Exhibit 10.4
CERTIFICATE OF DESIGNATION
OF
SERIES H CONVERTIBLE PREFERRED STOCK
OF
DIGITAL RECORDERS, INC.
Digital Recorders, Inc., a corporation organized and existing under the Business
Corporation Act of the State of North Carolina (hereinafter called the
“Corporation”), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 55-6-02 of the
Business Corporation Act by unanimous written consent dated October 31, 2005,
and approved by the sole holder of the outstanding shares of the Corporation’s
Series H Convertible Preferred Stock, par value $.10 per share, as required by
Section 55-10-04 of the Business Corporation Act by written consent dated
October 31, 2005;
RESOLVED, that pursuant to the authority granted to and vested in the Board of
Directors of this Corporation (hereinafter called the “Board of Directors” or
the “Board”) in accordance with the provisions of the Articles of Incorporation
of the Corporation (“Articles of Incorporation”), the Board of Directors hereby
certifies in their entirety the terms and provisions of the Series H Convertible
Preferred Stock (the “Preferred Stock”), shall have the designation and number
of shares, and the relative rights, preferences, and limitations thereof as
follows:

     
Section 1.
  Designation and Amount. The shares of this series shall be designated as
“Series H Convertible Preferred Stock” (the “Series H Preferred Stock”) and the
number of shares constituting the Series H Preferred Stock shall be 600 shares.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided that no decrease shall reduce the number of shares of
Series H Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series H
Preferred Stock.
 
   
Section 2.
  Dividends and Distributions.

     (a) The holders of shares of Series H Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, consistent with
applicable law and out of funds legally available therefor, dividends during the
period commencing on October 31, 2005 (the “Commencement Date”) and continuing
for as long as any of the shares of Series H Preferred Stock remain outstanding.
Dividends shall accrue quarterly at the rate of two percent (2.0%) on the
Liquidation Preference (as hereinafter defined), shall compound quarterly, and
shall be paid on February 10, May 10, August 10 and November 10 of each year
(each, a “Payment Date”) (except that if any such date is a Saturday, Sunday or
legal holiday, then such dividend shall be payable on the next day that is not a
Saturday, Sunday or legal holiday); provided, however, that the first payment of
dividends following the Commencement Date shall be made on February 10, 2006.
Each such dividend shall be payable in arrears to the holders of record of
shares of Series H Preferred Stock, as they appear on the stock records of the

1

--------------------------------------------------------------------------------

 

Corporation, at the close of business on the date that is fifteen (15) days
preceding the Payment Date thereof, provided, however, that the Board of
Directors may fix a different record date for any dividend payment, which date
shall be not less than ten (10) days nor more than sixty (60) days preceding the
Payment Date thereof. Dividends on shares of Series H Preferred Stock shall
accrue (whether or not declared) on a daily basis from and including the
Commencement Date. Accrued dividends for each Dividend Period (as hereinafter
defined) shall be cumulative (whether or not such dividends are declared) and
shall compound on each Payment Date. Such dividends shall accumulate to the
extent not paid on the Payment Date occurring on the last day of the Dividend
Period for which they accrue, and any such accrued and unpaid dividends for any
past Dividend Period may be declared and paid at any time, without reference to
any regular Payment Date, to holders of record on such date, not more than
forty-five (45) days preceding the Payment Date thereof, as may be fixed by the
Board of Directors. For purposes of this paragraph, a “Dividend Period” shall
mean a quarterly dividend period commencing on the calendar day immediately
following the Commencement Date and immediately following each subsequent
Payment Date and ending on and including the next following Payment Date. The
Series H Preferred Stock shall rank pari passu with the Series E Redeemable
Nonvoting Convertible Preferred Stock (“Series E Preferred Stock”) and the
Series G Convertible Preferred Stock (the “Series G Preferred Stock”) and prior
and superior to the Series AAA Preferred Stock and the common stock, par value
$.10 per share (the “Common Stock”), of the Corporation with respect to the
payment of dividends. In the event any new shares of Series H Preferred Stock
are issued during any Dividend Period or any shares of Series H Preferred Stock
are redeemed by the Corporation or converted during any Dividend Period, the
accrued dividends shall be prorated in proportion to the number of days during
that Dividend Period during which such shares were outstanding. All accrued but
unpaid dividends shall be paid upon redemption or conversion of the shares of
Series H Preferred Stock.
     (b) Such dividends shall be payable in additional shares of Series H
Preferred Stock. In the event that any payment of dividends in shares of
Series H Preferred Stock would require shareholder approval under the Nasdaq
listing requirements, the Corporation agrees to seek such approval, together
with approval of all future issuances of Series H Preferred Stock payable as
dividends on the outstanding shares of Series H Preferred Stock (if legally
permissible), at the next regularly scheduled meeting of shareholders after it
has been determined that shareholder approval would be required for the issuance
of any shares as dividends on the next scheduled Payment Date, if such
shareholder approval shall not have previously been sought. Dividends shall be
paid in cash out of funds legally available therefor on any Payment Date(s) that
may arise between the date of such determination and the meeting of shareholders
at which the shareholders vote on such authorization, the Series H Preferred
Stock holder agreeing to recuse itself from this vote. In the event the
shareholders reject such authorization, such dividends will be paid in shares of
Series H Preferred Stock to the maximum extent that they may be so paid without
violating the limitations set forth in the

