings arising out of or under any collective bargaining agreement to which Borrower is a party, or to the best knowledge of Borrower, any basis for which a claim may be made under any collective bargaining agreement to which Borrower is a party; and (h) there are no pending proceedings arising out of any employment discrimination claim or any basis for which any such claim may be made. SECTION 4.14 EMPLOYEE BENEFIT PLANS. Schedule 4.14 lists (i) any "employee benefit plans" as described in the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder ("ERISA") (other than a defined contribution pension plan not requiring any contribution by Borrower, paid time-off policy or vacation/holiday/sick leave policy, and employee group life and health plans that are fully funded through commercial insurance); and (ii) any defined benefit "employee pension benefit plans" (as defined in ERISA). Neither Borrower nor, to the best knowledge of Borrower, any other person has engaged in a transaction with respect to any employee benefit plan listed or required to be listed on Schedule 4.14 which could subject any such plan, Borrower or the Lender to a penalty under ERISA or a tax under the Internal Revenue Code of 1986, as amended (the "Code"), except for those transactions which could not reasonably be expected to have a Material Adverse Effect. Each of the employee benefit plans listed, or required to be listed, on Schedule 4.14 has been operated and administered in accordance with applicable law, including without limitation ERISA, except for any such failure which would not subject Borrower or the Lender to any penalty or other liability and except for any such failure which would not have an adverse effect upon the applicable plan or any participant therein. Borrower has not incurred, nor presently expects to incur, any liability under Title IV of ERISA that could result in liability to the Lenders or Borrower. Each employee benefit plan listed or required to be listed on Schedule 4.14 that is a group health plan within the meaning of Section 5000(b)(1) of the Code, is in compliance with the provisions of Section 4980B(f) of the Code, except for any such non-compliance which would not subject Borrower or the Lender to any penalty or liability and except for any such failure which would not have an adverse effect upon the applicable plan or any participant therein. There is not any pending or, to the best knowledge of Borrower, threatened claim by or on behalf of any employee benefit plan, by any employee covered under any such plan or otherwise involving any employee benefit plan (other than routine non-contested claims for benefits). SECTION 4.15 COMPLIANCE WITH LAWS. Each of Borrower and the Subsidiaries has all requisite licenses, permits and certificates including without limitation, drug, environmental and health and safety permits from federal, state and local authorities necessary to conduct its business and own and operate its assets (collectively, the "Permits"). Except as set forth on Schedule 4.15, neither Borrower nor any Subsidiary is in violation of any law, regulation or ordinance relating to its business, operations and properties which, individually or in the aggregate, could have a Material Adverse Effect, and the business and operations of Borrower or any Subsidiary do not violate, in any material respect, any federal, state, local or foreign laws, regulations or orders. Except as set forth on Schedule 4.15, Borrower and the Subsidiaries have not received any notice or communication from any federal, state, local or foreign governmental or regulatory authority or agency including without limitation, the U.S. Food and Drug Administration of any such violation or noncompliance. Borrower and the Subsidiaries have not engaged in any practices in violation of any antitrust law or regulation of any federal, state, local or foreign Governmental Authority. 16 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 4.16 LICENSES AND PERMITS. Borrower and the Subsidiaries have all licenses and franchises relating to the operation of their respective businesses as are necessary and required for such ownership and operation, all of which are in good standing and, except as expressly set forth on Schedule 4.16, are not subject to renewal within less than one (1) year. SECTION 4.17 CONTRACTS. Schedule 4.17 lists all contracts to which Borrower or the Subsidiaries are a party involving obligations in respect of the business for payment, performance of services or delivery of goods in excess of $25,000 or which require Borrower to continue to perform for a period of longer than twelve (12) months (the "Scheduled Contracts"). Borrower has delivered to the Lender true and correct copies of all the Scheduled Contracts. All of such Scheduled Contracts are valid and binding obligations of Borrower or the Subsidiaries, are in full force and effect, and, to the best knowledge of Borrower or the Subsidiaries, are enforceable against the parties thereto in accordance with their respective terms. Neither Borrower nor the Subsidiaries has received any notice that the other parties to the Scheduled Contracts are (i) in default under such Scheduled Contracts, or (ii) consider Borrower to be in default thereunder. Except as expressly noted in Schedule 4.17, to the best knowledge of Borrower or the Subsidiaries, no party to any of the Scheduled Contracts intends to terminate or adversely modify its agreement(s) with respect thereto or adversely change the volume of business done thereunder. SECTION 4.18 SHARES ISSUABLE UPON CONVERSION. The shares of Common Stock of Borrower when issued to the Lender upon conversion of the Debentures, will be duly and validly issued, fully paid and nonassessable and in compliance with all applicable securities laws. Such issuance will not give rise to preemptive rights, rights of first refusal or similar rights by any other security holder of Borrower. SECTION 4.19 INSIDER. (a) Neither Borrower, nor any Person having "control" (as that term is defined in the 1940 Act or in the regulations promulgated pursuant thereto) of Borrower is an "executive officer," "director," or "principal shareholder" (as those terms are defined in the 1940 Act) of any Lender. (b) Borrower's SEC reports disclose all material transactions required to be disclosed therein. (c) All agreements between Borrower and any of its officers, directors and principal shareholders, including employment agreements, are disclosed in the reports and filings made with the SEC or listed on Schedule 4.19. SECTION 4.20 SUBSIDIARIES. (a) All of the Subsidiaries of Borrower are listed on Schedule 4.20. Except as disclosed on Schedule 4.20, Borrower owns all of the outstanding capital stock or other equity interests of the Subsidiaries, free and clear of all adverse claims, other than Liens securing the Senior Obligations. All of such outstanding capital stock of each Subsidiary has been duly and validly authorized and issued and is fully paid and nonassessable. All such Subsidiaries are duly organized and existing in good standing 17 Agreement (Continued) - -------------------------------------------------------------------------------- under the laws of the respective jurisdictions of their incorporation or organization, are duly qualified as foreign corporations and in good standing in all jurisdictions in which failure to qualify would have a Material Adverse Effect, and have the corporate power and authority to own their respective properties and assets and to transact the business in which they are engaged and are or will be qualified in those jurisdictions wherein they propose to transact material business operations in the future. (b) Except as disclosed on Schedule 4.20, Borrower does not own any equity or long-term debt interest in any other Person, or any right or option to acquire any such interest in any such Person. (c) There are no restrictions on the payment of dividends by or advances from any Subsidiary to Borrower. SECTION 4.21 CASUALTIES. Except as disclosed on Schedule 4.21, neither the business nor the properties of Borrower is currently affected by any environmental hazard, fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty (whether or not covered by insurance). SECTION 4.22 INVESTMENT COMPANY ACT. Borrower is not an "investment company," as defined in Section 3 of the 1940 Act, nor a company that would be an investment company, except for the exclusions from the definition of an investment company in Section 3(C) of the 1940 Act, and Borrower is not controlled by such a company. SECTION 4.23 SUFFICIENCY OF CAPITAL. Borrower is, and after consummation of this Agreement and giving effect to all Indebtedness incurred and transactions contemplated in connection herewith will be, Solvent. SECTION 4.24 CORPORATE NAMES. Borrower has not, during the preceding five (5) years, done business under or used any assumed, fictitious or trade names, in its current businesses, except as disclosed on Schedule 4.24. SECTION 4.25 INSURANCE. All of the insurable properties of Borrower are insured for its benefit under valid and enforceable policies issued by insurers of recognized responsibility in amounts and against such risks and losses as is customary in Borrower's industry. Schedule 4.25 sets forth all of Borrower's property insurance policies. SECTION 4.26 INTELLECTUAL PROPERTY. Borrower owns, or is licensed to use, all material trademarks, service marks, trade names, patents and copyrights presently used to conduct its business, except those for which the failure to obtain could not be reasonably expected to have a Material Adverse Effect. To the best of its knowledge, Borrower has the right to use such intellectual property rights without infringing or violating the rights of any third parties. No claim has been asserted by any person to the ownership of or right to use any such rights or 18 Agreement (Continued) - -------------------------------------------------------------------------------- challenging or questioning the validity or effectiveness of any such license or agreement. Borrower is not in default of any such license agreements in any material respect, and no event has occurred and is continuing which, with notice or lapse of time or both, would constitute a material default. Each license agreement is enforceable in accordance with its terms and has not been canceled, abandoned or terminated, nor has Borrower received notice thereof. There are no claims for trademark or copyright infringement pending or threatened against Borrower or the Subsidiaries or their respective officers or directors. Neither Borrower nor any Subsidiary is currently using copyrightable material for which Borrower or any Subsidiary needs, but does not have, a license to conduct its existing business. Neither Borrower nor any Subsidiary is currently using any trademarks for which Borrower or any Subsidiary needs, but does not have, a valid character or trademark license to conduct its existing business. SECTION 4.27 REAL PROPERTY. (a) Set forth on Schedule 4.27 is a list of the addresses of each parcel of real property owned by or leased to Borrower, as indicated on the Schedule. (b) Borrower has delivered to the Lender true and correct copies of all of its leases or subleases and all related amendments, supplements and modifications and related documents (the "Scheduled Lease Documents"), which require payments or contingent payments by Borrower of any of the Subsidiaries subsequent to the date hereof in excess of $25,000. There are no other agreements, written or oral, between Borrower and any third parties claiming an interest in Borrower's interest in the Scheduled Leases or otherwise relating to Borrower's use and occupancy of any leased real property. All such leases are valid and binding obligations of the parties thereto, are in full force and effect and enforceable against the parties thereto in accordance with their terms; and no event has occurred including, but not limited to, the executed, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby which (whether with or without notice, lapse of time or both) would constitute a default thereunder. No property leased under any lease which the Lender has agreed to assume is subject to any lien, encumbrance, easement, right-of-way, building or use restriction, exception, variance, reservation or limitation as might in any respect interfere with or impair the present and continued use thereof in the usual and normal conduct of Borrower's business. (c) On the Loan Closing Date, Borrower will hold of record good, marketable and insurable title to the property described in Schedule 4.27 free and clear of all title defects, liens, pledges, claims, charges, rights of first refusal, security interests or other encumbrances and not, in the case of the real property, subject to any rights-of-way, building or use restrictions, exceptions, variances, reservations or limitations of any nature whatsoever, except with respect to all such properties, (i) matters set forth in Schedule 4.27, and (ii) liens for current taxes and assessments not in default (collectively, the "Permitted Encumbrances"). Notwithstanding the foregoing, Borrower's representations and warranties regarding title defects with respect to the real property is limited to defects arising by, through or under Borrower, but not otherwise. Borrower and the Subsidiaries have adequate title insurance coverage for such properties. All real property and structures owned or leased by Borrower, and all equipment owned or leased by Borrower, are in good operating condition and repair (ordinary wear and tear excepted), taking into account their respective ages and consistent with their past uses, and are adequate for the uses to which they are being put. Except as set forth on Schedule 4.27, to Borrower's best knowledge, the buildings and improvements owned or leased by Borrower are structurally sound. Borrower has not received any notice of any violation of any building, zoning or other law, ordinance or regulation in respect of such property or structures or their use by Borrower. To Borrower's best knowledge, there is no existing, proposed or contemplated plan to modify or realign any street or highway or any existing, 19 Agreement (Continued) - -------------------------------------------------------------------------------- proposed or contemplated eminent domain proceeding that would result in the taking of all or any part of the real property or that would materially adversely affect the current or planned use of the real property or any part thereof. The facilities consisting of owned personal property are subject to no liens or encumbrances except the security interests of record set forth on Schedule 4.27, which Schedule is a copy of a Uniform Commercial Code ("UCC") search duly obtained by Borrower in the last thirty (30) days and which search shows security interests of record relating to such facilities in the States of North Carolina and Texas. Borrower agrees to remove all security interests reflected on such UCC search, if any, prior to the Loan Closing (except those approved by the Lender in writing) and to remove any other security interests filed with respect to such facilities between the date of such UCC search and the date of the Loan Closing. Schedule 4.27 also describes all construction work, if any, which Borrower has contracted for and which is presently in progress in respect of the business, and also contains a good faith estimate, as of the date of this Agreement, of the cost and timetable to complete each such project. Copies of the architect's and the contractor's, if any, plans and specifications with respect to such construction in progress have been delivered to the Lender. SECTION 4.28 ENVIRONMENTAL. (a) Borrower is currently in compliance with all Environmental Laws (as defined below) which compliance includes, but is not limited to, the possession by Borrower of all permits and other governmental authorization required under applicable Environmental Laws, and compliance in all material respects with the terms and conditions thereof, except in any case where the failure to be in compliance would not have a Material Adverse Effect. (b) Except as set forth on Schedule 4.28, Borrower has not stored, disposed of or arranged for disposal of any Materials of Environmental Concern (as defined below) on any of the real property, except in compliance with applicable Environmental Laws. (c) Borrower has not received any communication (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that Borrower is not in full compliance with Environmental Laws, and there are no circumstances that may prevent or interfere with such full compliance in the future. There is no Environmental Claim (as defined below) pending or, to Borrower's best knowledge, threatened against, or which has been made known to, Borrower. (d) Except as set forth on Schedule 4.28, during the period the facilities have been held by Borrower, its affiliates or, to Borrower's best knowledge, its predecessors in interest, there have been no actions, activities, circumstances, conditions, events or incidents including, without limitation, the generation, handling, transportation, treatment, storage, release, emission, discharge, presence or disposal of any Hazardous Substance (as defined below), that could form the basis of any Environmental Claim against Borrower under any Environmental Law in effect at, or at any time prior to, the Loan Closing. (e) Without in any way limiting the generality of the foregoing to the best knowledge of Borrower, (i) there are no underground storage tanks located on the property owned or leased by Borrower or the Subsidiaries, (ii) there is no asbestos contained in or forming part of any building, building component, structure or office space owned or leased by Borrower or the Subsidiaries, and (iii) no polychlorinated biphenyls ("PCBs") are used or stored at any property owned or leased by Borrower or the Subsidiaries. The following terms shall have the following meanings: 20 Agreement (Continued) - -------------------------------------------------------------------------------- "Environmental Claim" means any claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of any Hazardous Substances at any location, whether or not owned or operated by Borrower, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Environmental Laws" means the federal, state and local environmental, health or safety laws, regulations, ordinances, rules and policies and common law in effect on the date hereof and the Loan Closing Date relating to the use, refinement, handling, treatment, removal, storage, production, manufacture, transportation or disposal, emissions, discharges, releases or threatened releases of materials of environmental concern, or otherwise relating to protection of the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), as the same may be amended or modified to the date hereof and the Loan Closing Date including, without limitation, the statutes listed below: Federal Resources Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, ET SEQ. Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, ET SEQ. Federal Clean Air Act, 42 U.S.C. Section 7401, ET SEQ. Federal Water Pollution Control Act, Federal Clean Water Act of 1977, 33 U.S.C. Section 1251, ET SEQ. Federal Insecticide, Fungicide and Rodenticide Act, Federal Pesticide Act of 1978, 7 U.S.C. Section 136, ET SEQ. Federal Hazardous Materials Transportation Act, 48 U.S.C. Section 1801, ET SEQ. Federal Toxic Substances Control Act, 15 U.S.C. Section 2601, ET SEQ. Federal Safe Drinking Water Act, 42 U.S.C. Section 300f, ET SEQ. "Hazardous Substances" means any toxic or hazardous waste, pollutants or substances including, without limitation, asbestos, PCBs, petroleum products and byproducts, substances defined or listed as "hazardous substance," "toxic substance," "toxic pollutant" or similarly identified substance or mixture, in or pursuant to any Environmental Law. SECTION 4.29 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties of Borrower herein shall survive the Loan Closing and the delivery of the Debentures, and any investigation at any time made by or on behalf of the Lender shall not diminish the Lender's right to rely on Borrower's representations and warranties as herein set forth. 21 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 4.30 FULL DISCLOSURE. Neither the representations or warranties of Borrower, the schedules to this Agreement, the financial statements referenced in Section 4.06, nor any SEC registration statement, report or proxy statement filed by the Borrower contains or will contain, as of the date thereon, any untrue statement of a material fact or omits or will omit to state any material fact necessary to keep the statements contained herein or therein from being misleading. ARTICLE V. - AFFIRMATIVE COVENANTS OF BORROWER So long as any part of the Debentures remains unpaid or has not been redeemed or converted hereunder, and until such payment, redemption or conversion in full, unless the Lender shall otherwise consent in writing, Borrower agrees that: SECTION 5.01 FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS. (a) Borrower shall accurately and fairly maintain its books of account in accordance with GAAP, retain such firm of independent certified public accountants requested by Borrower and approved by the Lender, to make annual audits of its accounts in accordance with generally accepted auditing standards. (b) Borrower shall provide the following reports and information to Lender: (i) As soon as available, and in any event within forty-five (45) days after the close of each fiscal quarter, Borrower's quarterly reports on Form 10-QSB with exhibits for said period. As soon as available, Borrower's reports on Form 8-K with any exhibits. (ii) As soon as available, and in any event within ninety (90) days after the close of each fiscal year, Borrower's annual report on Form 10-KSB with exhibits for said period. (iii) Each fiscal quarter, concurrent with the periodic report required above, a certificate executed by the Chief Financial Officer or Chief Executive Officer of Borrower (A) stating that a review of the activities of Borrower during such fiscal period has been made under his supervision and that Borrower has observed, performed and fulfilled each and every obligation and covenant contained herein and is not in Default under any of the same or, if any such Default shall have occurred, specifying the nature and status thereof, and (B) stating that Borrower and the Subsidiaries are in compliance as of the end of such fiscal quarter with the agreed minimum financial ratios and standards set forth in Schedule 7.01 to this Agreement. (iv) Promptly (but in any event within five (5) business days) upon becoming aware of the existence of any condition or event which constitutes a Default or which, with notice or the passage of time or both would become a Default or an Event of Default, written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. 22 Agreement (Continued) - -------------------------------------------------------------------------------- (v) Promptly (but in any event within five (5) business days) upon the receipt thereof by Borrower or the Board of Directors of Borrower, copies of all reports, all management letters and other detailed information submitted to Borrower or the Board by independent accountants in connection with each annual or interim audit or review of the accounts or affairs of Borrower made by such accountants. (vi) Promptly (but in any event within five (5) business days), such other information relating to the finances, budgets, properties, business and affairs of Borrower and each Subsidiary, as the Lender or the Agent may reasonably request from time to time. (vii) Promptly upon its becoming available, one copy of each financial statement, report, press release, notice or proxy statement sent by Borrower to stockholders generally, and of each regular or periodic report, registration statement or prospectus filed by Borrower with any securities exchange or the SEC or any successor agency, and of any order issued by any Governmental Authority in any proceeding to which Borrower is a party. (viii) As soon as available, and in any event within fifteen (15) days after the close of each fiscal quarter, a report setting forth the number of stock options, and their respective prices and terms, issued during such quarter and cumulatively. SECTION 5.02 PREPARATION OF BUDGETS. (a) Prior to the beginning of Borrower's fiscal year Borrower agrees to prepare and submit to the Board and furnish to Lender a copy of an annual plan for such year which shall include, without limitation, plans for expansion, if any, plans for incurrences of Indebtedness and projections regarding other sources of funds, quarterly projected capital and operating expense budgets, cash flow statements, profit and loss statements and balance sheet projections, itemized in such detail as the Board may request. (b) Borrower shall furnish to the Lender monthly financial reports, including budgets (as currently used by management in the conduct of business) within 30 days of the end of each month thereafter. (c) Borrower agrees that it will review its operations with Agent. Such operations reviews will be in such depth and detail as Agent shall reasonably request and will be held as reasonably necessary, generally once a fiscal quarter. SECTION 5.03 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Borrower shall, and shall cause its Subsidiaries to, pay and discharge (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any property belonging to it, before delinquent, (ii) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, will give rise to a Lien upon any of its property, other than a Permitted Lien, and (iii) all of its other Indebtedness in accordance with their respective terms, except as prohibited hereunder; provided, however, that Borrower and its Subsidiaries, if any, shall not be required to pay any such tax, assessment, charge, levy or other claim if and so long as the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings and appropriate accruals and reserves therefor have been established in accordance with GAAP. 23 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 5.04 MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS. Subject to Section 6.13, Borrower shall, and shall cause its operating Subsidiaries to, preserve and maintain their respective corporate existence and all of their respective material rights and privileges necessary in the normal conduct of their respective businesses, and to conduct their respective businesses in an orderly and efficient manner consistent with good business practices and in accordance with all valid regulations and orders of any Governmental Authority. Borrower shall keep its principal place of business within the United States. SECTION 5.05 SEC FILINGS. So long as Borrower has a class of securities registered pursuant to Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports and proxy statements required of a company whose securities are registered for public trading under and pursuant to the 1934 Act and any rules and regulations issued thereunder. SECTION 5.06 NOTICE. Borrower shall promptly notify the Lender of (i) any Material Adverse Change, (ii) any default under any Senior Obligations, other Indebtedness having an aggregate principal amount in excess of $25,000, material agreement, contract or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any Indebtedness having an aggregate principal amount in excess of $25,000, if any, (iii) any material adverse claim against or affecting Borrower or its Subsidiaries, if any, or any of its properties, and (iv) the commencement of, and any determination in, any material litigation with any third party or any proceeding before any Governmental Authority. SECTION 5.07 COMPLIANCE WITH LOAN DOCUMENTS. Borrower shall, and shall cause its Subsidiaries to, promptly comply with any and all covenants and provisions of the Loan Documents. SECTION 5.08 COMPLIANCE WITH MATERIAL AGREEMENTS. Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all Senior Documents, material agreements, indentures, mortgages or documents binding on it or affecting its properties or business. SECTION 5.09 OPERATIONS AND PROPERTIES. Borrower shall, and shall cause each of its Subsidiaries to, act prudently and in accordance with customary industry standards in managing or operating its assets, properties, business and investments. Borrower shall, and shall cause each of its Subsidiaries to, keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary to the conduct of its business. 24 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 5.10 BOOKS AND RECORDS; ACCESS. Borrower shall, and shall cause each of its Subsidiaries to, maintain complete and accurate books and records of its transactions in accordance with good accounting practices. Borrower shall give each duly authorized representative of the Lender access during all normal business hours, upon reasonable notice, to, and shall permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower and its Subsidiaries and relating to its affairs, and to inspect any of the properties of Borrower and its Subsidiaries; provided that the Lender agrees that any such inspection will be performed so as not to interfere with Borrower's normal business operations. Borrower shall make a copy of this Agreement, along with any waivers, consents, modifications or amendments, available for review at its principal office by the Lender or the Lender's representatives. SECTION 5.11 COMPLIANCE WITH LAW. Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations, ordinances and all orders and decrees of any Governmental Authority applicable to it or any of its properties, businesses or operations. SECTION 5.12 INSURANCE. Borrower shall, and shall cause each of its Subsidiaries to, maintain such worker's compensation insurance, liability insurance and insurance on its properties, assets and business, now owned or hereafter acquired, against such casualties, risks and contingencies, and in such types and amounts, as are consistent with customary practices and standards of companies engaged in similar businesses. SECTION 5.13 AUTHORIZATIONS AND APPROVALS. Borrower shall, and shall cause each of its Subsidiaries to, promptly obtain, from time to time and at its own expense, all such governmental licenses, authorizations, consents, permits and approvals as may be required to enable it to comply with its obligations hereunder and under the other Loan Documents. SECTION 5.14 ERISA COMPLIANCE. Borrower shall, at all times,(i) make prompt payment of all contributions required under all Plans, if any, and shall meet the minimum funding standards set forth in ERISA with respect to its Plans subject to ERISA, if any, (ii) notify the Lender immediately of any fact in connection with any of its Plans, which might constitute grounds for termination thereof by the Pension Benefit Guaranty Corporation or for the appointment, by the appropriate United States District Court, of a trustee to administer such Plan, together with a statement, if requested by the Lender, as to the reason therefor and the action, if any, proposed to be taken with respect thereto, and (iii) furnish to the Lender, upon its request, such additional information concerning any of its Plans as may be reasonably requested. 25 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 5.15 FURTHER ASSURANCES. Borrower shall, and shall cause each of its Subsidiaries to, make, execute or endorse, and acknowledge and deliver or file or cause the same to be done, all such notices, certifications and additional agreements, undertakings, transfers, assignments or other assurances, and take any and all such other action as the Lender may, from time to time, deem reasonably necessary or proper in connection with any of the Loan Documents, or the obligations of Borrower or its Subsidiaries, if any, thereunder, which the Lender may request from time to time. SECTION 5.16 INDEMNITY BY BORROWER. Borrower shall indemnify, save and hold harmless the Lender and its directors, officers, lenders, attorneys and employees (the "Indemnitee") from and against (i) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee if the claim, demand, action or cause of action, directly or indirectly, relates to this Agreement and the other Loan Documents issued pursuant thereto, the use of proceeds of the Loans, or the relationship of Borrower and the Lender under this Agreement or any transaction contemplated pursuant to this Agreement, (ii) any administrative or investigative proceeding by any Governmental Authority, directly or indirectly, related to a claim, demand, action or cause of action described in clause (i) above, and (iii) any and all liabilities, losses, costs or expenses (including reasonable attorneys' fees and disbursements) that any Indemnitee suffers or incurs as a result of any of the foregoing; PROVIDED, HOWEVER, that Borrower shall have no obligation under this Section 5.16 to the Lender with respect to any of the foregoing arising out of the gross negligence or willful misconduct of the Lender or its assignees or the breach by Lender or its assignees of this Agreement or any other Loan Document or other document executed in connection with any of the aforesaid, the breach by the Lender or its assignees of any intercreditor or participation agreement or commitment with other parties, the violation or alleged violation of any law, rule or regulation by the Lender or its assignees, or from the transfer or disposition by the Lender of any Debentures or the Common Stock issued upon conversion of the Debentures. If any claim, demand, action or cause of action is asserted against any Indemnitee, such Indemnitee shall promptly notify Borrower, but the failure to so promptly notify Borrower shall not affect Borrower's obligations under this Section unless such failure materially prejudices Borrower's right or ability to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. In the event that such Indemnitee's failure to properly notify Borrower materially prejudices Borrower's right or ability to participate in the contest of such claim, demand action or cause of action, then said Indemnitee shall have no right to receive, and Borrower shall have no obligation to pay, any indemnification amounts hereunder. Borrower may elect to defend any such claim, demand, action or cause of action (at its own expense) asserted against said Indemnitee and, if requested by Borrower in writing and so long as no Default or Event of Default shall have occurred and be continuing, such Indemnitee (at Borrower's expense) shall, in good faith, contest the validity, applicability and amount of such claim, demand, action or cause of action and shall permit Borrower to participate in such contest. Any Indemnitee that proposes to settle or compromise any claim or proceeding for which Borrower may be liable, for payment to or on behalf of an Indemnitee hereunder, shall give Borrower written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall obtain Borrower's written concurrence thereto. In the event that said Indemnitee fails to obtain Borrower's prior written consent to any such settlement or compromise, said Indemnitee shall have no right to receive, and Borrower shall have no obligation to pay, any indemnification amounts hereunder. Each Indemnitee may employ counsel, which counsel shall be reasonably acceptable to Borrower, in enforcing its rights hereunder and in defending against any claim, demand, action or cause of action covered by this Section 5.16; PROVIDED, HOWEVER, that each Indemnitee 26 Agreement (Continued) - -------------------------------------------------------------------------------- shall endeavor in connection with any matter covered by this Section 5.16 which also involves any other Indemnitee, use reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnitees, including allowing Borrower to select one lawyer for all parties, such selection to be subject to the approval of such parties, which approval shall not be unreasonably withheld. Any obligation or liability of Borrower to any Indemnitee under this Section 5.16 shall survive the expiration or termination of this Agreement and the repayment of the Debentures. SECTION 5.17 RESERVATION OF SHARES; SHAREHOLDER APPROVAL. Borrower shall, at all times, reserve and keep available sufficient authorized and unissued shares of Common Stock to effect the conversion of the Debentures. The Borrower has obtained the approval of its shareholders to issue to the Lender upon conversion of the Debentures all of the shares of Common Stock to which it is then entitled. SECTION 5.18 OWNERSHIP OF SUBSIDIARIES. Borrower shall own, at all times, all of the capital stock of, or other equity interests in, the Subsidiaries, except as disclosed on Schedule 5.18. SECTION 5.19 RETENTION OF STOCK OWNERSHIP. (a) Borrower shall not offer, sell or otherwise dispose of any shares of Common Stock or securities exercisable or convertible into shares of Common Stock for a period of twelve (12) months following the Loan Closing without the written approval of the Lender, other than (i) Common Stock issued upon the conversion of any of the Debentures; and (ii) Common Stock issued upon exercise of any presently outstanding employee stock options or warrants. (b) All officers, directors and ten percent (10%) shareholders will execute and deliver Lock-Up Agreements at the Loan Closing which shall provide that they will not offer, sell or otherwise dispose of the shares of Common Stock beneficially owned or controlled by them (including subsequently acquired shares or securities exercisable or convertible into shares) for a period of twelve (12) months following the Loan Closing. Thereafter, each such person shall only sell such shares pursuant to Rule 144, without the consent of the Lender, until the Debentures has been paid in full. Notwithstanding the foregoing, each such person may sell such shares at any time at a price in excess of $5.00 per share. SECTION 5.20 SUBSEQUENTLY FORMED U.S. SUBSIDIARIES. Borrower shall cause all subsequently formed U.S. Subsidiaries to execute the Subsidiaries' Guaranty and Security Agreement referenced in Section 3.01(c). SECTION 5.21 QUARTERLY PAYMENT OF FUNDS BY EUROPEAN SUBSIDIARIES. Borrower shall cause each of its European Subsidiaries to pay to Borrower within 20 days of the end of every fiscal quarter all of their respective Net Excess Working Capital for such fiscal quarter. 27 Agreement (Continued) - -------------------------------------------------------------------------------- ARTICLE VI. - NEGATIVE COVENANTS OF BORROWER So long as any part of the Debentures has not been redeemed or converted hereunder, and until such redemption or conversion in full, unless the Lender shall otherwise consent in writing, Borrower agrees that: SECTION 6.01 LIMITATION ON INDEBTEDNESS. At Loan Closing, Borrower and its Subsidiaries shall not have any outstanding Indebtedness, except Indebtedness arising under this Agreement, the Debentures, the Guaranties, or Permitted Indebtedness. Borrower and its Subsidiaries will not incur or guarantee any Indebtedness senior to or PARI PASSU with the Debentures, without the consent of the Lender, except for Senior Obligations and Acquisition Indebtedness. SECTION 6.02 LIMITATION ON LIENS. Borrower shall not, and shall not permit its Subsidiaries to, create, cause, incur, permit or suffer to exist any Lien upon any of its properties or assets, other than Permitted Liens. SECTION 6.03 LIMITATION ON INVESTMENTS. Borrower shall not, and shall not permit its Subsidiaries to, make or have outstanding any Investments in any Person, except for Borrower's or any Subsidiary's acquisition or ownership of stock of or other equity interests in Subsidiaries (including Persons that will be Subsidiaries after giving effect to such Investments), loans and other transactions between Borrower and any Subsidiaries, short term bank deposits, money market investments, investment-grade commercial paper, government securities and such other "cash equivalent" investments as the Lender may, from time to time, approve, and customer obligations and receivables arising out of sales or leases made or the rendering of services in the ordinary course of business. SECTION 6.04 ALTERATION OF MATERIAL AGREEMENTS. Borrower shall not, and shall not permit its Subsidiaries to, consent to or permit any alteration, amendment, modification, release, waiver or termination of any Senior Documentation or material agreement to which it is a party, other than in the ordinary course of business. SECTION 6.05 TRANSACTIONS WITH AFFILIATES. Except as disclosed in Schedule 6.05, Borrower shall not, and shall not permit its Subsidiaries to, enter into any transaction not in the ordinary course of business with, or pay any management fees to, any Affiliate, except for intercompany transactions, without the consent of the Lender, unless the terms thereof (i) are no less favorable to Borrower or such Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not an Affiliate, or (ii) if such transaction involves an amount less than $25,000, are set forth in writing and have been approved by a majority of the members of the Board of Directors having no personal stake in the transaction. Notwithstanding the foregoing, Borrower may grant options to employees or directors if otherwise permitted under this Agreement. 28 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 6.06 LIMITATIONS ON ACQUISITION OF NONRELATED BUSINESS. Borrower shall not, and shall not permit its Subsidiaries to, engage in any line of business, or acquire any new product lines or business, or acquire any companies unless such new product line or business acquired is primarily involved in, or substantially similar or related to, Borrower's current lines of business or extensions thereof. SECTION 6.07 LIMITATION ON SALE OF PROPERTIES. Borrower shall not, and shall not permit its Subsidiaries to, (i) sell, assign, convey, exchange, lease or otherwise dispose of any of its properties, rights, assets or business (including the capital stock of its operating Subsidiaries), whether now owned or hereafter acquired, without the consent of the Lender, except in the ordinary course of business, or (ii) sell, assign or discount any accounts receivable, except in the ordinary course of business (which shall include receivable financing or securitization), in each case without the consent of the Lender. SECTION 6.08 FISCAL YEAR AND ACCOUNTING METHOD. Borrower shall not, and shall not permit its Subsidiaries to, change its fiscal year or method of accounting, except as permitted by GAAP. SECTION 6.09 LIQUIDATION. Borrower shall not, and shall not permit its Subsidiaries to, (i) dissolve or liquidate (except for dissolution or liquidation of inactive Subsidiaries in the ordinary course of business), or (ii) enter into any other transaction that has a similar effect. SECTION 6.10 MATERIAL AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS. Borrower shall not, and shall not permit its Subsidiaries to, amend its Certificate or Articles of Incorporation (or other charter document) or bylaws in any material respect, without the consent of the Lender. SECTION 6.11 EXECUTIVE COMPENSATION. (a) Borrower will not increase the salary, bonus, or other compensation programs (whether in cash, securities or other property, and whether payment is deferred or current) of its chief executive officer and chief financial officer, unless such compensation increase is approved by a majority of the Board or a Compensation Committee of the Board, a majority of whom shall be nonemployee Directors. Compensation to other senior executive officers, including division managers, shall be consistent with the policies of the Compensation Committee. (b) Borrower shall not implement any bonus, profit sharing or other incentive plans, until such plans are formally adopted by the majority of the Board or a Compensation Committee of the Board, a majority of whom shall be nonemployee Directors. Borrower's executive compensation shall be consistent with the general compensation policies adopted by the Compensation Committee of the Board. 29 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 6.12 RESTRICTED PAYMENTS. Borrower shall not (i) without the consent of the Lender, declare or pay any Dividend (other than stock dividends) or make any other cash distribution on any Common Stock or any Preferred Stock, (ii) purchase, redeem or otherwise acquire any shares of Common Stock or any shares of Preferred Stock, without the consent of the Lender, (iii) make any payments of Indebtedness (other than Senior Obligations) which are PARI PASSU or subordinated to the Debentures, if at the time of such payment, Borrower is in Default with respect to the Loan, or (iv) make any prepayments of Indebtedness (other than Senior Obligations) which are PARI PASSU or subordinated to the Debentures, unless the Debentures is prepaid on a PRO RATA basis, without the consent of the Lender. Borrower shall not permit its Subsidiaries to enter into any agreements restricting the payment of dividends from the Subsidiaries to Borrower, without the consent of the Lender. Notwithstanding the foregoing, the Borrower may pay regular dividends to the holders of the Series AAA Preferred Stock and may redeem the Series AAA Preferred Stock in accordance with its terms. SECTION 6.13 PROHIBITION ON TRANSFER OF FUNDS TO EUROPEAN SUBSIDIARIES. Borrower shall not, and shall not permit any of its U.S. Subsidiaries, to transfer any funds to its European Subsidiaries, without the prior written consent of the Lender. SECTION 6.14 CONSOLIDATION OR MERGER. Borrower shall not consolidate with or merge into any other corporation, unless the surviving corporation, after such merger or consolidation, will not be in Default and the surviving corporation becomes a party to this Agreement. Subsidiaries shall only consolidate with or merge into Borrower or another Subsidiary; provided, however, that a Subsidiary may merge or consolidate with any other entity as long as such Subsidiary is the surviving corporation of such merger or consolidation, and Borrower is not in Default. ARTICLE VII. - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS SECTION 7.01 FINANCIAL RATIOS. So long as any of the Debentures has not been redeemed or converted hereunder, and until such redemption or conversion has been made in full, or unless the Lender shall otherwise consent in writing, Borrower, on a consolidated basis, shall be in compliance with the agreed minimum financial ratios and standards provided in Schedule 7.01, as of the end of each fiscal quarter of Borrower and as set forth in its most recent quarterly compliance certificates delivered pursuant to Section 5.01. ARTICLE VIII. - EVENTS OF DEFAULT SECTION 8.01 EVENTS OF DEFAULT. An "Event of Default" shall exist if any one or more of the following events (herein collectively called "Events of Default") shall occur and be continuing: 30 Agreement (Continued) - -------------------------------------------------------------------------------- (a) Borrower shall fail to pay when due (or shall state in writing an intention not to pay or its inability to pay) any installment of interest on or principal of, any Debentures or any fee, expense or other payment required hereunder; (b) Any representation or warranty made under this Agreement, or any of the other Loan Documents, or in any certificate or statement furnished or made to Agent pursuant hereto or in connection herewith or with the Loans hereunder, or in any Subsidiary Document shall prove to be untrue or inaccurate in any material respect as of the date on which such representation or warranty was made; (c) Default shall occur in the performance of any of the covenants or agreements of Borrower or of its Subsidiaries contained herein, or in any of the other Loan Documents or in any Subsidiary Document; (d) Default shall occur in the payment of any Senior Obligations or in the payment of any other Indebtedness having an aggregate principal amount in excess of $25,000, or nonmonetary default shall occur in respect of any note, loan agreement or credit agreement relating to any Indebtedness having an aggregate principal amount in excess of $25,000, and such default continues for more than the period of grace, if any, specified therein or any Indebtedness having an aggregate principal amount in excess of $25,000, shall become due before its stated maturity by acceleration of the maturity, or any indebtedness having an aggregate principal amount in excess of $25,000, shall become due by its terms and shall not be promptly paid or extended; (e) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against Borrower in accordance with the respective terms, or shall, in any way, be terminated or become or be declared by any court or by Borrower or any Subsidiary in any legal proceeding to be ineffective or inoperative, or shall in any way whatsoever cease to give or provide the respective rights, titles, interests, remedies, powers or privileges stated therein to be created thereby; (f) Borrower or its Subsidiaries shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of itself, or of all or substantially all of such Person's assets, (ii) file a voluntary petition in bankruptcy, admit in writing that such Person is unable to pay such Person's debts as they become due or generally not pay such Person's debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against such Person in any bankruptcy, reorganization or insolvency proceeding, or (vi) take corporate action for the purpose of effecting any of the foregoing; (g) An involuntary petition or complaint shall be filed against Borrower or any of its Subsidiaries seeking bankruptcy or reorganization of such Person or the appointment of a receiver, custodian, trustee, intervenor or liquidator of such Person, or all or substantially all of such Person's assets, and such petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of Borrower or its subsidiary or appointing a receiver, custodian, trustee, intervenor or liquidator of such Person, or of all or substantially all of such Person's assets; 31 Agreement (Continued) - -------------------------------------------------------------------------------- (h) Any final judgment(s) for the payment of money in excess of the sum of $100,000 in the aggregate shall be rendered against Borrower or any Subsidiary and such judgment or judgments shall not be satisfied or discharged prior to the date on which any of its assets could be lawfully sold to satisfy such judgment; or (i) Borrower shall fail to issue and deliver shares of Common Stock as provided herein upon conversion of the Debentures or exercise of the Warrants. (j) Borrower or the U.S. Subsidiaries shall transfer, directly or indirectly, any funds to Svenska Handelsbanken pursuant to the Letter of Support issued by the Borrower. SECTION 8.02 REMEDIES UPON EVENT OF DEFAULT. (a) If an Event of Default shall have occurred and be continuing, then the Lender may exercise any one or more of the following rights and remedies, and any other remedies provided in any of the Loan Documents, as the Lender in its sole discretion may deem necessary or appropriate: (i) declare the unpaid Principal Amount (after application of any payments or installments received by the Lender) of, and all interest then accrued but unpaid on, the Debentures and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Debentures to the contrary notwithstanding; (ii) reduce any claim to judgment; and (iii) without notice of default or demand, pursue and enforce any of the Lender's rights and remedies under the Loan Documents and the Subsidiary Documents, or otherwise provided under or pursuant to any applicable law or agreement, all of which rights may be specifically enforced. (b) In the event of a violation by Borrower of the negative covenants set forth in Article VI, the Lender may, in its sole discretion, (i) waive compliance with the covenants, provided Borrower is in compliance with Section 7.01 hereof; or (ii) require Borrower to redeem the Debentures at the higher of market value or the unpaid principal amount of the Debentures, together with an amount equal to an 18% annual yield on the principal amount through the Redemption Date, whichever is greater. SECTION 8.03 PERFORMANCE BY THE LENDER. Should Borrower or any Subsidiary fail to perform any covenant, duty or agreement contained herein or in any of the other Loan Documents or in any Subsidiary Document, Lender or Agent may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Lender or Agent, promptly pay any amount reasonably expended by Lender or Agent in such performance or attempted performance to Lender or Agent at its principal office, together with interest thereon, at the interest rate specified in the Debentures, from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that Lender or Agent assumes no liability or responsibility for the performance of any duties of Borrower or any Subsidiary hereunder or under any of the other Loan Documents or under any Subsidiary Document. 32 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 8.04 PAYMENT OF EXPENSES INCURRED BY THE LENDER. Upon the occurrence of a Default or an Event of Default, which occurrence is not cured within the notice provisions, if any, provided herein, Borrower agrees to pay and shall pay all costs and expenses (including reasonable attorneys' fees and expenses) incurred by Lender or Agent in connection with the preservation and enforcement of the Lender's rights under this Agreement, the Debentures or any other Loan Document. ARTICLE IX. - REGISTRATION RIGHTS SECTION 9.01 DEMAND REGISTRATION. (a) Borrower hereby agrees to register all or any portion of the Registrable Securities on one occasion if, and only if, it shall receive a written request from a Holder (the "Initiating Holder") that Borrower file a registration statement under the 1933 Act covering the registration of at least 25% of the Registrable Securities Then Outstanding. Borrower shall, within 20 days of its receipt thereof, give written notice of such request to all Holders of record of Registrable Securities. The Holders of said Registrable Securities shall then have 15 days from the date of mailing of such notice by Borrower to request that all or a portion of their respective Registrable Securities be included in said registration. (b) If the Holders intend to distribute the Registrable Securities covered by their request by means of a firm underwriting, they shall so advise Borrower as a part of their request made pursuant to this Agreement, and Borrower shall include such information in the written notice to the other Holders of Registrable Securities referred to in Section 9.01(a). In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by Borrower, the underwriter, the Initiating Holder and such Holder) is limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with Borrower as provided in Section 9.04(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by mutual agreement of Borrower and the Initiating Holder, which agreement shall not be unreasonably withheld. Notwithstanding any other provision of this Section 9.01, if the underwriter advises the Initiating Holder and Borrower in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holder shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated on a pro rata basis among all Holders that have requested to participate in such registration. The rights of the Holders shall be PARI PASSU to those of any other Persons previously granted demand registration rights and senior to those of any other Person subsequently granted demand registration rights. (c) Each such registration shall remain effective for a period of 180 days, unless the Initiating Holder otherwise determines. Notwithstanding the foregoing, if the Holders' elect not to sell all or any portion of the Registrable Securities pursuant to a demand registration which has become effective, such demand registration right shall nonetheless be deemed satisfied. (d) If, after a registration statement becomes effective, Borrower advises the Holders that the registration statement is required to be amended under applicable federal securities laws, the Holders shall suspend any further sales of their Registrable Securities, until the Company advises them that the 33 Agreement (Continued) - -------------------------------------------------------------------------------- registration statement has been amended, but not more than thirty (30) days. The 180-day time period referred to in subsection (c) during which the registration statement must be kept current after its effective date shall be extended for an additional number of business days equal to the number of business days during which the right to sell the Registrable Securities was suspended pursuant to the preceding sentence. (e) No demand for registration may be made for a one hundred eighty (180)-day period following completion of another underwritten offering of Borrower's equity securities. SECTION 9.02 "PIGGY-BACK" REGISTRATION. If Borrower proposes to register any of its capital stock under the 1933 Act in connection with the public offering of such securities for its own account or for the account of its security holders, other than Holders of Registrable Securities pursuant hereto (a "Piggy-Back Registration Statement"), except for (i) a registration relating solely to the sale of securities to participants in Borrower's stock or stock option plans or employee benefit plans or (ii) a registration relating solely to a transaction for which Form S-4 may be used, then: (a) Borrower shall give written notice of such determination to each Holder of Registrable Securities, and each such Holder shall have the right to request, by written notice given to Borrower within 15 days of the date that such written notice was mailed by Borrower to such Holder, that a specific number of Registrable Securities held by such Holder be included in the Piggy-Back Registration Statement (and related underwritten offering, if any) and the states in which such Registrable Securities are to be sold; (b) If the Piggy-Back Registration Statement relates to an underwritten offering, the notice given to each Holder shall specify the name or names of the managing underwriter or underwriters for such offering. In addition, such notice shall also specify the number of securities to be registered for the account of Borrower and for the account of its shareholders (other than the Holders of Registrable Securities), if any; (c) If the Piggy-Back Registration Statement relates to an underwritten offering, each Holder of Registrable Securities to be included therein must agree (i) to sell such Holder's Registrable Securities on the same basis as provided in the underwriting arrangement approved by Borrower, and (ii) to timely complete and execute all questionnaires, powers of attorney, indemnities, hold-back agreements, lock-up agreements, underwriting agreements and other documents required under the terms of such underwriting arrangements or by the SEC or by any state securities regulatory body; (d) If the managing underwriter or underwriters for the underwritten offering under the Piggy-Back Registration Statement determines that inclusion of all or any portion of the Registrable Securities in such offering would materially adversely affect the ability of the underwriters for such offering to sell all of the securities requested to be included for sale in such offering at the best price obtainable therefor, the aggregate number of Registrable Securities that may be sold by the Holders shall be limited to such number of Registrable Securities, if any, that the managing underwriter or underwriters determine may be included therein without such adverse effect as provided below. If the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering, there shall be included in the offering, first, up to the maximum number of securities to be sold by Borrower for its own account and for the account of other stockholders (other than 34 Agreement (Continued) - -------------------------------------------------------------------------------- Holders of Registrable Securities), as they may agree among themselves, and second, as to the balance, if any, Registrable Securities requested to be included therein by the Holders thereof (pro rata as between such Holders based upon the number of Registrable Securities initially proposed to be registered by each), or in such other proportions as the managing underwriter or underwriters for the offering may require; PROVIDED, HOWEVER, that in the event that the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering pursuant to the terms and conditions set forth above and the Piggy-Back Registration Statement is a result of public offering by Borrower of its securities for its own account, there shall be included in the offering, first, up to the maximum number of securities to be sold by Borrower for its own account and second, as to the balance, if any, securities to be sold for the account of Borrower's stockholders (both the Holders of Registrable Securities requested and such other stockholders of Borrower requested to be included therein) on a PRO RATA basis; (e) Holders of Registrable Securities shall have the right to withdraw their Registrable Securities from the Piggy-Back Registration Statement, but if the same relates to an underwritten offering, they may only do so during the time period and on the terms agreed upon among the underwriters for such underwritten offering and the Holders of Registrable Securities; (f) The exercise of the registration rights of the Holders with respect to any specific underwritten offering shall be subject to a 90-day delay at the request of the managing underwriter; (g) All demand and piggy-back registration rights of the Holders shall terminate when all of the Registrable Securities Then Outstanding may be sold pursuant to Rule 144(k). SECTION 9.03 SHELF REGISTRATION. Borrower shall file a "shelf" registration statement on Form S-3 under the 1933 Act (the "Shelf Registration") covering all of the Registrable Securities within 180 days of the date of the Debentures, and Borrower shall use its best efforts to cause the Shelf Registration to be declared effective and to keep the Shelf Registration continuously effective until all of the Registrable Securities registered therein cease to be Registrable Securities. The securities shall cease to be Registrable Securities (a) when the Shelf Registration shall have become effective under the 1933 Act and such securities shall have been disposed of pursuant to the Shelf Registration, or (b) such securities shall have been sold as permitted by Rule 144 under the 1933 Act or the date on which the Registrable Securities may be sold pursuant to Rule 144(k), whichever is the first to occur. Borrower agrees, if necessary, to supplement or amend the Shelf Registration, as required by the registration form utilized by Borrower or by the instructions applicable to such registration form or by the 1933 Act, and Borrower agrees to furnish to the holders of the Registrable Securities copies of any such supplement or amendment prior to its being used. SECTION 9.04 OBLIGATIONS OF BORROWER. Whenever required to effect the registration of any Registrable Securities pursuant to this Agreement, Borrower shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, subject to the receipt of all required information from the Holders, and keep such registration statement effective until the sooner of all such Registrable Securities having been distributed, or until 120 days have elapsed 35 Agreement (Continued) - -------------------------------------------------------------------------------- since such registration statement became effective (subject to an extension of this period as provided below); (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement, or 120 days have elapsed since such registration statement became effective (subject to the extension of this period as provided below); (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that Borrower shall not be required, in connection therewith or as a condition thereto, to qualify as a broker-dealer in any states or jurisdictions or to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with the managing underwriter of such offering, in usual and customary form reasonably satisfactory to Borrower and the Holders of a majority of the Registrable Securities to be included in such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto and covered by such registration statement is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (g) In the event of the notification provided for in Section 9.04(f) above, Borrower shall use its best efforts to prepare and file with the SEC (and to provide copies thereof to the Holders) as soon as reasonably possible an amended prospectus complying with the 1933 Act, and the period during which the prospectus referred to in the notice provided for in Section 9.04(f) above cannot be used and the time period prior to the use of the amended prospectus referred to in this Section 9.04(g) shall not be counted in the 120 day period of this Section 9.04. SECTION 9.05 FURNISH INFORMATION. (a) It shall be a condition precedent to the obligations of Borrower to take any action pursuant to this Article IX that the selling Holders shall furnish to Borrower any and all information reasonably requested by Borrower, its officers, directors, employees, counsel, agents or representatives, the underwriter or underwriters, if any, and the SEC or any other Governmental Authority, including, but not limited to: (i) such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities, as shall be required to effect the registration of their 36 Agreement (Continued) - -------------------------------------------------------------------------------- Registrable Securities; and (ii) the identity of and compensation to be paid to any proposed underwriter or broker-dealer to be employed in connection therewith. (b) In connection with the preparation and filing of each registration statement registering Registrable Securities under the 1933 Act, Borrower shall give the Holders of Registrable Securities on whose behalf such Registrable Securities are to be registered and their underwriters, if any, and their respective counsel and accountants, at such Holders' sole cost and expense (except as otherwise set forth herein), such access to copies of Borrower's records and documents and such opportunities to discuss the business of Borrower with its officers and the independent public accountants who have certified its financial statements as shall be reasonably necessary in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. SECTION 9.06 EXPENSES OF REGISTRATION. Except for a demand registration statement, the cost of which shall be borne by the Holders participating in such registration, all expenses, other than underwriting discounts and commissions applicable to the Registrable Securities sold by selling Holders, incurred in connection with the registration of the Registrable Securities pursuant to this Article, including, without limitation, all registration, filing and qualification fees, printer's expenses, and accounting and legal fees and expenses of Borrower, shall be borne by Borrower; provided, however, selling Holders shall be responsible for all costs of their due diligence and legal counsel and other advisors in connection with a registration of Registrable Securities. SECTION 9.07 INDEMNIFICATION REGARDING REGISTRATION RIGHTS. If any Registrable Securities are included in a registration statement under this Article: (a) To the extent permitted by law, Borrower will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages, liabilities (joint or several) or any legal or other costs and expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action to which they may become subject under the 1933 Act, the 1934 Act or state law, insofar as such losses, claims, damages, costs, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact with respect to Borrower or its securities contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements therein; (ii) the omission or alleged omission to state therein a material fact with respect to Borrower or its securities required to be stated therein or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by Borrower of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law. Notwithstanding the foregoing, the indemnity agreement contained in this Section 9.07(a) shall not apply and Borrower shall not be liable (i) in any such case for any such loss, claim, damage, costs, expenses, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon, and in conformity with, written information furnished expressly for use in connection with such registration by any such Holder or its authorized agent, underwriter or controlling person, or (ii) for amounts paid in settlement of any such 37 Agreement (Continued) - -------------------------------------------------------------------------------- loss, claim, damage, liability or action if such settlement is effected without the prior written consent of Borrower, which consent shall not be unreasonably withheld. (b) To the extent permitted by law, each Holder who participates in a registration pursuant to the terms and conditions of this Agreement shall indemnify and hold harmless Borrower, each of its directors and officers who have signed the registration statement, each Person, if any, who controls Borrower within the meaning of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law, each of Borrower's employees, agents, counsel and representatives, any underwriter and any other Holder selling securities in such registration statement, or any of its directors or officers, or any person who controls such Holder, against any losses, claims, damages, costs, expenses or liabilities (joint or several) to which Borrower or any such director, officer, controlling person, employee, agent, representative, underwriter or other such Holder, or director, officer or controlling person thereof, may become subject, under the 1933 Act, the 1934 Act or other federal or state law, only insofar as such losses, claims, damages, costs, expenses or liabilities or actions in respect thereto arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such Registration. Each such Holder will indemnify any legal or other expenses reasonably incurred by Borrower or any such director, officer, employee, agent, representative, controlling person, underwriter or other Holder, or officer, director or any controlling person thereof, in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this Section 9.07(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, costs, expenses, liability or action if such settlement is effected without the prior written consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 9.07 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9.07, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall have the right to retain its own counsel, with the reasonable fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve the indemnifying party of its obligations under this Section 9.07, except to the extent that the failure results in a failure of actual notice to the indemnifying party and such indemnifying party is materially prejudiced in its ability to defend such action solely as a result of the failure to give such notice. (d) If the indemnification provided for in this Section 9.07 is unavailable to an indemnified party under this Section in respect of any losses, claims, damages, costs, expenses, liabilities or actions referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, costs, expenses, liabilities or actions in such proportion as is appropriate to reflect the relative fault of Borrower, on the one hand and of the Holder, on the other, in connection with the Violation that resulted in such losses, claims, damages, costs, expenses, liabilities or actions. The relative fault of 38 Agreement (Continued) - -------------------------------------------------------------------------------- Borrower, on the one hand, and of the Holder, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of the material fact or the omission to state a material fact relates to information supplied by Borrower or by the Holder, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) Borrower, on the one hand, and the Holders, on the other, agree that it would not be just and equitable if contribution pursuant to this Section 9.07 were determined by a PRO RATA allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of losses, claims, damages, costs, expenses, liabilities and actions referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this Section 9.07, neither Borrower nor the Holders shall be required to contribute any amount in excess of the amount by which the total price at which the securities were offered to the public exceeds the amount of any damages which Borrower or each such Holder has otherwise been required to pay by reason of such Violation. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. SECTION 9.08 REPORTS UNDER THE 1934 ACT. So long as Borrower has a class of securities registered pursuant to Section 12 of the 1934 Act, with a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of Borrower to the public without registration or pursuant to a registration on Form S-3, if applicable, Borrower agrees to use its reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) File with the SEC, in a timely manner, all reports and other documents required of Borrower under the 1933 Act and the 1934 Act; (c) Use its best efforts to include all Common Stock covered by such registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ; or list all Common Stock covered by such registration statement on such securities exchange on which any of the Common Stock is then listed; or, if the Common Stock is not then quoted on NASDAQ or listed on any national securities exchange, use its best efforts to have such Common Stock covered by such registration statement quoted on NASDAQ or, at the option of Borrower, listed on a national securities exchange if eligible for listing; and (d) Furnish to any Holder, so long as the Holder owns any Registrable Securities, (i) forthwith upon request, a copy of the most recent annual or quarterly report of Borrower and such other SEC reports and documents so filed by Borrower, and (ii) such other information (but not any opinion of counsel) as may be reasonably requested by any Holder seeking to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 39 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 9.09 ASSIGNMENT OF REGISTRATION RIGHTS. Subject to the terms and conditions of this Agreement, and the Debentures, the right to cause Borrower to register Registrable Securities pursuant to this Agreement may be assigned by Holder to any transferee or assignee of such securities; provided that (i) such transferee or assignee is a transferee or assignee of at least ten percent (10%) of the Registrable Securities, (ii) such transferee or assignee is not a Person who is a direct, material competitor of Borrower, (iii) Borrower is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and, (iv) such assignment shall be effective only if, immediately following such transfer, the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; it being the intention that, so long as Holder holds any Registrable Securities hereunder, either Holder or its transferee or assignee of at least ten percent may exercise the demand right to registration and piggy-back registration rights hereunder. Other than as set forth above, the parties hereto hereby agree that the registration rights hereunder shall not be transferable or assigned and any contemplated transfer or assignment in contravention of this Agreement shall be deemed null and void and of no effect whatsoever. SECTION 9.10 OTHER MATTERS. (a) Each Holder of Registrable Securities hereby agrees by acquisition of such Registrable Securities that, with respect to each offering of the Registrable Securities, whether each Holder is offering such Registrable Securities in an underwritten or nonunderwritten offering, such Holder will comply with Regulation M or such other or additional anti-manipulation rules then in effect until such offering has been completed, and in respect of any nonunderwritten offering, in writing will inform Borrower, any other Holders who are selling shareholders, and any national securities exchange upon which the securities of Borrower are listed, that the Registrable Securities have been sold and will, upon Borrower's request, furnish the distribution list of the Registrable Securities. In addition, upon the request of Borrower, each Holder will supply Borrower with such documents and information as Borrower may reasonably request with respect to the subject matter set forth and described in this Section 9.10. (b) Each Holder of Registrable Securities hereby agrees by acquisition of such Registrable Securities that, upon receipt of any notice from Borrower of the happening of any event which makes any statement made in the registration statement, the prospectus or any document incorporated therein by reference, untrue in any material respect or which requires the making of any changes in the registration statement, the prospectus or any document incorporated therein by reference, in order to make the statements therein not misleading in any material respect, such Holder will forthwith discontinue disposition of Registrable Securities under the prospectus related to the applicable registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus, or until it is advised in writing by Borrower that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. ARTICLE X. - BOARD OF DIRECTORS SECTION 10.01 BOARD REPRESENTATION OR ATTENDANCE BY OBSERVER. (a) Borrower herewith agrees that Agent shall have the right, from time to time, to designate a nominee (initially, Russell Cleveland) to serve as a member of the Board of Directors of Borrower. In 40 Agreement (Continued) - -------------------------------------------------------------------------------- the event of a monetary Default under Section 8.01 hereof, the Agent shall have the right to designate one (1) additional nominee to serve as a member of the Board of Directors of Borrower. Borrower will nominate and use its best efforts to secure the election of such designee(s) as Director(s) of Borrower. During such time as Agent has not exercised such rights, the Agent shall have the right to designate an observer, who shall be entitled to attend and participate (but not vote) in all meetings of the Board of Directors and to receive all notices, reports, information, correspondence and communications sent by Borrower to members of the Board of Directors. All reasonable and appropriate costs and expenses incurred in connection therewith by any such designated Director or observer, or by Agent on behalf of such Director or observer, shall be reimbursed by Borrower. (b) Any such Director or observer shall, if requested to do so, absent himself or herself from the meeting in the event of, and so long as, the Directors are considering and acting on matters pertaining to any rights or obligations of Borrower or the Lender under this Agreement, the Debentures, the other Loan Documents or the Subsidiary Documents. SECTION 10.02 LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A DIRECTOR NOMINEE. It is provided and agreed that the actions and advice of any person while serving pursuant to Section 10.01 as a Director or an observer at meetings of the Board of Directors shall be construed to be the actions and advice of that person alone and not be construed as actions of the Lender as to any notice of requirements or rights of Lender under this Agreement, the Debentures, the other Loan Documents or the Subsidiary Documents nor as actions of the Lender to approve modifications, consents, amendments or waivers thereof; and all such actions or notices shall be deemed actions or notices of the Lender only when duly provided in writing and given in accordance with the provisions of this Agreement. SECTION 10.03 NONLIABILITY OF THE LENDER. The relationship between Borrower and the Lender is, and shall at all times remain, solely that of borrower and lender. The Lender neither undertakes nor assumes any responsibility or duty to Borrower to review, inspect, supervise, pass judgment upon or inform Borrower of any matter in connection with any phase of Borrower's business, operations or condition, financial or otherwise. Borrower shall rely entirely upon its own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or information supplied to Borrower by the Lender, or any representative or agent of the Lender, in connection with any such matter is for the protection of the Lender, and neither Borrower nor any third party is entitled to rely thereon. ARTICLE XI. - AGENCY PROVISIONS SECTION 11.01 THE LENDER'S REPRESENTATIONS AND WARRANTIES TO AGENT. Lender represents and warrants to the Agent: (a) It is legal for it to make the Loan, and the making of such Loan complies with laws applicable to it; (b) It has made, its own independent review (including any desired investigations and inspections) of, and it accepts and approves, the Loan, this Agreement and the associated documents and all other matters and information which it deems pertinent. It acknowledges that the Loan Documents 41 Agreement (Continued) - -------------------------------------------------------------------------------- and the Subsidiary Documents are a complete statement of all understandings and respective rights and obligations between and among the Lender, Subsidiaries and Borrower regarding the Loan; (c) Lender has not made any express or implied representation or warranty to any other lender with respect to this transaction; (d) It will, independently and without reliance upon any other lender, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and will make such investigation as it deems necessary to inform itself as to the Loan, the Loan Documents, the Subsidiary Documents, Borrower and any collateral; PROVIDED, HOWEVER, nothing contained in this Section shall limit Agent's obligation to provide the Lender with the information and documents Agent is expressly required to deliver under this Agreement; (f) The Loan Documents executed by the Lender are valid and binding obligations of the Lender. SECTION 11.02 WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS. A waiver of an interest or principal payment, a declaration of a Default or any amendment, modification or waiver of this Agreement or the Debentures will require the consent of the Lender. SECTION 11.03 AGENCY. (a) Lender hereby designates and appoints Renaissance Group as its Agent under this Agreement and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and the Subsidiary Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Lender and does not assume, and shall not be deemed to have assumed, any obligation toward or relationship of agency or trust with or for Borrower. The Agent may perform any of its duties under this Agreement, or under the other Loan Documents or the Subsidiary Documents, by or through its agents or employees. (b) The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, in the other Loan Documents or in the Subsidiary Documents. Except as expressly provided herein, the duties of the Agent shall be mechanical and administrative in nature. The Agent shall have, and may use, its sole discretion with respect to exercising or refraining from taking any actions which the Agent is expressly entitled to take or assert under this Agreement, the other Loan Documents and the Subsidiary Documents. The Agent shall not have, by reason of this Agreement, a fiduciary relationship with respect to the Lender. Nothing in this Agreement, any of the other Loan Documents or any of the Subsidiary Documents, express or implied, is intended to or shall be construed to impose upon the Agent any obligations in respect of this Agreement, any of the other Loan Documents or any of the Subsidiary Documents except as expressly set forth herein or therein. If the Agent seeks the consent or approval of the Lender to the taking or refraining from taking any action hereunder, the Agent shall send notice thereof to the Lender. The Agent may employ agents, co-agents and attorneys-in-fact and shall not be responsible to the Lender or Borrower, except as to money or securities received by it or its authorized 42 Agreement (Continued) - -------------------------------------------------------------------------------- agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. (c) Neither the Agent nor any of its officers, directors, employees or agents shall be liable to the Lender for any action taken or omitted by it or any of them under this Agreement, any of the other Loan Documents or any of the Subsidiary Documents, or in connection herewith or therewith, except that no Person shall be relieved of any liability imposed by law, intentional tort or gross negligence. The Agent shall not be responsible to the Lender for any recitals, statements, representations or warranties contained in this Agreement or for the execution, effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Agreement, any of the other Loan Documents or any of the Subsidiary Documents or any of the transactions contemplated thereby, or for the financial condition of Borrower or the Subsidiaries. The Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, any of the other Loan Documents or any of the Subsidiary Documents or the financial condition of Borrower, or the existence or possible existence of any Default or Event of Default. Agent shall give the Lender notice of any Default or Event of Default of which Agent has actual notice. The Agent may, at any time, request instructions from the Lender with respect to any actions or approvals which, by the terms of this Agreement, of any of the other Loan Documents or of any of the Subsidiary Documents, the Agent is permitted or required to take or to grant, and if such instructions are promptly requested, the Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents or any of the Subsidiary Documents until it shall have received such instructions from the Lender. Without limiting the foregoing, the Lender shall not have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting under this Agreement, any of the other Loan Documents or any of the Subsidiary Documents in accordance with the instructions of the Lender. (d) The Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it, in good faith, to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement, any of the other Loan Documents or any of the Subsidiary Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. (e) To the extent that the Agent is not reimbursed and indemnified by Borrower, the Lender will reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement, any of the other Loan Documents, or any of the Subsidiary Documents or any action taken or omitted by the Agent under this Agreement, any of the other Loan Documents or any of the Subsidiary Documents. The obligations of the Lender under this indemnification provision shall survive the payment in full of the Loans and the termination of this Agreement. 43 Agreement (Continued) - -------------------------------------------------------------------------------- ARTICLE XII. - MISCELLANEOUS SECTION 12.01 STRICT COMPLIANCE. Any waiver by the Lender of any breach or any term or condition of this Agreement, the other Loan Documents or the Subsidiary Documents shall not be deemed a waiver of any other breach, nor shall any failure to enforce any provision of this Agreement, the other Loan Documents or the Subsidiary Documents operate as a waiver of such provision or of any other provision, nor constitute nor be deemed a waiver or release of Borrower for anything arising out of, connected with or based upon this Agreement, the other Loan Documents or the Subsidiary Documents. SECTION 12.02 WAIVERS AND MODIFICATIONS. All modifications, consents, amendments or waivers (herein "Waivers") of any provision of this Agreement, the Debentures, any other Loan Documents or any Subsidiary Documents, and any consent to departure therefrom, shall be effective only if the same shall be in writing by the Lender and then shall be effective only in the specific instance and for the purpose for which given. No notice or demand given, in any case, shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. No failure to exercise, and no delay in exercising, on the part of Agent or Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder, under the other Loan Documents and under the Subsidiary Documents shall be in addition to all other rights provided by law. SECTION 12.03 LIMITATION ON LIABILITY. The duties, warranties, covenants and promises arising from the Loan Documents and the Subsidiary Documents of Lender or Agent to Borrower shall be several and not joint, and Borrower shall have no legal or equitable cause of action against Lender or Agent (or their successors or assigns) for any liability of the other (or its successors or assigns). SECTION 12.04 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION. Any suit, action or proceeding against Borrower with respect to this Agreement or the Debentures or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Dallas, or in the United States federal courts located in the State of Texas, as Lender or Agent, in its sole discretion, may elect, and Borrower hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. Borrower hereby agrees that service of all writs, process and summonses in any such suit, action or proceeding brought in the State of Texas may be brought upon, and Borrower hereby irrevocably appoints, CT Corporation System, Dallas, Texas, as its true and lawful attorney-in-fact in the name, place and stead of Borrower to accept such service of any and all such writs, process and summonses. Borrower hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any Debentures brought in such courts, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. 44 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 12.05 INVALID PROVISIONS. If any provision of any Loan Document is held to be illegal, invalid or unenforceable under present or future laws during the term of this Agreement, such provision shall be fully severable; such Loan Document shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of such Loan Document; and the remaining provisions of such Loan Document shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from such Loan Document. Furthermore, in lieu of each such illegal, invalid or unenforceable provision shall be added as part of such Loan Document a provision mutually agreeable to Borrower and Lender as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In the event Borrower and Lender are unable to agree upon a provision to be added to the Loan Document within a period of ten (10) business days after a provision of the Loan Document is held to be illegal, invalid or unenforceable, then a provision acceptable to independent arbitrators, such to be selected in accordance with the provisions of the American Arbitration Association, as similar in terms to the illegal, invalid or unenforceable provision as is possible and be legal, valid and enforceable shall be added automatically to such Loan Document. In either case, the effective date of the added provision shall be the date upon which the prior provision was held to be illegal, invalid or unenforceable. SECTION 12.06 MAXIMUM INTEREST RATE. (a) Regardless of any provision contained in any of the Loan Documents, Lender shall never be entitled to receive, collect or apply as interest on the Debentures any amount in excess of interest calculated at the Maximum Rate, and, in the event that Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Obligation is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Debentures; provided that, if the Debentures is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal amount of the Debentures and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. (b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of interest permitted by applicable law on such day that, at any time or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness evidenced by the Debentures under the laws which are presently in effect of the United States of America and the laws of any other jurisdiction which are or may be applicable to the holder of the Debentures and such Indebtedness or, to the extent permitted by law, under such applicable laws of the United States of America and the laws of any other jurisdiction which are or may be applicable to the holder of the Debentures and which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. 45 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 12.07 PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES. (a) Lender and the Agent shall have the right to enter into a participation agreement with any other party or its Affiliates with respect to the Debentures, or to sell all or any part of the Debentures, but any participation or sale shall not affect the rights and duties of Lender or the Agent hereunder vis-a-vis Borrower. In the event that all or any portion of the Loan shall be at any time, assigned, transferred or conveyed to other parties, any action, consent or waiver (except for compromise or extension of maturity), to be given or taken by Lender or the Agent hereunder (herein "Action"), shall be such action as taken by the holder of a majority in amount of the Principal Amount of the Debentures then outstanding, as such holder are recorded on the books of Borrower and represented by the Agent as described in subsection (b) below. (b) Assignment or sale of the Debentures shall be effective on the books of Borrower only upon (i) endorsement of the Debentures, or part thereof, to the proposed new holder, along with a current notation of the amount of payments or installments received and net Principal Amount yet unfunded or unpaid, and presentment of such Debentures to Borrower for issue of a replacement Debentures, in the name of the new holder; and (ii) delivery of an opinion of counsel, reasonably satisfactory to Borrower, that transfer shall not require registration or qualification under applicable state or federal securities laws. (c) The Debentures may be sold, transferred or assigned only to Affiliates of Lender or permitted transferees in multiples of $100,000. SECTION 12.08 CONFIDENTIALITY. (a) All financial reports or information that are furnished to Lender or Holders, or their respective director designees or other representatives, pursuant to this Agreement or pursuant to the Debentures, the other Loan Documents or the Subsidiary Documents shall be treated as confidential unless and to the extent that such information has been otherwise disclosed by Borrower, but nothing herein contained shall limit or impair the Lender's or Holders' right to disclose such reports to any appropriate Governmental Authority, or to use such information to the extent pertinent to an evaluation of the Obligation, or to enforce compliance with the terms and conditions of this Agreement, or to take any lawful action which the Lender or Holders deem necessary to protect their respective interests under this Agreement. (b) Lender and the Agent shall use their reasonable efforts to protect and preserve the confidentiality of such information, except for such disclosure as shall be required for compliance by Lender or its respective director designees with SEC reporting requirements or any administrative or judicial proceeding or otherwise as a matter of law. The provisions of Section 5.01 notwithstanding, Borrower may refuse to provide information as required pursuant thereto to an assignee or successor in interest to Lender, unless and until such assignee or successor shall have executed an agreement to maintain the confidentiality of the information as provided herein. SECTION 12.09 BINDING EFFECT. The Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors, assigns and legal representatives; PROVIDED, HOWEVER, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations thereunder. 46 Agreement (Continued) - -------------------------------------------------------------------------------- SECTION 12.10 NO THIRD PARTY BENEFICIARY. The parties do not intend the benefits of this Agreement to inure to any third party, nor shall this Agreement be construed to make or render Lender liable to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, or for debts or claims accruing to any such persons against Borrower. Notwithstanding anything contained herein, in the Debentures, in any other Loan Document or in any Subsidiary Document, no conduct by any or all of the parties hereto, before or after signing this Agreement, any other Loan Document nor any Subsidiary Document, shall be construed as creating any right, claim or cause of action against Lender, or any of its respective officers, directors, agents or employees, in favor of any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, nor to any other person or entity other than Borrower. SECTION 12.11 ENTIRETY. This Agreement and the Debentures, the other Loan Documents, the Subsidiary Documents and any other documents or instruments issued or entered into pursuant hereto and thereto contain the entire agreement between the parties and supersede all prior agreements and understandings, written or oral (if any), relating to the subject matter hereof and thereof. SECTION 12.12 HEADINGS. Section headings are for convenience of reference only and, except as a means of identification of reference, shall in no way affect the interpretation of this Agreement. SECTION 12.13 SURVIVAL. All representations and warranties made by Borrower herein shall survive delivery of the Debentures and the making of the Loans. SECTION 12.14 MULTIPLE COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. SECTION 12.15 KNOWLEDGE OF BORROWER. As used herein or in any of the other Loan Documents, all references to "Borrower's best knowledge" or "to the knowledge of Borrower" or words or phrases of similar import (whether or not modified by any additional phrase) shall in each case mean the knowledge of Borrower, the Subsidiaries or their respective executive officers, directors and principal shareholders. SECTION 12.16 NOTICES. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by 47 Agreement (Continued) - -------------------------------------------------------------------------------- telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. If to Borrower to: Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 Facsimile: (704) 866-8010 If to Lender to: Renaissance US Growth & Income Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 48 Agreement (Continued) - -------------------------------------------------------------------------------- with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 If to Agent to: Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. SECTION 12.17 GOVERNING LAW. THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS LOAN AGREEMENT. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 49 Agreement (Continued) - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed and delivered, as of the date and year first above written. BORROWER: DIGITAL RECORDERS, INC. By: -------------------------------- David L. Turney Chairman, CEO & President LENDER: RENAISSANCE US GROWTH & INCOME TRUST PLC By: -------------------------------- Name: Russell Cleveland Title: Director BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: -------------------------------- Name: Russell Cleveland Title: Director AGENT: RENAISSANCE CAPITAL GROUP, INC. By: -------------------------------- Name: Russell Cleveland Title: President and CEO SCHEDULES TO CONVERTIBLE LOAN AGREEMENT Schedule 2.08 Schedule of Brokers/Finders Schedule 4.03 Schedule of Conflicts or Consents Schedule 4.05 Schedule of Permitted Liens Schedule 4.06 Schedule of Any Material Adverse Change Schedule 4.08 Schedule of Material Agreements Schedule 4.09 Schedule of Litigation Schedule 4.10 Schedule of Unpaid Taxes Schedule 4.11 Schedule of Capitalization Schedule 4.13 Schedule of Employee Matters Schedule 4.14 Schedule of Employee Benefit Plans Schedule 4.15 Schedule of Compliance with Laws Matters Schedule 4.16 Schedule of Licenses and Permits Schedule 4.17 Schedule of Contracts Schedule 4.19 Schedule of Agreements between Borrower and any of its officers, directors, and principal shareholders, including employment agreements Schedule 4.20 Schedule of Subsidiaries Schedule 4.21 Schedule of Casualties Schedule 4.24 Schedule of Corporate Names Schedule 4.25 Schedule of Insurance Schedule 4.27 Schedule of Real Property Schedule 4.28 Schedule of Environmental Matters Schedule 5.18 Schedule of Ownership of Subsidiaries Schedule 6.01 Schedule of Limitation on Indebtedness Schedule 6.05 Schedule of Transactions with Affiliates Schedule 7.01 Schedule of Financial Ratios SCHEDULE 2.08 - BROKERS ----------------------- John D. Higgins, a director of Digital Recorders, Inc., 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 Mobitec Holdings AB transaction. 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. Such fee payable is based upon a percentage of the amount of financing. The fee will be $17,500. SCHEDULE 4.03 - NO CONFLICTS OR CONSENT --------------------------------------- The consent from Guaranty Business Credit Corporation (successor to Finova Capital Corporation) SCHEDULE 4.05 - LIENS --------------------- A UCC and lien search for North Carolina and Texas are attached. SCHEDULE 4.06 - FINANCIAL CONDITION ----------------------------------- None SCHEDULE 4.08 - MATERIAL AGREEMENTS ----------------------------------- None SCHEDULE 4.09 - LITIGATION -------------------------- A complaint was filed on November 27, 2000 in the Superior Court of Forsyth County, N.C., by Flextronics International USA, INC. as plaintiff ("Flextronics"), claiming that Digital Recorders, Inc. ("DRI"), owed the sum of $56,650.92 plus interest. (Flextronics had purchased the trade receivables of a former vendor of Digital Recorders, Inc. with whom there were several problems; the components received from the vendor were not acceptable, and the amounts claimed had been specifically disputed in correspondence between the plaintiff's collection agency and DRI.) Despite the actual knowledge of the current address of DRI, Flextronics attempted service of process on the registered agent at a former address, and then served through the Secretary of State, who also acknowledged that the address listed was no longer valid, because DRI had moved. Flextronics presented an "Entry of Default and Judgment by Default by Clerk" which was signed by an assistant clerk of court and filed on March 7, 2001. On May 14, 2001, Digital Recorders, Inc. received its first notice of the suit, by execution on the default judgment issued by Flextronics at to DRI's correct, current address. On May 24, 2001, DRI served a motion to set aside the default and default judgment demonstrating the questionable service of process, the absence of actual notice, and the existence of meritorious defenses to the asserted claim. A hearing has been set for June 25, 2001. The company expects the judgment to be set aside at the hearing. SCHEDULE 4.10 - TAXES --------------------- All required taxes have been filed and paid. SCHEDULE 4.11 - CAPITALIZATION ------------------------------ There are 10,000,000 common shares authorized with a $.10 par value. There is a total of 3,274,475 common shares outstanding. In addition, 430,000 shares shall be issued to Mattias Bodin and Tobias Bodin pursuant to the Stock Purchase Agreement between Bengt Bodin, Annacarin Bodin, Mattias Bodin, Tobias Bodin and Bertil Lindqvist and DRI. There are 1,000,000 preferred shares authorized with a $.10 par value. There is a total of 354 preferred shares outstanding. There is a total of 819,600 shares of Common Stock reserved for issuance under DRI's Stock Option Plan. Estimated options to be approved in 2001 are 160,000. Other Warrants/Options/Convertibles 1) 221,250 per new AAA extension/conversion 2) Ritger Warrant of 75,000 (various prices) (37,500 @ $3.00/18750 @ $5.00/18,750 @ $7.50) 3) Dominick and Dominick Warrant of 150,000 shares at $3.75 4) University of Washington Warrant of 5,000 shares at $3.00 5) Bodin Warrant of 100,000 shares 6) Lite Vision Warrant of 100,000 at $2.4375 7) Publicly traded warrants of 1,265,000 SCHEDULE 4.13 - EMPLOYMENT -------------------------- (a) None (b) None (c) None (d) None (e) None (f) None (g) None (h) None SCHEDULE 4.14 - EMPLOYEE BENEFIT PLANS -------------------------------------- (1) THE GUARDIAN o Major medical o Medical prescription coverage o Dental coverage o Vision coverage o Life insurance ($25,000 - base; additional if death is accidental and/or common carrier coverage) o Long term disability coverage DRI pays the full premium for the life and the long term disability coverage. Each employee pays a small portion toward total premium for the others listed above ($22.10 for employee only, $68.52 for employee and spouse, $62.85 for employee and child(ren), and $113.77 for employee and family, per month). Bundled with the health policy, is our FLEX PLAN for dependant care and medical reimbursements. (2) GREAT WEST o 401K retirement accounts for employee's contributions o incorporation of employer contributions to 401K, established 3/01 to be effective 7/01 for those already contributing voluntarily (amounts to be established after end of fiscal year and will be based primarily on profitability). (3) VOLUNTARY POLICIES o AFLAC o American United Life (additional life and short term disability policies) (4) VACATION LEAVE Ranges in length from 80 to 160 hours, based on length of service (5) SICK/BEREAVEMENT LEAVE Up to 40 hours per year (6) HOLIDAY LEAVE Observe nine days per calendar year (7) FMLA (8) EDUCATIONAL ASSISTANCE (9) CIVIC LEAVE (10) MILITARY LEAVE (11) ANNUAL TEAMSMANSHIP AWARD Awarded to the DRI team member, nominated by fellow co-workers, who has most favorably influenced the company through exemplary attitude, leadership, dedication, and diligence above and beyond normal expectations. (12) SOCIAL FUNCTIONS Periodic all-employee dinners, company Christmas party and fall picnic (13) OMNIBUS STOCK OPTION PLAN SCHEDULE 4.15 - COMPLIANCE WITH LAWS ------------------------------------ None SCHEDULE 4.16 - LICENSE AND PERMITS ----------------------------------- None other than ones in the ordinary course of business SCHEDULE 4.17 - CONTRACTS ------------------------- DRI has some purchase orders that may exceed 12 months. These purchase orders have been generated in the ordinary course of business SCHEDULE 4.19 - INSIDER AGREEMENTS NOT LISTED ON SEC FILINGS ------------------------------------------------------------ None SCHEDULE 4.20 - SUBSIDIARIES ---------------------------- Digital Audio Corporation is a North Carolina corporation Transit-Media GmbH is a corporation located in Etlingen, Germany TwinVision of North America, Inc. is a North Carolina corporation Robinson Turney International, Inc. is a shell Texas Corporation SCHEDULE 4.21 - CASUALTIES -------------------------- None SCHEDULE 4.24 - CORPORATE NAMES ------------------------------- List of trade names or other names which the company did business as during the past five years: Digital Recorders, Inc. TwinVision of North America, Inc. Robinson Turney International, Inc. Digital Audio Corporation Transit-Media GmbH DRI Talking Bus SCHEDULE 4.25 - INSURANCE ------------------------- See attached SCHEDULE 4.27 - REAL PROPERTY ----------------------------- Former Office & Warehouse, Digital Recorders, Inc. & TwinVision of North America, Inc.: 2300 Englert Dr., Suite B Durham County, Durham NC 27713 This facility has been subleased to Cartesian Technologies, Inc. Landlord: Realmark Property Investors LTD Partnership c/o Property Resources Mgmt P.O. Box 19206 Raleigh, NC 27619 Offices of DRI Executives of CEO and CFO and RTI 5949 Sherry Lane, Suite 1050 Sterling Plaza Bldg, Box 26 Dallas, Texas 75225 Landlord: Equity Office Properties Trust Sterling Plaza 5949 Sherry Lane, Suite 1475 Dallas, Texas 75225 Offices & Warehouse & Assembly DAC division: 5121 Holly Ridge Rd. Wake County, Raleigh, NC 27612 Landlord: James E. Paul, Jr. 1133 Bal Harbor, #1139-132 Punta Gorda, FL 33950 Warehouse for Digital Recorders (a/k/a as TCS and TwinVision of North America, Inc. plus offices for Digital Recorders corporate administration, TwinVision North America, Inc., and TCS administration: 4018 Patriot Dr., Suite 100 Wake County, Durham NC 27709 Landlord: The Prudential Savings Bank, FSB c/o C.B. Richard Ellis PO Box 14385 Durham, NC 27709 SCHEDULE 4.28 - ENVIRONMENTAL ----------------------------- None SCHEDULE 5.18 - OWNERSHIP OF SUBSIDIARIES ----------------------------------------- Digital Recorders, Inc. owns 100% of the outstanding shares of each of its subsidiaries SCHEDULE 6.01 - SCHEDULE OF LIMITATION ON INDEBTEDNESS ------------------------------------------------------ None SCHEDULE 6.05 - TRANSACTIONS WITH AFFILIATES -------------------------------------------- Other than in the ordinary course of business, there have been no particular transactions with affiliates deemed material or significant. SCHEDULE 7.01 FINANCIAL RATIOS ------------------------------ (a) CURRENT RATIO. The Borrower will not permit its Current Ratio as of the end of each fiscal quarter to be less than 1.30:1. (b) INTEREST COVERAGE RATIO. The Borrower will not permit its Interest Coverage Ratio to be less than 1:1, with such ratio to be calculated quarterly on a cumulative basis for the initial four (4) fiscal quarters of Borrower after the date hereof and thereafter to be calculated quarterly for the four (4) fiscal quarters of Borrower immediately preceding the date of determination. EX-10.36 4 a2053907zex-10_36.txt EXHIBIT 10.36 - -------------------------------------------------------------------------------- THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR APPLICABLE STATE SECURITIES LAWS ("STATE ACTS"), AND SHALL NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED, UNLESS SUCH TRANSFER IS MADE IN COMPLIANCE WITH THE ACT AND THE STATE ACTS. - -------------------------------------------------------------------------------- DIGITAL RECORDERS, INC. 8.00% CONVERTIBLE DEBENTURE - -------------------------------------------------------------------------------- $1,500,000 NO. 1 - -------------------------------------------------------------------------------- DATE OF ISSUE: JUNE 27, 2001 DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company" or "Borrower"), for value received, promises to pay to: THE FROST NATIONAL BANK, CUSTODIAN FBO RENAISSANCE US GROWTH & INCOME TRUST PLC TRUST NO. W00740100 or to its order, (together with any assignee, jointly or severally, the "Holder" or "Lender") on or before June 27, 2008 (the "Due Date") (unless this Debenture shall have been sooner called for redemption or presented for conversion as herein provided), the sum of One Million Five Hundred Thousand Dollars ($1,500,000) (the "Principal Amount") and to pay interest on the unpaid Principal Amount at the rate of 8.00% per annum. All payments of both principal and interest shall be made at the address of the Holder hereof as it appears in the books and records of the Borrower, or at such other place as may be designated by the Holder hereof. 1. INTEREST. Interest on the Principal Amount outstanding from time to time shall be payable in monthly installments commencing August 1, 2001, and subsequent payments shall be made on the first day of each month thereafter until the Principal Amount and all accrued and unpaid interest shall have been paid in full. Overdue principal and interest on the Debenture shall bear interest at the maximum rate permitted by applicable law. 2. MATURITY. If not sooner paid, redeemed or converted, this Debenture shall mature on June 27, 2008 at which time the remaining unpaid Principal Amount, and all accrued and unpaid interest and any other charges then due under the Loan Agreement, shall be due and payable in full. This Debenture shall be prepaid PRO RATA with any prepayments of Indebtedness other than Senior Obligations. This Debenture shall be senior in right of payment to all other Indebtedness of the Company, except the Senior Obligations. 3. MANDATORY PRINCIPAL INSTALLMENTS. If this Debenture is not sooner redeemed or converted as provided hereunder, Borrower shall pay to Holder, commencing on June 27, 2004 and continuing on the first day of each successive month thereafter prior to maturity, mandatory principal redemption installments, each of such installments to be in the amount of Ten Dollars ($10) per Thousand Dollars ($1,000) of the then remaining Principal Amount, and further, at maturity, Borrower shall pay to Holder a final installment of the remaining unpaid Principal Amount, and all accrued and unpaid interest and any other charges then due under the Loan Agreement. 4. OPTIONAL REDEMPTION BY HOLDER. (a) If at any time after the date hereof (i) the Company's Common Stock, $.10 per share ("Common Stock"), is not listed on the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"), or quoted on the NASDAQ National Market System ("National Market") or the NASDAQ SmallCap System ("SmallCap"), (ii) there is a change of control of the Company's voting securities, without the written consent of the Holder, (iii) there is a change of at least one-half of the Company's Board of Directors as it shall exist on the date hereof, without the written consent of the Holder, (iv) all or substantially all of the assets or capital stock of the Company or its subsidiaries are sold, without the consent of the Holder, or (v) the Company or its subsidiaries are merged or consolidated with or into unaffiliated entities, without the written consent of Holder, the Holder shall have the right to require this Debenture to be redeemed by the Company at the sum equal to the Principal Amount, together with an amount equal to an 18% annual yield on the Principal Amount through the date of redemption (the "Redemption Date"). (b) The Holder may exercise its right to require that the Company redeem this Debenture pursuant to Section 4(a) prior to maturity by giving notice thereof to the Company, which notice shall specify the terms of redemption (including the place at which the Holder may obtain payment), the total redemption payment and the Redemption Date, which Redemption Date shall be within thirty (30) days of the date of such notice. 5. OPTIONAL REDEMPTION BY COMPANY. (a) On any interest payment date, and after receipt of irrevocable notice from the Borrower as provided for below, this Debenture is redeemable, in whole but not in part, at 101% of the Principal Amount, together with accrued and unpaid interest through the Redemption Date, by the Company, if all of the following conditions are satisfied: (i) the average closing bid price for the Common Stock for the 20 consecutive trading days prior to the date of notice exceeds an amount equal to three times the Conversion Price then in effect, and the Common Stock is listed or quoted on the National Market, the SmallCap, AMEX or NYSE; (ii) the average daily trading volume for the 20 consecutive trading days prior to the date of the irrevocable notice shall be no less than 40,000 shares; (iii) the market price for the Common Stock at the time of notice reflects a price-to-earnings ratio of no greater than 25 times fully diluted earnings per share, excluding any 2 extraordinary gains; and (iv) the shares of Common Stock issuable upon conversion of this Debenture shall have been fully registered under applicable securities laws, or the Borrower shall have furnished to the Holder an opinion of counsel that such shares of Common Stock may be publicly sold pursuant to an exemption from registration under applicable securities laws. The Company's right of redemption is subject to the Holder's prior right of conversion of the Debenture. (b) If the Holder shall notify the Company in writing of its intent to sell the Debenture, this Debenture is redeemable at the Borrower's option, in whole but not in part, at 101% of the Principle Amount, together with accrued and unpaid interest through the Redemption Date, by the Company for a period of up to 30 days after the date of notice. (c) The Company may exercise its right to redeem this Debenture pursuant to Sections 5(a) and (b) prior to maturity by giving notice thereof to the Holder of this Debenture as such name appears on the books of the Borrower, which notice shall specify the terms of redemption (including the place at which the Holder may obtain payment), the total redemption payment and the Redemption Date. 6. CONVERSION RIGHT. (a) The Holder of this Debenture shall have the right, at Holder's option, at any time, to convert all, or, in multiples of $100,000, any part of this Debenture into such number of fully paid and nonassessable shares of Common Stock as provided herein. The Holder of this Debenture may exercise the conversion right by giving written notice (the "Conversion Notice") to Borrower of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by the Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the outstanding Principal Amount of the Debenture divided by the Conversion Price (as defined below) and in effect on the date the Conversion Notice is given; provided, however, that in the event that this Debenture shall have been partially redeemed, shares of Common Stock shall be issued pro rata, rounded to the nearest whole share. Conversion shall be deemed to have been effected on the date the Conversion Notice is received (the "Conversion Date"). In the case of any Debenture called for redemption, the conversion rights will expire at the close of business on the Redemption Date. Within 20 business days after receipt of the Conversion Notice, Borrower shall issue and deliver by hand against a signed receipt therefor or by United States registered mail, return receipt requested, to the address designated in the Conversion Notice, a stock certificate or stock certificates of Borrower representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid on the Debenture up to and including the Conversion Date. The conversion rights will be governed by the following provisions: 3 (b) CONVERSION PRICE. On the issue date hereof and until such time as an adjustment shall occur, the Conversion Price shall be $2.00 per share; provided, however, that the Conversion Price shall be subject to adjustment at the times and in accordance with the provisions set forth below. (i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE CONVERSION PRICE. If and whenever any Additional Common Stock shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the price per share for the Additional Common Stock then issued, if issued in connection with a sale of shares, or the value of the Additional Common Stock then issued, as determined in accordance with generally accepted accounting principles, if issued other than for cash, and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debenture into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (ii) SALE OF SHARES. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the gross amount of the cash paid to Borrower for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. (iii) STOCK SPLITS, SUBDIVISIONS OR COMBINATIONS. In the event of a stock split or subdivision of shares of Common Stock into a greater number of shares, the Conversion Price shall be proportionately decreased, and in the event of a combination of shares of Common Stock into a smaller number of shares, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the record date. (iv) STOCK DIVIDENDS. Shares of Common Stock issued as a dividend or other distribution on any class of capital stock of Borrower shall be deemed to have been issued without consideration. (v) EXCEPTIONS. The term "Additional Common Stock" herein shall mean all shares of Common Stock or securities convertible or exercisable into shares of Common Stock hereafter issued by Borrower (including Common Stock 4 held in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issuable upon exercise of presently outstanding amounts or stock options; or (C) up to 300,000 shares of Common Stock issuable upon exercise of employee or director stock options to be granted in the future at less than the initial Conversion Price. (c) ADJUSTMENT FOR MERGERS AND CONSOLIDATIONS. In the event of any consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith, consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the maturity of this Debenture to purchase, at a total price equal to the Conversion Price immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were convertible by the Holder immediately prior to such consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be entitled to receive distributions on the date of such event on the same basis with holders of Common Stock as if this Debenture had been converted immediately prior to such event, less the Conversion Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease and this Debenture shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Debenture, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Holder surrendering this Debenture. (d) DISTRIBUTIONS. In the event of distribution to all Common Stock holders of any securities, cash or properties or assets or other rights to purchase securities or assets, then, after such event, this debenture will also be convertible into the kind and amount of securities, cash and other property which the Holder would have been entitled to receive if the Holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. (e) CAPITAL REORGANIZATION AND RECLASSIFICATION. In case of any capital reorganization or reclassification of the Common Stock of Borrower (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of 5 shares), this Debenture shall be convertible into the kind and number of shares of stock or other securities or property of Borrower to which the Holder of the Debenture would have been entitled to receive if the Holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the immediately foregoing sentence shall similarly apply to successive reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. (f) NOTICE. In the event Borrower shall propose to take any action which shall result in an adjustment in the Conversion Price, Borrower shall give notice to the Holder of this Debenture, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of 10 days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. (g) CERTIFICATE. Following completion of an event which results in an adjustment to the Conversion Price, Borrower shall furnish to the Holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of the Borrower, of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect, which statement shall constitute an amendment to this Debenture. (h) In the event of an adjustment to the Conversion Price due to a sale of securities by the Borrower below the Conversion Price which would result in the holders of all debentures evidencing the Loan having the right to acquire more than 20% of the then outstanding shares of Common Stock, the Borrower agrees to hold a vote of the shareholders within 120 days to authorize such an adjustment. In the event the shareholders reject the authorization, the Holder shall have the right to cause the Company to redeem the Debenture in accordance with the provisions of Section 4. 7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. (a) Notwithstanding the provisions of Section 6 hereof, if the Company does not achieve operating income of at least $2,438,000 in fiscal year 2001 and the market price of the Common Stock is below the conversion price at the time of publication of the Company's results for that period, then the Conversion Price shall be automatically adjusted downward to an amount equal to volume-weighted average closing bid price of the Common Stock, as reported in THE WALL STREET JOURNAL, for the ten consecutive trading days (the "Trading Period") following Borrower's public press release of its fiscal year 2001 financial results; provided that the Conversion Price as adjusted shall not be less than $1.50 per share. If an adjustment occurs pursuant to this Section 7, then the Borrower shall furnish to the holder of this Debenture a statement, within ten days of the occurrence thereof, signed by the Chief Financial Officer and the Secretary of Borrower, 6 of the facts creating such adjustment and specifying the adjusted Conversion Price then in effect. The Holder shall not convert this Debenture or sell any shares of Common Stock during the Trading Period, as well as nine days prior to the commencement of the Trading Period. This restriction also extends to any short selling of the shares of Common Stock by the Holder or any affiliate. (b) Under no circumstance will this adjustment to the Conversion Price cause the holders of all debentures evidencing the Loan to acquire greater than 20% of the Borrower's then outstanding shares of Common Stock. In the event that this adjustment to the Conversion Price allows the holders of all debentures evidencing the Loan to acquire greater than 20% of the Borrower's then outstanding shares of Common Stock, then the debenture holders will be entitled to decrease the Conversion Price, so that their potential and actual ownership is equal to twenty percent (20%) of the issued and outstanding Common Stock at the time this adjustment becomes effective. 8. RESERVATION OF SHARES. Borrower warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock or treasury shares of Common Stock necessary to effect conversion of this Debenture. 9. TAXES. The Company shall pay any documentary or other transactional taxes attributable to the issuance or delivery of this Debenture or the shares of Common Stock issued upon conversion by the Holder (excluding any federal, state or local income taxes and any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any political subdivision thereof, under which such Holder is organized or is qualified to do business). 10. DEFAULT. (a) EVENT OF DEFAULT. An "Event of Default" shall exist if an "Event of Default" (as defined in the Loan Agreement) shall occur and be continuing. (b) REMEDIES UPON EVENT OF DEFAULT. If an Event of Default shall have occurred and be continuing, then the Holder may exercise any one or more of the rights and remedies provided in the Loan Documents, as the Holder, in its sole discretion, may deem necessary or appropriate. (c) REMEDIES NONEXCLUSIVE. Each right, power or remedy of the Holder hereof upon the occurrence of any Event of Default as provided for in this Debenture or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Debenture or now or hereafter existing at law or in equity or by statute, and the exercise or beginning of the exercise by the Holder or transferee hereof of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Holder of any or all such other rights, powers or remedies. (d) EXPENSES. Upon the occurrence of a Default or an Event of Default, which occurrence is not cured within the notice provisions, if any provided therefore, Borrower 7 agrees to pay and shall pay all reasonable costs and expenses (including attorneys' fees and expenses) incurred by the Holder in connection with the preservation and enforcement of Holder's rights under the Convertible Loan Agreement, the Debenture, or any other Loan Document. 11. FAILURE TO ACT AND WAIVER. No failure or delay by the Holder hereof to require the performance of any term or terms of this Debenture or not to exercise any right or any remedy shall constitute a waiver of any such term or of any right or of any default, nor shall such delay or failure preclude the Holder hereof from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Debenture, the Holder hereof shall not be deemed to waive the right either to require payment when due of all other amounts payable, or to later declare a default for failure to effect such payment of any such other amount. The failure of the Holder of this Debenture to give notice of any failure or breach of the Borrower under this Debenture shall not constitute a waiver of any right or remedy in respect of such continuing failure or breach or any subsequent failure or breach. 12. CONSENT TO JURISDICTION. The Company hereby agrees and consents that any action, suit or proceeding arising out of this Debenture may be brought in any state or federal court in the State of Texas, including the United States District Court for the Northern District of Texas, or in any other court having jurisdiction over the subject matter, all at the sole election of the Holder hereof, and by the issuance and execution of this Debenture, the Borrower irrevocably consents to the jurisdiction of each such court. The Company hereby irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the Borrower to accept service of process for and on behalf of the Borrower in any action, suit or proceeding arising out of this Debenture. Except for default in payment of interest or principal when and as they become due, and except as otherwise specifically set forth herein or otherwise agreed to in writing by the parties, any action, dispute, claim or controversy (all such herein called "Dispute") between or among the parties as to the facts or the interpretation of the Debenture shall be resolved by arbitration as set forth in the Loan Agreement. 13. HOLDER'S RIGHT TO REQUEST MULTIPLE DEBENTURES. The Holder shall, upon written request and presentation of the Debenture, have the right, at any interest payment date, to request division of this Debenture into two or more instruments, each of such to be in such amounts as shall be requested; provided however, that no Debenture shall be issued in denominations of face amount less than $100,000. 14. TRANSFER. Subject to Section 12.08 of the Loan Agreement, this Debenture may be transferred on the books of the Borrower by the registered Holder hereof, or by Holder's attorney duly authorized in writing, in multiples of $100,000 only upon (i) delivery to the Borrower of a duly executed assignment of the Debenture, or part thereof, to the proposed new Holder, along with a current notation of the amount of payments received and net Principal Amount yet unfunded, and presentment of such Debenture to the Borrower for issue of a replacement Debenture, or Debentures, in the name of the new Holder, (ii) the designation by the new Holder of the Lender's agent for notice, such agent to be the sole party to whom Borrower shall be required to provide notice when notice to Holder is required hereunder and who shall be the sole 8 party authorized to represent Lender in regard to modification or waivers under the Debenture, the Loan Agreement, or other Loan Documents; and any action, consent or waiver (other than a compromise of principal and interest) when given or taken by Lender's agent for notice, shall be deemed to be the action of the holders of a majority in amount of the Principal Amount of the Debenture, as such holders are recorded on the books of the Borrower, and (iii) in compliance with the legend to read as follows: "This Debenture has not been registered under the Securities Act of 1933, as amended ("Act"), or applicable state securities laws ("State Acts"), and shall not be sold, hypothecated, or otherwise transferred, unless such transfer is made in compliance with the Act and the State Acts." The Company shall be entitled to treat any holder of record of the Debenture as the Holder in fact thereof and of the Debenture and shall not be bound to recognize any equitable or other claim to or interest in this Debenture in the name of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law. 15. NOTICES. All notices and communications under this Debenture shall be in writing and shall be either delivered in person or by overnight service, such as FedEx, and accompanied by a signed receipt therefor; or mailed first-class United States certified mail, return receipt requested, postage prepaid, and addressed as follows: (i) if to the Borrower at its address for notice as stated in the Loan Agreement; and (ii) if to the Holder of this Debenture, to the address (a) of such Holder as it appears on the books of the Borrower or (b) in the case of a partial assignment to one or more Holders, to the Lender's agent for notice, as the case may be. Any notice of communication shall be deemed given and received as of the date of such delivery if delivered; or if mailed, then three days after the date of mailing. 16. MAXIMUM INTEREST RATE. (a) Regardless of any provision contained in this Debenture, Lender shall never be entitled to receive, collect or apply as interest on the Debenture any amount in excess of interest calculated at the Maximum Rate, and, in the event that Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Debenture is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Debenture; provided that, if the Debenture is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal amount of the Debenture and, in 9 such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. (b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of interest (if any) permitted by applicable law on such day that, at any time or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness evidenced by the Debenture under the laws which are presently in effect of the United States of America or by the laws of any other jurisdiction which are or may be applicable to the Holders of the Debenture and such Indebtedness or, to the extent permitted by law, under such applicable laws of the United States of America or by the laws of any other jurisdiction which are or may be applicable to the Holder of the Debenture and which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. 17. LOAN AGREEMENT, GUARANTY AND SECURITY AND PLEDGE AGREEMENTS. This Debenture is issued pursuant to the Convertible Loan Agreement dated of even date herewith among the Company and the other parties thereto, and the Holder is entitled to all the rights and benefits thereunder. Both Borrower and the Holder have participated in the negotiation and preparation of the Convertible Loan Agreement and of this Debenture. Borrower agrees that a copy of the Loan Agreement with all amendments, additions and substitutions therefor shall be available to the Holder at the offices of Borrower. The indebtedness evidenced by this Debenture is secured pursuant to the Security and Pledge Agreements dated of even date herewith among the Company, its subsidiaries and the Holder, and the Holder is entitled to all rights and benefits of a secured party thereunder. The payment and performance of this Debenture is guaranteed by the Company's subsidiaries pursuant to their Guaranty dated of even date herewith. 18. DEFINED TERMS. Capitalized terms used but not defined herein shall have the meaning given them in the Loan Agreement. 19. GOVERNING LAW. This Debenture shall be governed by and construed and enforced in accordance with the substantive laws of the State of Texas, without regard to the conflicts of laws provisions thereof, and the applicable laws of the United States. Venue and jurisdiction shall lie in the federal or state courts of Dallas County, Texas. [SIGNATURE PAGE FOLLOWS.] 10 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly issued, executed and delivered on the date and year above stated. DIGITAL RECORDERS, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 11 EX-10.37 5 a2053907zex-10_37.txt EXHIBIT 10.37 - -------------------------------------------------------------------------------- THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR APPLICABLE STATE SECURITIES LAWS ("STATE ACTS"), AND SHALL NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED, UNLESS SUCH TRANSFER IS MADE IN COMPLIANCE WITH THE ACT AND THE STATE ACTS. - -------------------------------------------------------------------------------- DIGITAL RECORDERS, INC. 8.00% CONVERTIBLE DEBENTURE - -------------------------------------------------------------------------------- $1,500,000 NO. 2 - -------------------------------------------------------------------------------- DATE OF ISSUE: JUNE 27, 2001 DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company" or "Borrower"), for value received, promises to pay to: HSBC GLOBAL CUSTODY NOMINEE (U.K.) LIMITED, DESIGNATION NO. 896414 or to its order, (together with any assignee, jointly or severally, the "Holder" or "Lender") on or before June 27, 2008 (the "Due Date") (unless this Debenture shall have been sooner called for redemption or presented for conversion as herein provided), the sum of One Million Five Hundred Thousand Dollars ($1,500,000) (the "Principal Amount") and to pay interest on the unpaid Principal Amount at the rate of 8.00% per annum. All payments of both principal and interest shall be made at the address of the Holder hereof as it appears in the books and records of the Borrower, or at such other place as may be designated by the Holder hereof. 1. INTEREST. Interest on the Principal Amount outstanding from time to time shall be payable in monthly installments commencing August 1, 2001, and subsequent payments shall be made on the first day of each month thereafter until the Principal Amount and all accrued and unpaid interest shall have been paid in full. Overdue principal and interest on the Debenture shall bear interest at the maximum rate permitted by applicable law. 2. MATURITY. If not sooner paid, redeemed or converted, this Debenture shall mature on June 27, 2008 at which time the remaining unpaid Principal Amount, and all accrued and unpaid interest and any other charges then due under the Loan Agreement, shall be due and payable in full. This Debenture shall be prepaid PRO RATA with any prepayments of Indebtedness other than Senior Obligations. This Debenture shall be senior in right of payment to all other Indebtedness of the Company, except the Senior Obligations. 3. MANDATORY PRINCIPAL INSTALLMENTS. If this Debenture is not sooner redeemed or converted as provided hereunder, Borrower shall pay to Holder, commencing on June 27, 2004 and continuing on the first day of each successive month thereafter prior to maturity, mandatory principal redemption installments, each of such installments to be in the amount of Ten Dollars ($10) per Thousand Dollars ($1,000) of the then remaining Principal Amount, and further, at maturity, Borrower shall pay to Holder a final installment of the remaining unpaid Principal Amount, and all accrued and unpaid interest and any other charges then due under the Loan Agreement. 4. OPTIONAL REDEMPTION BY HOLDER. (a) If at any time after the date hereof (i) the Company's Common Stock, $.10 per share ("Common Stock"), is not listed on the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"), or quoted on the NASDAQ National Market System ("National Market") or the NASDAQ SmallCap System ("SmallCap"), (ii) there is a change of control of the Company's voting securities, without the written consent of the Holder, (iii) there is a change of at least one-half of the Company's Board of Directors as it shall exist on the date hereof, without the written consent of the Holder, (iv) all or substantially all of the assets or capital stock of the Company or its subsidiaries are sold, without the consent of the Holder, or (v) the Company or its subsidiaries are merged or consolidated with or into unaffiliated entities, without the written consent of Holder, the Holder shall have the right to require this Debenture to be redeemed by the Company at the sum equal to the Principal Amount, together with an amount equal to an 18% annual yield on the Principal Amount through the date of redemption (the "Redemption Date"). (b) The Holder may exercise its right to require that the Company redeem this Debenture pursuant to Section 4(a) prior to maturity by giving notice thereof to the Company, which notice shall specify the terms of redemption (including the place at which the Holder may obtain payment), the total redemption payment and the Redemption Date, which Redemption Date shall be within thirty (30) days of the date of such notice. 5. OPTIONAL REDEMPTION BY COMPANY. (a) On any interest payment date, and after receipt of irrevocable notice from the Borrower as provided for below, this Debenture is redeemable, in whole but not in part, at 101% of the Principal Amount, together with accrued and unpaid interest through the Redemption Date, by the Company, if all of the following conditions are satisfied: (i) the average closing bid price for the Common Stock for the 20 consecutive trading days prior to the date of notice exceeds an amount equal to three times the Conversion Price then in effect, and the Common Stock is listed or quoted on the National Market, the SmallCap, AMEX or NYSE; (ii) the average daily trading volume for the 20 consecutive trading days prior to the date of the irrevocable notice shall be no less than 40,000 shares; (iii) the market price for the Common Stock at the time of notice reflects a price-to-earnings ratio of no greater than 25 times fully diluted earnings per share, excluding any extraordinary gains; and (iv) the shares of Common Stock issuable upon conversion of this Debenture shall have been fully registered under applicable securities laws, or the Borrower shall have furnished to the Holder an opinion of counsel that such shares of 2 Common Stock may be publicly sold pursuant to an exemption from registration under applicable securities laws. The Company's right of redemption is subject to the Holder's prior right of conversion of the Debenture. (b) If the Holder shall notify the Company in writing of its intent to sell the Debenture, this Debenture is redeemable at the Borrower's option, in whole but not in part, at 101% of the Principle Amount, together with accrued and unpaid interest through the Redemption Date, by the Company for a period of up to 30 days after the date of notice. (c) The Company may exercise its right to redeem this Debenture pursuant to Sections 5(a) and (b) prior to maturity by giving notice thereof to the Holder of this Debenture as such name appears on the books of the Borrower, which notice shall specify the terms of redemption (including the place at which the Holder may obtain payment), the total redemption payment and the Redemption Date. 6. CONVERSION RIGHT. (a) The Holder of this Debenture shall have the right, at Holder's option, at any time, to convert all, or, in multiples of $100,000, any part of this Debenture into such number of fully paid and nonassessable shares of Common Stock as provided herein. The Holder of this Debenture may exercise the conversion right by giving written notice (the "Conversion Notice") to Borrower of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by the Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the outstanding Principal Amount of the Debenture divided by the Conversion Price (as defined below) and in effect on the date the Conversion Notice is given; provided, however, that in the event that this Debenture shall have been partially redeemed, shares of Common Stock shall be issued pro rata, rounded to the nearest whole share. Conversion shall be deemed to have been effected on the date the Conversion Notice is received (the "Conversion Date"). In the case of any Debenture called for redemption, the conversion rights will expire at the close of business on the Redemption Date. Within 20 business days after receipt of the Conversion Notice, Borrower shall issue and deliver by hand against a signed receipt therefor or by United States registered mail, return receipt requested, to the address designated in the Conversion Notice, a stock certificate or stock certificates of Borrower representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid on the Debenture up to and including the Conversion Date. The conversion rights will be governed by the following provisions: (b) CONVERSION PRICE. On the issue date hereof and until such time as an adjustment shall occur, the Conversion Price shall be $2.00 per share; provided, however, that the Conversion Price shall be subject to adjustment at the times and in accordance with the provisions set forth below. 3 (i) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE CONVERSION PRICE. If and whenever any Additional Common Stock shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the price per share for the Additional Common Stock then issued, if issued in connection with a sale of shares, or the value of the Additional Common Stock then issued, as determined in accordance with generally accepted accounting principles, if issued other than for cash, and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debenture into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (ii) SALE OF SHARES. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the gross amount of the cash paid to Borrower for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. (iii) STOCK SPLITS, SUBDIVISIONS OR COMBINATIONS. In the event of a stock split or subdivision of shares of Common Stock into a greater number of shares, the Conversion Price shall be proportionately decreased, and in the event of a combination of shares of Common Stock into a smaller number of shares, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the record date. (iv) STOCK DIVIDENDS. Shares of Common Stock issued as a dividend or other distribution on any class of capital stock of Borrower shall be deemed to have been issued without consideration. (v) EXCEPTIONS. The term "Additional Common Stock" herein shall mean all shares of Common Stock or securities convertible or exercisable into shares of Common Stock hereafter issued by Borrower (including Common Stock held in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issuable upon exercise of presently outstanding warrants or stock options; or (C) up to 300,000 shares of Common Stock issuable upon exercise of employee or director stock options to be granted in the future at less than the initial Conversion Price. 4 (c) ADJUSTMENT FOR MERGERS AND CONSOLIDATIONS. In the event of any consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith, consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the maturity of this Debenture to purchase, at a total price equal to the Conversion Price immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were convertible by the Holder immediately prior to such consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be entitled to receive distributions on the date of such event on the same basis with holders of Common Stock as if this Debenture had been converted immediately prior to such event, less the Conversion Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease and this Debenture shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Debenture, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Holder surrendering this Debenture. (d) DISTRIBUTIONS. In the event of distribution to all Common Stock holders of any securities, cash or properties or assets or other rights to purchase securities or assets, then, after such event, this debenture will also be convertible into the kind and amount of securities, cash and other property which the Holder would have been entitled to receive if the Holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. (e) CAPITAL REORGANIZATION AND RECLASSIFICATION. In case of any capital reorganization or reclassification of the Common Stock of Borrower (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of shares), this Debenture shall be convertible into the kind and number of shares of stock or other securities or property of Borrower to which the Holder of the Debenture would have been entitled to receive if the Holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the immediately foregoing sentence shall similarly apply to successive 5 reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. (f) NOTICE. In the event Borrower shall propose to take any action which shall result in an adjustment in the Conversion Price, Borrower shall give notice to the Holder of this Debenture, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of 10 days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. (g) CERTIFICATE. Following completion of an event which results in an adjustment to the Conversion Price, Borrower shall furnish to the Holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of the Borrower, of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect, which statement shall constitute an amendment to this Debenture. (h) In the event of an adjustment to the Conversion Price due to a sale of securities by the Borrower below the Conversion Price which would result in the holders of all debentures evidencing the Loan having the right to acquire more than 20% of the then outstanding shares of Common Stock, the Borrower agrees to hold a vote of the shareholders within 120 days to authorize such an adjustment. In the event the shareholders reject the authorization, the Holder shall have the right to cause the Company to redeem the Debenture in accordance with the provisions of Section 4. 7. ONE-TIME ADJUSTMENT TO CONVERSION PRICE. (a) Notwithstanding the provisions of Section 6 hereof, if the Company does not achieve operating income of at least $2,438,000 in fiscal year 2001 and the market price of the Common Stock is below the conversion price at the time of publication of the Company's results for that period, then the Conversion Price shall be automatically adjusted downward to an amount equal to volume-weighted average closing bid price of the Common Stock, as reported in THE WALL STREET JOURNAL, for the ten consecutive trading days (the "Trading Period") following Borrower's public press release of its fiscal year 2001 financial results; provided that the Conversion Price as adjusted shall not be less than $1.50 per share. If an adjustment occurs pursuant to this Section 7, then the Borrower shall furnish to the holder of this Debenture a statement, within ten days of the occurrence thereof, signed by the Chief Financial Officer and the Secretary of Borrower, of the facts creating such adjustment and specifying the adjusted Conversion Price then in effect. The Holder shall not convert this Debenture or sell any shares of Common Stock during the Trading Period, as well as nine days prior to the commencement of the Trading Period. This restriction also extends to any short selling of the shares of Common Stock by the Holder or any affiliate. 6 (b) Under no circumstance will this adjustment to the Conversion Price cause the holders of all debentures evidencing the Loan to acquire greater than 20% of the Borrower's then outstanding shares of Common Stock. In the event that this adjustment to the Conversion Price allows the holders of all debentures evidencing the Loan to acquire greater than 20% of the Borrower's then outstanding shares of Common Stock, then the debenture holders will be entitled to decrease the Conversion Price, so that their potential and actual ownership is equal to twenty percent (20%) of the issued and outstanding Common Stock at the time this adjustment becomes effective. 8. RESERVATION OF SHARES. Borrower warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock or treasury shares of Common Stock necessary to effect conversion of this Debenture. 9. TAXES. The Company shall pay any documentary or other transactional taxes attributable to the issuance or delivery of this Debenture or the shares of Common Stock issued upon conversion by the Holder (excluding any federal, state or local income taxes and any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any political subdivision thereof, under which such Holder is organized or is qualified to do business). 10. DEFAULT. (a) EVENT OF DEFAULT. An "Event of Default" shall exist if an "Event of Default" (as defined in the Loan Agreement) shall occur and be continuing. (b) REMEDIES UPON EVENT OF DEFAULT. If an Event of Default shall have occurred and be continuing, then the Holder may exercise any one or more of the rights and remedies provided in the Loan Documents, as the Holder, in its sole discretion, may deem necessary or appropriate. (c) REMEDIES NONEXCLUSIVE. Each right, power or remedy of the Holder hereof upon the occurrence of any Event of Default as provided for in this Debenture or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Debenture or now or hereafter existing at law or in equity or by statute, and the exercise or beginning of the exercise by the Holder or transferee hereof of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Holder of any or all such other rights, powers or remedies. (d) EXPENSES. Upon the occurrence of a Default or an Event of Default, which occurrence is not cured within the notice provisions, if any provided therefore, Borrower agrees to pay and shall pay all reasonable costs and expenses (including attorneys' fees and expenses) incurred by the Holder in connection with the preservation and enforcement of Holder's rights under the Convertible Loan Agreement, the Debenture, or any other Loan Document. 7 11. FAILURE TO ACT AND WAIVER. No failure or delay by the Holder hereof to require the performance of any term or terms of this Debenture or not to exercise any right or any remedy shall constitute a waiver of any such term or of any right or of any default, nor shall such delay or failure preclude the Holder hereof from exercising any such right, power or remedy at any later time or times. By accepting payment after the due date of any amount payable under this Debenture, the Holder hereof shall not be deemed to waive the right either to require payment when due of all other amounts payable, or to later declare a default for failure to effect such payment of any such other amount. The failure of the Holder of this Debenture to give notice of any failure or breach of the Borrower under this Debenture shall not constitute a waiver of any right or remedy in respect of such continuing failure or breach or any subsequent failure or breach. 12. CONSENT TO JURISDICTION. The Company hereby agrees and consents that any action, suit or proceeding arising out of this Debenture may be brought in any state or federal court in the State of Texas, including the United States District Court for the Northern District of Texas, or in any other court having jurisdiction over the subject matter, all at the sole election of the Holder hereof, and by the issuance and execution of this Debenture, the Borrower irrevocably consents to the jurisdiction of each such court. The Company hereby irrevocably appoints CT Corporation System, Dallas, Texas, as agent for the Borrower to accept service of process for and on behalf of the Borrower in any action, suit or proceeding arising out of this Debenture. Except for default in payment of interest or principal when and as they become due, and except as otherwise specifically set forth herein or otherwise agreed to in writing by the parties, any action, dispute, claim or controversy (all such herein called "Dispute") between or among the parties as to the facts or the interpretation of the Debenture shall be resolved by arbitration as set forth in the Loan Agreement. 13. HOLDER'S RIGHT TO REQUEST MULTIPLE DEBENTURES. The Holder shall, upon written request and presentation of the Debenture, have the right, at any interest payment date, to request division of this Debenture into two or more instruments, each of such to be in such amounts as shall be requested; provided however, that no Debenture shall be issued in denominations of face amount less than $100,000. 14. TRANSFER. Subject to Section 12.08 of the Loan Agreement, this Debenture may be transferred on the books of the Borrower by the registered Holder hereof, or by Holder's attorney duly authorized in writing, in multiples of $100,000 only upon (i) delivery to the Borrower of a duly executed assignment of the Debenture, or part thereof, to the proposed new Holder, along with a current notation of the amount of payments received and net Principal Amount yet unfunded, and presentment of such Debenture to the Borrower for issue of a replacement Debenture, or Debentures, in the name of the new Holder, (ii) the designation by the new Holder of the Lender's agent for notice, such agent to be the sole party to whom Borrower shall be required to provide notice when notice to Holder is required hereunder and who shall be the sole party authorized to represent Lender in regard to modification or waivers under the Debenture, the Loan Agreement, or other Loan Documents; and any action, consent or waiver (other than a compromise of principal and interest) when given or taken by Lender's agent for notice, shall be deemed to be the action of the holders of a majority in amount of the Principal Amount of the 8 Debenture, as such holders are recorded on the books of the Borrower, and (iii) in compliance with the legend to read as follows: "This Debenture has not been registered under the Securities Act of 1933, as amended ("Act"), or applicable state securities laws ("State Acts"), and shall not be sold, hypothecated, or otherwise transferred, unless such transfer is made in compliance with the Act and the State Acts." The Company shall be entitled to treat any holder of record of the Debenture as the Holder in fact thereof and of the Debenture and shall not be bound to recognize any equitable or other claim to or interest in this Debenture in the name of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law. 15. NOTICES. All notices and communications under this Debenture shall be in writing and shall be either delivered in person or by overnight service, such as FedEx, and accompanied by a signed receipt therefor; or mailed first-class United States certified mail, return receipt requested, postage prepaid, and addressed as follows: (i) if to the Borrower at its address for notice as stated in the Loan Agreement; and (ii) if to the Holder of this Debenture, to the address (a) of such Holder as it appears on the books of the Borrower or (b) in the case of a partial assignment to one or more Holders, to the Lender's agent for notice, as the case may be. Any notice of communication shall be deemed given and received as of the date of such delivery if delivered; or if mailed, then three days after the date of mailing. 16. MAXIMUM INTEREST RATE. (a) Regardless of any provision contained in this Debenture, Lender shall never be entitled to receive, collect or apply as interest on the Debenture any amount in excess of interest calculated at the Maximum Rate, and, in the event that Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Debenture is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, pro rate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Debenture; provided that, if the Debenture is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal amount of the Debenture and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. 9 (b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of interest (if any) permitted by applicable law on such day that, at any time or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness evidenced by the Debenture under the laws which are presently in effect of the United States of America or by the laws of any other jurisdiction which are or may be applicable to the Holders of the Debenture and such Indebtedness or, to the extent permitted by law, under such applicable laws of the United States of America or by the laws of any other jurisdiction which are or may be applicable to the Holder of the Debenture and which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. 17. LOAN AGREEMENT, GUARANTY AND SECURITY AND PLEDGE AGREEMENTS. This Debenture is issued pursuant to the Convertible Loan Agreement dated of even date herewith among the Company and the other parties thereto, and the Holder is entitled to all the rights and benefits thereunder. Both Borrower and the Holder have participated in the negotiation and preparation of the Convertible Loan Agreement and of this Debenture. Borrower agrees that a copy of the Loan Agreement with all amendments, additions and substitutions therefor shall be available to the Holder at the offices of Borrower. The indebtedness evidenced by this Debenture is secured pursuant to the Security and Pledge Agreements dated of even date herewith among the Company, its subsidiaries and the Holder, and the Holder is entitled to all rights and benefits of a secured party thereunder. The payment and performance of this Debenture is guaranteed by the Company's subsidiaries pursuant to their Guaranty dated of even date herewith. 18. DEFINED TERMS. Capitalized terms used but not defined herein shall have the meaning given them in the Loan Agreement. 19. GOVERNING LAW. This Debenture shall be governed by and construed and enforced in accordance with the substantive laws of the State of Texas, without regard to the conflicts of laws provisions thereof, and the applicable laws of the United States. Venue and jurisdiction shall lie in the federal or state courts of Dallas County, Texas. 10 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly issued, executed and delivered on the date and year above stated. DIGITAL RECORDERS, INC. By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- 11 EX-10.38 6 a2053907zex-10_38.txt EXHIBIT 10.38 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR APPLICABLE STATE SECURITIES LAWS ("STATE ACTS"), AND SHALL NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED, UNLESS SUCH TRANSFER IS MADE IN COMPLIANCE WITH THE ACT AND THE STATE ACTS. STOCK PURCHASE WARRANT This Stock Purchase Warrant (this "Warrant"), dated June 27, 2001, is issued THE FROST NATIONAL BANK, CUSTODIAN FBO, RENAISSANCE US GROWTH & INCOME TRUST PLC, TRUST NO. W00740100 ("Holder"), by DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company"). 1. PURCHASE OF SHARES. Subject to the terms and conditions hereinafter set forth, the Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company one hundred thousand (100,000) fully paid and non-assessable shares of Common Stock, no par value (the "Common Stock"), of the Company (as adjusted pursuant to Section 7 hereof, the "Shares") for the purchase price specified in Section 2 below. 2. PURCHASE PRICE. The purchase price for the Shares is $2.00 per share. Such price shall be subject to adjustment pursuant to Section 7 hereof (such price, as adjusted from time to time, is herein referred to as the "Warrant Price"). 3. EXERCISE PERIOD. This Warrant is exercisable in whole or in part at any time from the date hereof through June 27, 2006. 4. METHOD OF EXERCISE. While this Warrant remains outstanding and exercisable in accordance with Section 3 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (a) surrender of this Warrant, together with a duly executed copy of the form of Exercise Notice attached hereto, to the Secretary of the Company at its principal offices, and the payment to the Company of an amount equal to the aggregate purchase price for the number of Shares being purchased; or (b) if the Company's Common Stock is publicly traded as of such date, the instruction to retain that number of Shares having a value equal to the aggregate exercise price of the Shares as to which this Warrant is being exercised and to issue to the Holder the remainder of such Shares computed using the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Common Stock to be issued to the Holder. 1 Y = the number of shares of Common Stock as to which this Warrant is being exercised. A = the fair market value of one share of Common Stock. B = the Warrant Price. As used herein, the "fair market value of one share of Common Stock" shall mean: (2) Except in the circumstances described in clause (2) or (3) hereof, the closing price of the Company's Common Stock, as reported in the WALL STREET JOURNAL, on the trading day immediately prior to the date of exercise; (3) If such exercise is in conjunction with a merger, acquisition or other consolidation pursuant to which the Company is not the surviving entity, the value received by the holders of the Common Stock pursuant to such transaction for each share; or (4) If such exercise is in conjunction with the initial public offering of the Company, the price at which the Common Stock is sold to the public in such offering. 5. CERTIFICATES FOR SHARES. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Shares so purchased shall be issued as soon as practicable thereafter, and in any event within thirty (30) days of the delivery of the subscription notice. 6. RESERVATION OF SHARES. The Company covenants that it will at all times keep available such number of authorized shares of its Common Stock, free from all preemptive rights with respect thereto, which will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 7. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as follows: (a) STOCK DIVIDENDS, SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time prior to the expiration of this Warrant subdivide its Common Stock, by stock split or otherwise, combine its Common Stock or issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, the number of Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend and proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective or 2 as of the record date of such dividend, or, in the event that no record date is fixed, upon the making of such dividend. (b) RECLASSIFICATION, REORGANIZATION, MERGER, SALE OR CONSOLIDATION. In the event of any reclassification, capital reorganization or other change in the Common Stock of the Company (other than as a result of a subdivision, combination or stock dividend provided for in Section 7(a) above) or in the event of a consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such reclassification, reorganization or change, consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such reclassification, reorganization or change, consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were exercisable by the Holder immediately prior to such reclassification, reorganization or change, consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if this Warrant had been exercised immediately prior to such event, less the Warrant Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease, and this Warrant shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Warrant, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Holder surrendering this Warrant. (c) CERTAIN DISTRIBUTIONS. In case the Company shall fix a record date for the making of a dividend or distribution of cash, securities or property to all holders of Common Stock (excluding any dividends or distributions referred to in Sections 7(a) or 7(b) above, the number of Shares purchasable upon an exercise of this Warrant after such record date shall be adjusted to equal the product obtained by multiplying the number of Shares purchasable upon an exercise of this Warrant immediately prior to such record date by a fraction, the numerator of which shall be the Warrant Price immediately prior to such distribution, and the denominator of which shall be the Warrant Price immediately prior to such distribution, less the fair market value per Share, as determined by the Holder, of the cash, securities or property so distributed. Such adjustment shall be made successively whenever any such distribution is made and shall become effective on the effective date of distribution. 3 (d) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE WARRANT PRICE. If and whenever any Additional Common Stock shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Warrant Price, then in each such case the initial Warrant Price shall be reduced to a new Warrant Price in an amount equal to the price per share for the Additional Common Stock then issued, if issued in connection with a sale of shares, or the value of the Additional Common Stock then issued, as determined in accordance with generally accepted accounting principles, if issued other than for cash, and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Warrant Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debentures into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (e) SALE OF SHARES. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the gross amount of the cash paid to Borrower for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Borrower (including Common Stock held in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issuable upon exercise of presently outstanding amounts or stock options; or (C) up to 300,000 shares of Common Stock issuable upon exercise of employee or director stock options to be granted in the future at less than the initial Warrant Price. 8. PRE-EXERCISE RIGHTS. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares, including without limitation, the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, and the Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. 9. REGISTRATION RIGHTS. The Shares of Common Stock issuable shall be subject to the registration rights set forth in the Convertible Loan Agreement of even date herewith by and among the Holder and the Company, and the Holder shall be entitled to all rights and benefits thereof. 10. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the Holder and their respective successors and assigns. [SIGNATURE PAGE FOLLOWS.] 4 11. GOVERNING LAW. This Warrant shall be governed by the laws of the State of Texas, excluding the conflicts of laws provisions thereof. DIGITAL RECORDERS, INC. By: -------------------------------------- David L. Turney Chairman, Chief Executive Officer and President 5 EXERCISE NOTICE Dated _________, ____ The undersigned hereby irrevocably elects to exercise the Stock Purchase Warrant, dated June 27, 2001, issued by DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company") to the undersigned to the extent of purchasing ___________ shares of Common Stock and hereby makes payment of $_________ in payment of the aggregate Warrant Price of such Shares. RENAISSANCE US GROWTH & INCOME TRUST PLC By: ---------------------------------- Russell Cleveland, Director EX-10.39 7 a2053907zex-10_39.txt EXHIBIT 10.39 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR APPLICABLE STATE SECURITIES LAWS ("STATE ACTS"), AND SHALL NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED, UNLESS SUCH TRANSFER IS MADE IN COMPLIANCE WITH THE ACT AND THE STATE ACTS. STOCK PURCHASE WARRANT This Stock Purchase Warrant (this "Warrant"), dated June 27, 2001, is issued to HSBC GLOBAL CUSTODY NOMINEE (U.K.) LIMITED, DESIGNATION NO. 896414 ("Holder"), by DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company"). 1. PURCHASE OF SHARES. Subject to the terms and conditions hereinafter set forth, the Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company one hundred thousand (100,000) fully paid and non-assessable shares of Common Stock, no par value (the "Common Stock"), of the Company (as adjusted pursuant to Section 7 hereof, the "Shares") for the purchase price specified in Section 2 below. 2. PURCHASE PRICE. The purchase price for the Shares is $2.00 per share. Such price shall be subject to adjustment pursuant to Section 7 hereof (such price, as adjusted from time to time, is herein referred to as the "Warrant Price"). 3. EXERCISE PERIOD. This Warrant is exercisable in whole or in part at any time from the date hereof through June 27, 2006. 4. METHOD OF EXERCISE. While this Warrant remains outstanding and exercisable in accordance with Section 3 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (a) surrender of this Warrant, together with a duly executed copy of the form of Exercise Notice attached hereto, to the Secretary of the Company at its principal offices, and the payment to the Company of an amount equal to the aggregate purchase price for the number of Shares being purchased; or (b) if the Company's Common Stock is publicly traded as of such date, the instruction to retain that number of Shares having a value equal to the aggregate exercise price of the Shares as to which this Warrant is being exercised and to issue to the Holder the remainder of such Shares computed using the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Common Stock to be issued to the Holder. 1 Y = the number of shares of Common Stock as to which this Warrant is being exercised. A = the fair market value of one share of Common Stock. B = the Warrant Price. As used herein, the "fair market value of one share of Common Stock" shall mean: (2) Except in the circumstances described in clause (2) or (3) hereof, the closing price of the Company's Common Stock, as reported in the WALL STREET JOURNAL, on the trading day immediately prior to the date of exercise; (3) If such exercise is in conjunction with a merger, acquisition or other consolidation pursuant to which the Company is not the surviving entity, the value received by the holders of the Common Stock pursuant to such transaction for each share; or (4) If such exercise is in conjunction with the initial public offering of the Company, the price at which the Common Stock is sold to the public in such offering. 5. CERTIFICATES FOR SHARES. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Shares so purchased shall be issued as soon as practicable thereafter, and in any event within thirty (30) days of the delivery of the subscription notice. 6. RESERVATION OF SHARES. The Company covenants that it will at all times keep available such number of authorized shares of its Common Stock, free from all preemptive rights with respect thereto, which will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 7. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as follows: (a) STOCK DIVIDENDS, SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time prior to the expiration of this Warrant subdivide its Common Stock, by stock split or otherwise, combine its Common Stock or issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, the number of Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend and proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective or 2 as of the record date of such dividend, or, in the event that no record date is fixed, upon the making of such dividend. (b) RECLASSIFICATION, REORGANIZATION, MERGER, SALE OR CONSOLIDATION. In the event of any reclassification, capital reorganization or other change in the Common Stock of the Company (other than as a result of a subdivision, combination or stock dividend provided for in Section 7(a) above) or in the event of a consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such reclassification, reorganization or change, consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such reclassification, reorganization or change, consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were exercisable by the Holder immediately prior to such reclassification, reorganization or change, consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if this Warrant had been exercised immediately prior to such event, less the Warrant Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease, and this Warrant shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Warrant, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Holder surrendering this Warrant. (c) CERTAIN DISTRIBUTIONS. In case the Company shall fix a record date for the making of a dividend or distribution of cash, securities or property to all holders of Common Stock (excluding any dividends or distributions referred to in Sections 7(a) or 7(b) above, the number of Shares purchasable upon an exercise of this Warrant after such record date shall be adjusted to equal the product obtained by multiplying the number of Shares purchasable upon an exercise of this Warrant immediately prior to such record date by a fraction, the numerator of which shall be the Warrant Price immediately prior to such distribution, and the denominator of which shall be the Warrant Price immediately prior to such distribution, less the fair market value per Share, as determined by the Holder, of the cash, securities or property so distributed. Such adjustment shall be made successively whenever any such distribution is made and shall become effective on the effective date of distribution. 3 (d) ADJUSTMENT FOR ISSUANCE OF SHARES AT LESS THAN THE WARRANT PRICE. If and whenever any Additional Common Stock shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Warrant Price, then in each such case the initial Warrant Price shall be reduced to a new Warrant Price in an amount equal to the price per share for the Additional Common Stock then issued, if issued in connection with a sale of shares, or the value of the Additional Common Stock then issued, as determined in accordance with generally accepted accounting principles, if issued other than for cash, and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Warrant Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debentures into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (e) SALE OF SHARES. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the gross amount of the cash paid to Borrower for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Borrower (including Common Stock held in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issuable upon exercise of presently outstanding amounts or stock options; or (C) up to 300,000 shares of Common Stock issuable upon exercise of employee or director stock options to be granted in the future at less than the initial Warrant Price. 8. PRE-EXERCISE RIGHTS. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares, including without limitation, the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, and the Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. 9. REGISTRATION RIGHTS. The Shares of Common Stock issuable shall be subject to the registration rights set forth in the Convertible Loan Agreement of even date herewith by and among the Holder and the Company, and the Holder shall be entitled to all rights and benefits thereof. 10. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the Holder and their respective successors and assigns. [SIGNATURE PAGE FOLLOWS.] 4 11. GOVERNING LAW. This Warrant shall be governed by the laws of the State of Texas, excluding the conflicts of laws provisions thereof. DIGITAL RECORDERS, INC. By: ------------------------------------- David L. Turney Chairman, Chief Executive Officer and President 5 EXERCISE NOTICE Dated _________, ____ The undersigned hereby irrevocably elects to exercise the Stock Purchase Warrant, dated June 27, 2001, issued by DIGITAL RECORDERS, INC., a North Carolina corporation (the "Company") to the undersigned to the extent of purchasing ___________ shares of Common Stock and hereby makes payment of $_________ in payment of the aggregate Warrant Price of such Shares. BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: ------------------------------- Russell Cleveland, Director EX-10.40 8 a2053907zex-10_40.txt EXHIBIT 10.40 SECURITY AGREEMENT This SECURITY AGREEMENT (this "Agreement"), dated as of June 27, 2001, is entered into among DIGITAL RECORDERS, INC., a North Carolina corporation ("Borrower"), and RENAISSANCE US GROWTH & INCOME TRUST PLC ("RUSGIT"), BFSUS SPECIAL OPPORTUNITIES TRUST PLC, a public limited company registered in England and Wales ("BFSUS") (RUSGIT and BFSUS collectively referred to as "Lender"), and RENAISSANCE CAPITAL GROUP, INC., a Texas corporation, as Agent for the Secured Party (the "Agent"). RECITALS A. Lender, Agent and Borrower have entered into a Convertible Loan Agreement of even date herewith (the "Loan Agreement"), pursuant to which Lender will lend to Borrower the aggregate principal amount of $3,000,000 evidenced by Borrower's 8.00% Convertible Debentures of even date herewith (the "Debentures"). B. As a condition for entering into the Loan Agreement and providing the Loan, Lender required that Borrower grant a security interest in its assets as collateral for such Loan. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements set forth herein, the parties agree as follows: 1. GRANT OF SECURITY INTEREST. In order to secure payment when due of the Obligations now existing or hereafter incurred, Borrower hereby irrevocably grants to the Lender a continuing security interest in the following property of the Borrower (the "Collateral"), whether now owned or existing, or hereafter acquired, owned, existing or arising (whether by contract or operation of law), and wherever located, which shall be retained by Lender until the Obligations have been paid in full and the Loan Agreement has been terminated; PROVIDED, HOWEVER, that such Liens in the Collateral shall at all times be subject and subordinate to the Liens granted by Borrower to the holder of Senior Obligations, on the terms set forth in the Intercreditor Agreement. a. All accounts (including inter-company receivables), contract rights, chattel paper and rights of payment of every kind (collectively, "Accounts") and instruments and general intangibles of Borrower. b. All bank accounts of Borrower. c. All monies and property of any kind of Borrower, now or hereafter in the possession or under the control of Lender, Agent or a bailee of Lender. d. All licenses, patents, patent applications, copyrights, trademarks, trademark applications, trade names, assumed names, service marks and service mark applications of Borrower. 1 e. All inventory, equipment (including any and all computer hardware and components), machinery and fixtures of Borrower in all forms and wherever located, and all parts and products thereof, all accessories thereto, and all documents therefor. f. All books and records (including, without limitation, customer lists, credit files, tapes, ledger cards, computer software and hardware, electronic data processing software, computer programs, printouts and other computer materials and records) of Borrower evidencing or containing information regarding or otherwise pertaining to any of the foregoing. g. Contract rights under agreements between Borrower and its Subsidiaries. h. All accessories to, substitutions for and all replacements, products and proceeds of the foregoing, including, without limitation, proceeds of insurance policies insuring the Collateral (including, but not limited to, claims paid and premium refunds). 2. INSURANCE ON COLLATERAL. Borrower further warrants and agrees that it will pay for and maintain insurance in the amounts and of the types required pursuant to Section 5.12 of the Loan Agreement. 3. DELIVERY OF RECEIVABLES. Subject to the rights of the holders of the Senior Obligations, upon Agent's request, upon the occurrence and during the continuance of an Event of Default, Borrower will, at any reasonable time and at Borrower's own expense, physically deliver to Agent, all Accounts (including inter-company receivables) assigned to Agent at any reasonable place or places designated by Agent. Failure to deliver any Account, or failure to deliver physical possession of any instruments, documents or writings in respect of any Account shall not invalidate Agent's Lien and security interest therein, except to the extent that possession may be required by applicable law for the perfection of said Lien or security interest, in which latter case, the Account shall be deemed to be held by the Borrower (for the holders of the Senior Obligations, as applicable) as the custodian agent of Agent, for the benefit of Lender. Failure of Agent to demand or require Borrower to include any Account in any schedule, to execute any schedule, to assign and deliver any schedule or to deliver physical possession of any instruments, documents or writings related to any Account shall not relieve Borrower of its duty so to do. 4. COLLECTION OF RECEIVABLES. Borrower hereby agrees that it shall use commercially reasonable efforts, at its sole cost and expense and in its own name, to promptly and diligently collect and enforce payment of all Accounts and Borrower will defend and hold Lender and Agent harmless from any and all loss, damage, penalty, fine or expense arising from such collection or enforcement. 5. FINANCING STATEMENTS. Borrower agrees to execute all financing statements and amendments thereto as Agent, on behalf of the Lender, may request from time to time to evidence the security interest granted to Agent hereunder and will pay the cost of all filing fees and taxes, if any, necessary to effect the filing thereof. Wherever permitted by law, during the term of this Agreement, Borrower authorizes Agent to file financing statements with respect to the Collateral without the signature of Borrower, and shall give notice thereof to Borrower. 2 Without the written consent of Agent, Borrower will not allow any financing statement or notice of assignment to be on file in any public office covering any Collateral, proceeds thereof or other matters subject to the security interest granted to Agent herein, unless such financing statement relates to a Permitted Lien. 6. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion, discharge or obtain the release of any Lien asserted by any Person against the Collateral, other than a Permitted Lien which, in the Lender's judgment, may have a Material Adverse Effect on the Lender's rights with respect to the Collateral. All sums paid by Lender in respect thereof shall be payable, on demand, by Borrower to Lender and shall be a part of the Obligations. 7. DEFAULT AND REMEDIES. a. Borrower shall be in default hereunder upon the occurrence and during the continuation of an Event of Default, as set forth in the Loan Agreement. b. Upon the occurrence and during the continuation of any Event of Default (i) unless Lender or Agent shall elect otherwise, the entire unpaid amount of the Obligations due under the Loan Agreement, as are not then otherwise due and payable, shall become immediately due and payable without notice to Borrower or demand by Lender or Agent and (ii) either Lender or Agent may, at its or their option, exercise from time to time any and all rights and remedies available to them under the Uniform Commercial Code or otherwise, including the right to foreclose or otherwise realize upon the Collateral and to dispose of any of the Collateral at one or more public or private sales or other proceedings, and Borrower agrees that any of Lender, Agent or their nominee may become the purchaser at any such sale or sales. Borrower agrees that ten (10) days shall be reasonable prior notice of the date of any public sale or other disposition of the same. All rights and remedies granted Lender hereunder or under any other agreement between Lender and Borrower shall be deemed concurrent and cumulative and not alternative, and Lender, or Agent on its behalf, may proceed with any number of remedies at the same time or at different times until all the Obligations are fully satisfied. The exercise of any one right or remedy shall not be deemed a waiver or release of, or an election against, any other right or remedy. Borrower shall pay to Lender or Agent, on demand, any and all expenses (including reasonable attorneys' fees and legal expenses) which may have been incurred by Lender or Agent (i) in the prosecution or defense of any action arising under this Agreement, the Collateral or any of Lender's rights therein or thereto; or (ii) in connection with the custody, preservation, use, operation, preparation for sale or sale of the Collateral, the incurring of all of which are hereby authorized to the extent Lender or Agent deem the same advisable. Borrower's liability to Lender or Agent for any such payment shall be included in the Obligations. The proceeds of any Collateral received by Lender or Agent at any time before or after an Event of Default, whether from a sale or other disposition of Collateral or otherwise, or the Collateral itself, may be applied to the payment, in full or in part, of such of the Obligations and in such order and manner as Lender or Agent may elect. 3 8. REPRESENTATIONS AND COVENANTS OF BORROWER. Borrower hereby represents to and agrees with Lender as follows: a. Except as referred to in Section 1, Borrower owns the Collateral as sole owner, free and clear of any Liens, other than Permitted Liens. b. So long as any Obligations remain unpaid, Borrower agrees not to sell, assign or transfer the Collateral, other than sales of Collateral in the ordinary course of business, and to maintain it free and clear of any Liens, other than Permitted Liens. 9. MISCELLANEOUS. a. This Agreement shall bind and inure to the benefit of the parties and their respective heirs, personal representatives, successors and assigns, except that Borrower shall not assign any of its rights hereunder without Lender's and Agent's prior written consent. b. Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remainder of this Agreement or the validity or enforceability of such provision in any other jurisdiction. c. This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the State of Texas, without regard to the conflicts of laws provisions thereof, and the applicable laws of the United States. Venue and jurisdiction shall be in the state or federal courts in Dallas County, Texas. d. Borrower hereby consents to the jurisdiction of the courts of the State of Texas in any action or proceeding which may be brought against it under or in connection with this Agreement or any transaction contemplated hereby or to enforce any agreement contained herein and, in the event any such action or proceeding shall be brought against it, Borrower agrees not to raise any objection to such jurisdiction or to the laying of venue in Dallas County, Texas or, if applicable, any other county in any state in which Collateral is located. e. All capitalized terms, unless otherwise specified, have the meanings assigned to them in the Loan Agreement and the Debentures. f. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. 4 If to Borrower to: Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 Facsimile: (704) 866-8010 If to Lender to: Renaissance US Growth & Income Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 5 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 If to Agent to: Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. g. Capitalized terms used herein, unless otherwise defined herein, have the definitions given them in the Loan Agreement and in the Intercreditor Agreement among TwinVision Corp. of North America, Inc., a North Carolina corporation, Digital Audio Corporation, a North Carolina corporation, Borrower, Lender, Agent, and Guaranty Business Credit Corporation, a Delaware corporation. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 6 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date and year written above. BORROWER: DIGITAL RECORDERS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ LENDER: RENAISSANCE US GROWTH & INCOME TRUST PLC By: ----------------------------- Name: Russell Cleveland Title: Director BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: ----------------------------- Name: Russell Cleveland Title: Director AGENT: RENAISSANCE CAPITAL GROUP, INC. By: ----------------------------- Name: Russell Cleveland Title: President and CEO 7 EX-10.41 9 a2053907zex-10_41.txt EXHIBIT 10.41 SUBSIDIARY SECURITY AGREEMENT This SECURITY AGREEMENT is made and entered into as of this 27th day of June, 2001, among TWINVISION OF NORTH AMERICA, INC., a North Carolina corporation and DIGITAL AUDIO CORPORATION, a North Carolina corporation (each a "Guarantor" and collectively, the "Guarantors"), and RENAISSANCE US GROWTH & INCOME TRUST PLC ("RUSGIT"), BFSUS SPECIAL OPPORTUNITIES TRUST PLC, a public limited company registered in England and Wales ("BFSUS") (RUSGIT and BFSUS collectively referred to as "Lender"), and RENAISSANCE CAPITAL GROUP, INC., a Texas corporation, as agent for the Secured Party (the "Agent"). WHEREAS, Lender, Agent and DIGITAL RECORDERS, INC. (the "Borrower"), have entered into a Convertible Loan Agreement of even date herewith (the "Loan Agreement"), pursuant to which Lender will lend to the Borrower the aggregate principal amount of $3,000,000 evidenced by the Borrower's 8.00% Convertible Debentures of even date herewith (the "Debentures"); WHEREAS, as a condition for entering into the Loan Agreement and providing the Loan, Lender required that Guarantors, each a subsidiary of the Borrower, guarantee the Obligations of the Borrower and grant a security interest in the assets of Guarantors as collateral for such Guarantee; and WHEREAS, Guarantors executed a Guarantee of even date herewith in favor of Lender (the "Guarantee"), whereby Guarantors guaranteed the due performance and full and prompt payment of all obligations and indebtedness of the Borrower arising under the Loan Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereby agree as follows: 1. GRANT OF SECURITY INTEREST. In order to secure payment when due of all Obligations now existing or hereafter incurred, Guarantors hereby irrevocably grant to Lender a continuing security interest in the following property of Guarantors (the "Collateral"), whether now owned or existing, or hereafter acquired, owned, existing or arising (whether by contract or operation of law), and wherever located, which shall be retained by Lender until the Obligations have been paid in full and the Loan Agreement has been terminated; PROVIDED, HOWEVER, that such Liens in the Collateral shall at all times be subject and subordinate to the Liens granted by Guarantors to the holder of Senior Obligations, on the terms set forth in the Subordination and Intercreditor Agreement. (a) All accounts (including inter-company receivables), contract rights, chattel paper and rights of payment of every kind (collectively, "Accounts") and instruments and general intangibles of Guarantors. (b) All bank accounts of Guarantors. 1 (c) All monies, residues and property of any kind, now or at any time or times hereafter, in the possession or under the control of Lender, Agent or a bailee of Lender. (d) All licenses, patents, patent applications, copyrights, trademarks, trademark applications, trade names, assumed names, service marks and service mark applications of Guarantors. (e) All inventory, equipment (including any and all computer hardware and components), machinery and fixtures of Guarantors in all forms and wherever located, and all parts and products thereof, all accessories thereto, and all documents therefor. (f) All books and records (including, without limitation, customer lists, credit files, tapes, ledger cards, computer software and hardware, electronic data processing software, computer programs, printouts and other computer materials and records) of Guarantors evidencing or containing information regarding or otherwise pertaining to any of the foregoing. (g) All accessories to, substitutions for and all replacements, products and proceeds of the foregoing including, without limitation, proceeds of insurance policies insuring the Collateral (including, but not limited to, claims paid and premium refunds). 2. INSURANCE ON COLLATERAL. Guarantors further warrant and agree that in each case where the terms of any such Accounts require the Guarantor or the account debtor named in such Account to place or carry insurance in respect of the property to which such Account relates, the Guarantor or the account debtor will pay for and maintain such insurance. 3. DELIVERY OF RECEIVABLES. Upon Lender's or Agent's request, upon the occurrence of an Event of Default, the Guarantors will, at any reasonable time and at Guarantor's own expense, physically deliver to Lender or Agent all Accounts assigned to Lender at any reasonable place or places designated by Lender or Agent. Failure to deliver any Account, or failure to deliver physical possession of any instruments, documents or writings in respect of any Account shall not invalidate Lender's Lien and security interest therein, except to the extent that possession may be required by applicable law for the perfection of said Lien or security interest, in which latter case, the Account shall be deemed to be held by Guarantors as the custodian agent of Lender, for the benefit of Lender. Failure of Lender or Agent to demand or require Guarantors to include any Account in any schedule, to execute any schedule, to assign and deliver any schedule or to deliver physical possession of any instruments, documents or writings related to any Account shall not relieve Guarantors of their duty so to do. 4. COLLECTION OF RECEIVABLES. Guarantors hereby agree that they shall use commercially reasonable efforts, at their sole cost and expense and in their own names, to promptly and diligently collect and enforce payment of all Accounts and Guarantors will defend 2 and hold Lender harmless from any and all loss, damage, penalty, fine or expense arising from such collection or enforcement. 5. FINANCING STATEMENTS. Guarantors agree to execute all financing statements and amendments thereto as Lender or Agent may request from time to time to evidence the security interest granted to Lender hereunder and will pay all filing fees and taxes, if any, necessary to effect the filing thereof. Wherever permitted by law, Guarantors authorize Lender or Agent to file financing statements with respect to the Collateral without the signature of Guarantors, and shall give notice thereof to the Guarantors. Without the written consent of Lender or Agent, Guarantors will not allow any financing statement or notice of assignment to be on file in any public office covering any Collateral, proceeds thereof or other matters subject to the security interest granted to Lender herein, unless such financing statement relates to a Permitted Lien. 6. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion, discharge or obtain the release of any security interest, lien, claim or encumbrance asserted by any Person against the Collateral, other than a Permitted Lien. All sums paid by Lender in respect thereof shall be payable, on demand, by Guarantors to such Lender and shall be a part of the Obligations. 7. DEFAULT AND REMEDIES. (a) Guarantors shall be in default hereunder upon the occurrence of an Event of Default, as set forth in the Loan Agreement. (b) Upon the occurrence of any Event of Default which shall be continuing, (i) unless Lender or Agent shall elect otherwise, the entire unpaid amount due under the Guarantee as are not then otherwise due and payable shall become immediately due and payable without notice to Guarantors or demand by Lender or Agent and (ii) either Lender or Agent may at its or their option exercise from time to time any and all rights and remedies available to them under the Uniform Commercial Code or otherwise, including the right to foreclose or otherwise realize upon the Collateral and to dispose of any of the Collateral at one or more public or private sales or other proceedings, and Guarantors agree that any of Lender, Agent or their nominee may become the purchaser at any such sale or sales. Guarantors agree that ten (10) days shall be reasonable prior notice of the date of any public sale or other disposition, if the same may be made. All rights and remedies granted Lender hereunder or under any other agreement between Lender and Guarantors shall be deemed concurrent and cumulative and not alternative, and Lender, or Agent on its behalf, may proceed with any number of remedies at the same time or at different times until all the Obligations are fully satisfied. The exercise of any one right or remedy shall not be deemed a waiver or release of or an election against any other right or remedy. Guarantors shall pay to Lender or Agent, on demand, any and all expenses (including reasonable attorneys' fees and legal expenses) which may have been incurred by Lender or Agent (i) in the prosecution or defense of any action growing out of or connected with the subject matter of this Agreement, the Guarantee, the Collateral or any of Lender's rights therein or thereto; or (ii) in connection with the custody, preservation, use, operation, preparation for sale or sale of the Collateral, the 3 incurring of all of which are hereby authorized to the extent Lender or Agent deem the same advisable. Guarantors' liability to Lender or Agent for any such payment shall be included in the Obligations. The proceeds of any Collateral received by Lender or Agent at any time before or after default, whether from a sale or other disposition of Collateral or otherwise, or the Collateral itself, may be applied to the payment in full or in part of such of the Obligations and in such order and manner as Lender or Agent may elect. 8. REPRESENTATIONS AND COVENANTS OF GUARANTORS. Guarantors hereby represent to and agree with Lender as follows: (a) Except as referred to in Section 1, Guarantors own the Collateral as sole owners, free and clear of any Liens, other than Permitted Liens. (b) So long as any amounts due pursuant to the Loan Agreement remain unpaid, Guarantors agree not to sell, assign or transfer the Collateral, other than the sale of Collateral in the ordinary course of business, and to maintain it free and clear of any Liens, other than Permitted Liens. 9. MISCELLANEOUS. (a) This Agreement shall bind and inure to the benefit of the parties and their respective heirs, personal representatives, successors and assigns, except that Guarantors shall not assign any of their rights hereunder without Lender's and Agent's prior written consent. (b) Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remainder of this Agreement or the validity or enforceability of such provision in any other jurisdiction. (c) All issues arising hereunder shall be governed by the laws of the State of Texas. (d) Guarantors hereby consent to the jurisdiction of the courts of the State of Texas in any action or proceeding which may be brought against them under or in connection with this Agreement or any transaction contemplated hereby or to enforce any agreement contained herein, and in the event any such action or proceeding shall be brought against one or both of them, Guarantors agree not to raise any objection to such jurisdiction or to the laying of venue in Dallas County, Texas or, if applicable, any other county in any state in which Collateral is located. 4 (e) Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. If to Guarantors to: c/o Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 Facsimile: (704) 866-8010 If to Lender to: Renaissance US Growth & Income Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President 5 Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 If to Agent to: Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. (f) Capitalized terms used herein, unless otherwise defined herein, have the definitions given them in the Loan Agreement and in the Intercreditor Agreement among TwinVision Corp. of North America, Inc., a North Carolina corporation, Digital Audio Corporation, a North Carolina corporation, Borrower, Lender, Agent, and Guaranty Business Credit Corporation, a Delaware corporation. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 6 7 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date and year written above. GUARANTORS: TWINVISION OF NORTH AMERICA, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- DIGITAL AUDIO CORPORATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- LENDER: RENAISSANCE US GROWTH & INCOME TRUST PLC By: -------------------------------------- Name: Russell Cleveland Title: Director BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: -------------------------------------- Name: Russell Cleveland Title: Director AGENT: RENAISSANCE CAPITAL, GROUP, INC. By: -------------------------------------- Name: Russell Cleveland Title: President and CEO 8 EX-10.42 10 a2053907zex-10_42.txt EXHIBIT 10.42 ================================================================================ SUBSIDIARY GUARANTY made by Subsidiaries of DIGITAL RECORDERS, INC. in favor of RENAISSANCE US GROWTH & INCOME TRUST PLC and BFSUS SPECIAL OPPORTUNITIES TRUST PLC Dated as of June 27, 2001 ================================================================================ SUBSIDIARY GUARANTY, dated as of June 27, 2001, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the "GUARANTORS"), in favor of RENAISSANCE US GROWTH & INCOME TRUST PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC ("BFSUS") (RUSGIT and BFSUS collectively referred to as the "Holder") pursuant to the 8.00% Convertible Debentures ("Debentures"), dated as of June 27, 2001 (as amended, supplemented or otherwise modified from time to time, the "Debentures"), from DIGITAL RECORDERS, INC., a North Carolina corporation (the "BORROWER") in favor of Holder. W I T N E S S E T H: WHEREAS, the Borrower is obligated to Holder, pursuant to the terms and subject to the conditions set forth in the Debentures; WHEREAS, the Borrower is a member of an affiliated group of companies that includes each Guarantor; WHEREAS, the Borrower and the Guarantors are engaged in related businesses, and each Guarantor will derive substantial, direct and indirect, benefit from the making of the loan under the Debentures; and WHEREAS, it is a condition precedent to the Holder accepting delivery of the Debentures that the Guarantors shall have executed and delivered this Guaranty to the Holder; NOW, THEREFORE, in consideration of the premises and to induce the Holder to accept delivery of the Note, each Guarantor hereby agrees with the Holder as follows: ARTICLE I. DEFINED TERMS SECTION 1.01 DEFINITIONS. (a) Unless otherwise defined herein, terms defined in the Debentures and used herein shall have the meanings given to them in the Debentures. (b) The following terms shall have the following meanings: "GUARANTY": this Subsidiary Guaranty, as the same may be amended, supplemented or otherwise modified from time to time. "OBLIGATIONS": the collective reference to the unpaid principal of, and interest on, the Debentures, the Loan Agreement, and the other Loan Documents and the loan evidenced thereby, and all other obligations and liabilities of the Borrower to the Holder (including, without limitation, interest accruing at the then applicable rate provided in the Debentures after the maturity of the Debentures and interest accruing at the then applicable rate provided in the Debentures after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest 1 is allowed in such proceeding) whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Debentures, this Guaranty or the other Loan Documents, or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Holder that are required to be paid by the Borrower pursuant to the terms of any of the foregoing agreements). SECTION 1.02 OTHER DEFINITIONAL PROVISIONS. The words "hereof," "herein," "hereto" and "hereunder" and words of similar import when used in this Guaranty shall refer to this Guaranty as a whole and not to any particular provision of this Guaranty, and Section and Schedule references are to this Guaranty unless otherwise specified. (a) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. ARTICLE II. GUARANTY SECTION 2.01 GUARANTY. (a) The Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantee to the Holder and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.02). (c) Each Guarantor agrees that the Obligations may, at any time and from time to time, exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of the Holder hereunder. (d) The guarantee contained in this Section 2 shall remain in full force and effect until all the Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full. (e) No payment made by the Borrower, any of the Guarantors, any other guarantor or any other person or received or collected by the Holder from the Borrower, any of the Guarantors, any other guarantor or any other person by virtue of any action or proceeding or any set-off or appropriation or application, at any time or from time to time, in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any 2 payment made by such Guarantor in respect of the Obligations or any payment received or collected from such Guarantor in respect of the Obligations), remain liable for the Obligations up to the maximum liability of such Guarantor hereunder until the Obligations are paid in full. SECTION 2.02 RIGHT OF CONTRIBUTION. Each Guarantor hereby agrees that, to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.03. The provisions of this Section 2.02 shall in no respect limit the obligations and liabilities of any Guarantor to the Holder, and each Guarantor shall remain liable to the Holder for the full amount guaranteed by such Guarantor hereunder. SECTION 2.03 NO SUBROGATION. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by the Holder, no Guarantor shall be entitled to be subrogated to any of the rights of the Holder against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Holder for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Holder by the Borrower on account of the Obligations are paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Holder, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Holder in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Holder, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Holder may determine. SECTION 2.04 AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Obligations made by the Holder may be rescinded by the Holder and any of the Obligations continued, and the Obligations, or the liability of any other person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Holder, and the Debentures, the Loan Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Holder may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Holder for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Holder shall have no obligation to protect, secure, perfect or insure any Lien at any time held by them as security for the Obligations or for the guarantee contained in this Section 2 or any property subject thereto. 3 SECTION 2.05 GUARANTY ABSOLUTE AND UNCONDITIONAL. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Holder upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Holder, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Obligations. Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Debentures, the Loan Agreement or any other Loan Document, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Holder, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may, at any time, be available to or be asserted by the Borrower or any other person against the Holder, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the Holder may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as they may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Holder to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Holder against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. SECTION 2.06 REINSTATEMENT. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Holder upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 4 SECTION 2.07 PAYMENTS. Each Guarantor hereby guarantees that payments hereunder will be paid to the Holder without set-off or counterclaim in United States Dollars at the office of the Holder as provided for in the Debentures. ARTICLE III. REPRESENTATIONS AND WARRANTIES To induce the Holder to enter into the Loan Agreement and to accept delivery of the Debentures, each Guarantor hereby represents and warrants to the Holder that the representations and warranties set forth in ARTICLE IV of the Loan Agreement as they relate to such Guarantor, each of which is hereby incorporated herein by reference, are true and correct, and the Holder shall be entitled to rely on each of them as if they were fully set forth herein, PROVIDED that each reference in each such representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 3, be deemed to be a reference to such Guarantor's knowledge. ARTICLE IV. COVENANTS Each Guarantor covenants and agrees with the Holder that, from and after the date of this Guaranty until the Obligations shall have been paid in full, such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Event of Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its subsidiaries. ARTICLE V. MISCELLANEOUS SECTION 5.01 AMENDMENTS IN WRITING. None of the terms or provisions of this Guaranty may be waived, amended, supplemented or otherwise modified except pursuant to a written instrument signed by Holder. SECTION 5.02 NOTICES. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. If to Borrower to: Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 5 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 Facsimile: (704) 866-8010 If to Guarantors to: c/o Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 Facsimile: (704) 866-8010 If to Lender to: Renaissance US Growth & Income Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 6 BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 If to Agent to: Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 7 Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. SECTION 5.03 WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. The Holder shall not, by any act (except by a written instrument pursuant to Section 5.01 hereof), delay, indulgence, omission or otherwise, be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. SECTION 5.04 ENFORCEMENT EXPENSES; INDEMNIFICATION. (a) Each Guarantor agrees to pay, or reimburse the Holder for, all its reasonable costs and expenses incurred in collecting against such Guarantor under the guarantee contained in Section 2 hereof or otherwise enforcing or preserving any rights under this Guaranty and the other Loan Documents to which such Guarantor is a party including, without limitation, the fees and disbursements of counsel to the Holder. (b) Each Guarantor agrees to pay, and to save the Holder harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable in connection with any of the transactions contemplated by this Guaranty. (c) Each Guarantor agrees to pay, and to save the Holder harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Guaranty, and hereby expressly and in addition thereto, makes, assumes, affirms, adopts and ratifies the indemnification obligations applicable to the Guarantors as set forth in the Debentures. (d) The agreements in this Section shall survive repayment of the Obligations and all other amounts payable under the Debentures and the Loan Agreement and the other Loan Documents. SECTION 5.05 SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon the successors and assigns of each Guarantor and shall inure to the benefit of the Holder and their respective 8 successors and assigns; provided that no Guarantor may assign, transfer or delegate any of its rights or obligations under this Guaranty without the prior written consent of the Holder. SECTION 5.06 SET-OFF. Each Guarantor hereby irrevocably authorizes the Holder at any time and from time to time while an Event of Default shall have occurred and be continuing, without notice to such Guarantor or any other Guarantor, any such notice being expressly waived by each Guarantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Holder to or for the credit or the account of such Guarantor, or any part thereof in such amounts as the Holder may elect, against and on account of the obligations and liabilities of such Guarantor to the Holder hereunder and claims of every nature and description of the Holder against such Guarantor, in any currency, whether arising hereunder, under the Debentures, the Loan Agreement, any other Loan Document or otherwise, as the Holder may elect, whether or not the Holder has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Holder shall notify such Guarantor promptly of any such set-off and the application made by the Holder of the proceeds thereof, PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Holder under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Holder may have. SECTION 5.07 COUNTERPARTS. This Guaranty may be executed by one or more of the parties to this Guaranty in one or more of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. SECTION 5.08 SEVERABILITY. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 5.09 SECTION HEADINGS. The Section headings used in this Guaranty are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. SECTION 5.10 INTEGRATION. This Guaranty and the other Loan Documents represent the agreement of the Guarantors and the Holder with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Holder relative to the subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents. SECTION 5.11 GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF, AND THE APPLICABLE LAWS OF THE UNITED STATES. 9 SECTION 5.12 SUBMISSION TO JURISDICTION; WAIVERS. Each Guarantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guaranty and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the exclusive general jurisdiction of the Courts of the State of Texas, the courts of the United States of America located in Texas, and appellate courts thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; and (c) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. SECTION 5.13 ACKNOWLEDGMENTS. Each Guarantor hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Guaranty and the other Loan Documents to which it is a party; (b) the Holder has no fiduciary relationship with or duty to any Guarantor arising out of or in connection with this Guaranty or any of the other Loan Documents, and the relationship between the Guarantors, on the one hand, and the Holder, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Guarantors and the Holder. SECTION 5.14 WAIVER OF JURY TRIAL. EACH GUARANTOR AND, BY ACCEPTANCE OF THE BENEFITS HEREOF, THE HOLDER, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 10 IN WITNESS WHEREOF, each of the undersigned has caused this Guaranty to be duly executed and delivered as of the date first above written. TWINVISION OF NORTH AMERICA, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- DIGITAL AUDIO CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 11 Exhibit I FORM OF ASSUMPTION AGREEMENT ASSUMPTION AGREEMENT, dated as of _______________ __, ______ made by _________________________, a ______________ corporation (the "Additional Guarantor"), in favor of RENAISSANCE US GROWTH & INCOME TRUST PLC ("RUSGIT") and BFSUS Special Opportunities Trust PLC ("BFSUS") (RUSGIT and BFSUS collectively referred to as Holder, pursuant to the Debentures referred to below. All capitalized terms not defined herein shall have the meaning ascribed to them in such Debentures. W I T N E S S E T H : WHEREAS, Digital Recorders, Inc. (the "Borrower") has delivered to the Holder 8.00% Convertible Debentures, dated as of June 27, 2001 (as amended, supplemented or otherwise modified from time to time, the "Debentures"); WHEREAS, in connection with the Debentures, the Borrower and certain of its subsidiaries (other than the Additional Guarantor) have entered into the Subsidiary Guaranty, dated as of June 27, 2001 (as amended, supplemented or otherwise modified from time to time, the "Guaranty") in favor of the Holder; WHEREAS, the Debentures requires the Additional Guarantor to become a party to the Guaranty; and WHEREAS, the Additional Guarantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guaranty; NOW, THEREFORE, IT IS AGREED: 1. GUARANTY. By executing and delivering this Assumption Agreement, the Additional Guarantor, hereby becomes a party to the GUARANTY as a Guarantor thereunder with the same force and effect as if originally named therein as a Guarantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Guarantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in Schedule 1 to the GUARANTY. The Additional Guarantor hereby represents and warrants that each of the representations and warranties contained in Section 3 of the GUARANTY is true and correct on, and as of, the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date. 1 2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF, AND THE APPLICABLE LAWS OF THE UNITED STATES. IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written. [ADDITIONAL GUARANTOR] By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 2 EX-10.43 11 a2053907zex-10_43.txt EXHIBIT 10.43 LOCK-UP AGREEMENT June 27, 2001 Renaissance US Growth & Income Trust PLC BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB-59 Dallas, Texas 75206 Re: Digital Recorders, Inc. Gentlemen: The undersigned executive officer, director or principal shareholder of Digital Recorders, Inc., a North Carolina corporation (the "Company"), owns shares of common stock, $.10 per share ("Common Stock"), of the Company and understands that you propose to enter into a Convertible Loan Agreement, dated as of June 27, 2001 (the "Loan Agreement"), with the Company providing for a convertible loan to the Company in the aggregate principal amount of $3,000,000 (the "Loan"). In consideration for your execution of the Loan Agreement, your providing the Loan and for other good and valuable consideration, the receipt of which are hereby acknowledged, the undersigned agrees with you that for a period beginning on the date of the Loan Agreement and continuing to and including the date twelve (12) months after the date of the Loan Agreement (the "Lock-Up Period"), the undersigned will not, directly or indirectly, offer, sell, contract to sell, transfer, assign or otherwise dispose of any shares of Common Stock beneficially owned or controlled by the undersigned (including subsequently acquired shares or securities convertible or exercisable into shares), without your prior written consent, except for transfers to family members, family partnerships and trusts for the benefit of family members or for estate planning purposes, provided that prior to any such transfer, any such transferee shall have executed and delivered to you a lock-up agreement substantially in the form of this Agreement for the remaining period covered hereby. The undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against any transfer of shares of Common Stock owned by the undersigned not in compliance with this Lock-Up Agreement. Notwithstanding anything to the contrary above, the undersigned may sell shares of Common Stock during the Lock-Up Period, so long as such sales are made at prices above $5.00 per share. Very truly yours, Name: ----------------------------------- Title: ---------------------------------- EX-10.44 12 a2053907zex-10_44.txt EXHIBIT 10.44 PLEDGE AGREEMENT This PLEDGE AGREEMENT, dated as of June 27, 2001, between DIGITAL RECORDERS, INC., a North Carolina corporation ("Pledgor"), RENAISSANCE US GROWTH & INCOME TRUST PLC, a public limited company registered in England and Wales ("RUSGIT"), BFSUS SPECIAL OPPORTUNITIES TRUST PLC, a public limited company registered in England and Wales ("BFSUS") (RUSGIT and BFSUS collectively referred to as "Secured Party"), and RENAISSANCE CAPITAL GROUP, INC., a Texas corporation, for the Secured Party (the "Agent"). RECITALS A. Pledgor, Secured Party and Agent entered into a Convertible Loan Agreement of even date herewith (the "Loan Agreement"). Capitalized terms used but not defined herein shall have the meanings set forth in the Loan Agreement. B. Pursuant to the terms of the Loan Agreement, Secured Party will lend to Pledgor the aggregate principal amount of $3,000,000 to be evidenced by the Pledgor's 8.00% Convertible Debentures of even date herewith (the "Debentures"). C. Pledgor is the owner of the shares (collectively, the "Shares") of capital stock hereto issued by each Subsidiary described on SCHEDULE A, and Pledgor has agreed to pledge and assign to Secured Party a security interest in the Shares, together with any additional shares of capital stock of any U.S. subsidiary subsequently acquired by Pledgor or an affiliate, subject with respect to such U.S. subsidiaries only, to the prior pledge to Guaranty Business Credit Corporation ("GBCC") to secure payment of the Obligations of Pledgor under the Loan Agreement and Debentures. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants, the parties agree as follows: 1. PLEDGE OF SHARES. Pledgor hereby pledges and assigns to the Secured Party the Shares, subject with respect to any U.S. subsidiaries only, to the prior pledge to GBCC, for the purpose of securing the full and prompt payment, when due, by Pledgor of the Obligations. 2. DELIVERY OF SHARES. Upon execution of this Pledge, Pledgor shall deliver to Agent all the certificates representing the Shares of DRI-Europa AB, a Swedish corporation, together with duly executed stock powers, in blank. In the event that GBCC releases its security interest in the Shares of the U.S. subsidiaries, the Pledgor shall deliver such Shares to Agent in like manner. Agent shall hold all such certificates and stock powers subject to the terms of this Pledge Agreement. 3. VOTING OF SHARES AND RECEIPT OF DIVIDENDS. Subject to the rights of GBCC with respect to the shares of the U.S. subsidiaries, Pledgor shall have the right to vote the Shares, except as provided herein and in the Loan Agreement and Debentures, upon the occurrence of an Event of Default or a Default. 1 4. REPRESENTATIONS AND WARRANTIES. Pledgor hereby warrants, represents and covenants as follows: a. Pledgor owns the Shares, free from any adverse claims and Liens, except the prior security interest of Svenska Handelsbanken with respect to the Shares of the European Subsidiaries; b. Pledgor will notify Secured Party of, and will defend the Shares against, all claims and demands of all persons at any time claiming the Shares or any interest therein; c. Pledgor will pay all taxes and assessments upon the Shares prior to the date of delinquency for payment of such taxes and assessments; and d. Pledgor has the full power, authority and capacity to grant the security interest hereunder. 5. RETURN OF SECURITY. When the Obligations have been paid in full, Agent shall promptly deliver the certificates representing the Shares then held by it and all related stock powers to Pledgor. 6. OCCURRENCE OF EVENT OF DEFAULT. Subject to the rights of Svenska Handelsbanken with respect to the Shares of the European Subsidiaries, if an Event of Default or a Default occurs, Agent or Secured Party shall have the right to exercise any rights and remedies provided in the Loan Agreement, as Secured Party or Agent, in its or their sole discretion, may deem necessary or appropriate. Secured Party or Agent shall further have the right to exercise any remedies afforded a secured party under the Uniform Commercial Code of Texas or any other applicable law with respect to the Shares. 7. DURATION OF PLEDGE. This Pledge shall be terminated upon the earlier of: (i) foreclosure by Secured Party of the security interest granted hereunder upon the occurrence of a Default or an Event of Default, or (ii) return of the Shares to Pledgor upon payment of the Obligations. 8. Miscellaneous. a. GOVERNING LAW. This Pledge shall be governed by and construed and enforced in accordance with the substantive laws of the State of Texas, without regard to the conflicts of laws provisions thereof, and the applicable laws of the United States. Venue and jurisdiction shall be in the state or federal courts in Dallas County, Texas. b. BINDING EFFECT. All of the terms, covenants, representations, warranties and conditions herein shall be binding upon, and inure to the benefit of, and be enforceable by the parties and their respective successors and assignees. c. WAIVER. This Pledge may not be amended, modified, superseded or canceled, nor may any of the terms, covenants, representations, warranties or conditions 2 hereof be waived, except by a written instrument executed by the party against whom such amendment, modification, supersedure, cancellation or waiver is charged. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of any breach of any term, covenant, representation or warranty contained herein, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of any breach of any other term, covenant, representation or warranty. d. ATTORNEYS' FEES. If any party brings an action in connection with the performance, breach or interpretation of this Pledge, or in any action related to the transaction contemplated hereby, the prevailing party in such action shall be entitled to recover from the losing party in such action all reasonable costs and expenses of such litigation, including attorneys' fees, court costs, costs of investigation, accounting and other costs reasonably incurred or related to such litigation. e. SEVERABILITY. If any provision hereof is determined to be illegal or unenforceable, such determination shall not affect the validity or enforceability of the remaining provisions hereof, all of which shall remain in full force and effect. f. FURTHER DOCUMENTS. Each party covenants and agrees that, from time to time, after the date hereof, at the reasonable request of any other party, and without further consideration, such party will execute and deliver such other documents and take such other action reasonably required to carry out, in all respects, the transactions contemplated and intended by this Pledge. g. NOTICES. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. If to Secured Party or Agent: Renaissance US Growth & Income Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 3 BFSUS Special Opportunities Trust PLC c/o Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 Renaissance Capital Group, Inc. 8080 North Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attn.: Robert C. Pearson Senior Vice President Telephone: (214) 891-8294 Facsimile: (214) 891-8291 with a copy to: Norman R. Miller, Esq. Kirkpatrick & Lockhart LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 Telephone: (214) 939-4906 Facsimile: (214) 939-4949 If to Pledgor: Digital Recorders, Inc. Sterling Plaza, Box 26 5949 Sherry Lane, Suite 1050 Dallas, Texas 75225 Attn.: David L. Turney Chairman, CEO and President Telephone: (214) 378-9429 Facsimile: (214) 378-8437 with a copy to: David Furr, Esq. Gray, Layton, Drum, Kersh, Solomon & Furr, PA 516 South New Hampton Road P.O. Box 2636 Gastonia, North Carolina 28053-2637 Telephone: (704) 865-4400 4 Facsimile: (704) 866-8010 Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. h. PARTIES IN INTEREST. Nothing in this Pledge, whether express or implied, is intended to confer any rights or remedies under or by reason of this Pledge on any persons other than the parties and their respective successors and assigns, nor is anything in this Pledge intended to relieve or discharge the obligation or liability of any third persons to any party to this Pledge, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Pledge. i. DEFINED TERMS. All capitalized terms, unless otherwise specified, have the same meanings assigned to them in the Loan Agreement and Debentures. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 5 IN WITNESS WHEREOF, this Pledge Agreement is executed as of the date first above written. PLEDGOR: DIGITAL RECORDERS, INC. By: ------------------------------------ Name: David L. Turney Title: Chairman, CEO and President SECURED PARTY: RENAISSANCE US GROWTH & INCOME TRUST, PLC By: ------------------------------------ Name: Russell Cleveland Title: Director BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: ------------------------------------ Name: Russell Cleveland Title: Director AGENT: RENAISSANCE CAPITAL GROUP, INC. By: ------------------------------------ Name: Russell Cleveland Title: President and CEO 6 SCHEDULE A SUBSIDIARIES NO. OF SHARES ------------ ------------- Twin Vision of North America, Inc. 100 Digital Audio Corporation 100 EX-99.2 13 a2053907zex-99_2.txt EXHIBIT 99.2 David L. Turney, Chairman, CEO Digital Recorders, Inc. (919) 313-3003 davet@digrec.com In Chicago: Brien Gately (847) 296-4200 bgately@tirc.com FOR IMMEDIATE RELEASE June 28, 2001 DIGITAL RECORDERS COMPLETES ACQUISITION OF MOBITEC RESEARCH TRIANGLE PARK, NC - Digital Recorders, Inc. (DRI), (NASDAQ: TBUS) today announced it has completed acquisition of Mobitec Holding AB of Goteborg, Sweden. David L. Turney, Chairman and CEO of DRI, stated, "Mobitec is the premier supplier, and in our estimation, holds the largest market share, of Electronic Destination Sign Systems in the Nordic markets. Mobitec is profitable and adds in excess of $11 million annually in revenues to DRI's top line, which is expected to be about $34 million this year, prior to the acquisition. This acquisition, on an annualized basis, is anticipated to move DRI into the $45 million to $50 million revenue range. This is consistent with growth plans and goals DRI management has stated it is pursuing. Mobitec is a well-established company that is highly respected for its products, technology, service, and quality. We believe the synergy among DRI, both the TwinVision and Transit Media subsidiaries, and Mobitec is extraordinary." "Mobitec, which has a strong management team, serves not only the Nordic markets but also has subsidiaries in Australia and Germany as well as a joint venture in Brazil, expanding DRI's geographical reach and offers significant cross-selling opportunities. We believe these other operations of Mobitec also hold significant market share in their respective markets. The aquisition of Mobitec is part of DRI's stated plans to grow both by internal and external means. We expect the acquisition to be accretive to DRI and a major first-step success in our strategy to grow at an accelerated pace," Turney said. "The acquisition is within a new corporate framework of DRI-Europa AB, our new subsidiary in Goteborg, Sweden. Mobitec will stand in that framework with Transit Media Gmbh. Together they will serve the European market as well as selected Mid-East and Asian markets," Turney noted. "Details of the acquisition and its financing are discussed in our recent Proxy filing. The appropriate 8K filings will provide additional financial details. However, in summary, consideration paid approximates $7.4 Million in a combination of DRI Common Stock, Convertible Subordinated Debentures, a term loan with Svenska Handelsbanken of Goteborg, and seller financing," Turney concluded. Reiterating what he stated in December when the potential acquisition was first announced, Bengt Bodin, prior Chairman and prior majority owner of Mobitec noted, "I am very pleased to see this relationship with DRI. It meets my vision for Mobitec and is a major step toward our shared goal with DRI of creating one of the stronger global organizations in this field. I intend to stay involved working directly with Dave Turney to further the success in creating this new, larger world-wide business enterprise." DRI develops technologically advanced digital communications systems for transit and transportation applications as well as digital signal processing equipment for law enforcement applications. Law enforcement market products include MCAP(R) and PCAP(R). The company's transit and transportation systems include TALKING BUS(R), an on-vehicle internal voice messaging and passenger information system, and the TwinVision LeDot(R) Destination Sign System - a proprietary, electronic external destination sign. For more information about DRI visit website: http://www.tirc.com/invest/digital/dr-profile.htm or www.digrec.com STATEMENTS WHICH ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS IDENTIFIED BY WORDS SUCH AS "EXPECT," "ANTICIPATE," "BELIEVE," "PROJECT," AND "FORECAST", ABOUT THE COMPANY'S CONFIDENCE AND STRATEGIES AND ITS EXPECTATIONS ABOUT NEW AND EXISTING PRODUCTS, TECHNOLOGIES AND OPPORTUNITIES, MARKET AND INDUSTRY SEGMENT GROWTH, DEMAND AND ACCEPTANCE OF NEW AND EXISTING PRODUCTS, EXPECTATIONS OF FUTURE REVENUES OR PROFITABILITY, ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE RISKS INCLUDE, BUT ARE NOT LIMITED TO, PRODUCT DEMAND AND MARKET ACCEPTANCE RISKS; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; THE EFFECTS OF ECONOMIC CONDITIONS AND TRADE, LEGAL, SOCIAL AND ECONOMIC RISKS, SUCH AS IMPORT, LICENSING AND TRADE RESTRICTIONS; THE RESULT OF THE COMPANY'S BUSINESS PLAN AND THE IMPACT ON THE COMPANY OF ITS RELATIONSHIP WITH ITS LENDER. THE CONSUMMATION OF THE ACQUISITION OF MOBITEC MAY SUBJECT THE COMPANY TO ADDITIONAL RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, OPERATION IN ADDITIONAL INTERNATIONAL MARKETS, CURRENCY EXCHANGE FLUCTUATIONS, CHANGING POLITICAL AND ECONOMIC CONDITIONS, ADDITIONAL DEBT FINANCING AND CORRESPONDING EXPENSE, AND RISKS ASSOCIATED WITH THE CHANGE IN OWNERSHIP OF MOBITEC AND ASSOCIATED CHANGES, IF ANY, IN RELATIONSHIPS WITH MOBITEC'S CUSTOMERS, SUPPLIERS, EMPLOYEES AND PARTNERS. # # # # # # # # -----END PRIVACY-ENHANCED MESSAGE-----