2

--------------------------------------------------------------------------------

 

second sentence of this paragraph (b), and thereafter, such dividends shall be
paid in cash out of funds legally available therefor, commencing on the next
Payment Date.
     (c) The number of shares of Series H Preferred Stock (or fraction thereof)
issuable on each whole or fractional share of Series H Preferred Stock on each
Payment Date shall be equal to the quotient (rounded to four decimal places)
obtained by dividing (i) the dollar value of the dividend to be paid thereon by
(ii) the Liquidation Preference thereof.
     (d) If the effectiveness of any registration statement filed by the Company
to permit the resale of shares of the Series H Preferred Stock (the
“Registration Statement”) is suspended or otherwise impaired for more than
twenty (20) calendar days in any twelve-month period (unless otherwise permitted
in a Registration Rights Agreement governing such registration), then the
quarterly rate at which dividends accrue on the Series H Preferred Stock then in
effect shall increase by one-quarter of one percent (0.25%) for each additional
period of ten (10) days that the Registration Statement is suspended or
otherwise impaired. If the Corporation loses its listing on the Nasdaq Stock
Market, then the quarterly rate at which dividends accrue on the Series H
Preferred Stock then in effect shall increase by one-quarter of one percent
(0.25%) for each period of thirty days until the Corporation’s Common Stock is
again listed thereon. The maximum quarterly dividend rate, as adjusted pursuant
to this subsection (d), shall be three and one-half percent (3.5%).
     (e) If the average closing bid price for the Common Stock on the principal
public trading market for such stock does not exceed 2.5 times the then-current
Conversion Price (as hereinafter defined) for any period of seventy-five (75)
consecutive trading days, or if such closing bid price does not exceed 2.5 times
the then-current Conversion Price for a total of at least one hundred and fifty
(150) trading days (whether or not consecutive), in either case during the
period commencing on the Commencement Date and ending on October 31, 2010, then
the quarterly rate at which dividends accrue on the Series H Preferred Stock
then in effect shall be increased by one and one-half percent (1.5%) beginning
on October 31, 2010, effective for the dividend payable on the November 10, 2010
Payment Date and continuing for as long as any of the shares of Series H
Preferred Stock remain outstanding. Furthermore, holder may require, at its
option, the payment of said increased dividend to be paid in cash rather than in
additional Series H Preferred Shares.

     
Section 3.
  Voting Rights. Except as is required by applicable law, the holders of
Series H Preferred Stock shall be entitled to vote with the holders of Common
Stock and the holders of the Corporation’s Series G Preferred Stock, voting
together as a single class, on any matters on which holders of Common Stock are
entitled to vote, and the holder of each outstanding whole or fractional share
of Series H Preferred Stock shall be entitled to a number of votes equal to the
quotient obtained by dividing the Liquidation Preference thereof by the
Conversion Price. Fractional votes shall not, however, be permitted and any

3

--------------------------------------------------------------------------------

 

     
 
  fractional voting rights resulting from the above formula (after aggregating
all whole and fractional shares of Series H Preferred Stock held by each holder)
shall be adjusted downward to the nearest whole number.
 
   
Section 4.
  Liquidation.

     (a) The liquidation preference for the Series H Preferred Stock (the
“Liquidation Preference”) shall equal Five Thousand Dollars ($5,000.00) per
share. The Series H Preferred Stock shall be pari passu with Series E Preferred
Stock and the Series G Preferred Stock (collectively with the Series H Preferred
Stock, the “Preferred Stock”) and rank prior and superior to the Series AAA
Preferred Stock and the Common Stock with respect to payments upon liquidation,
dissolution and winding up. The Series AAA Preferred Stock, the Common Stock and
any other class or series of stock ranking junior to the Preferred Stock with
respect to payments upon liquidation, dissolution and winding up are referred
to, collectively, herein as “Junior Stock”.
     (b) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary (collectively, a “Liquidating
Event”), the Corporation shall pay or make adequate provision for the payment of
all indebtedness and other obligations of the Corporation. Thereafter, the
remaining assets of the Corporation shall be used to pay, prior to any
distribution of any of the assets of the Corporation to the holders of Junior
Stock by reason of the ownership thereof, an amount equal to the Liquidation
Preference per share of the Preferred Stock, plus an amount equal to accrued and
unpaid dividends on such shares, if any.
     (c) After all such Liquidation Preferences shall have been paid in full to
each holder of Preferred Stock (including accrued but unpaid dividends), each
holder of Junior Stock other than Common Stock shall be entitled to be paid from
the remaining assets of the Corporation such amounts, if any, to which such
holder may be entitled under any other provision of these Articles of
Incorporation prior to any distribution of any of the assets of the Corporation
to the holders of Common Stock.
     (d) Any assets of the Corporation remaining after the payments specified in
paragraphs (b) and (c) above shall be distributed pro rata with respect to the
outstanding shares of Common Stock.
     (e) If upon any Liquidating Event, the assets of the Corporation shall be
insufficient to pay all the holders of any class or series of capital stock the
full amount to which they are entitled pursuant to this Section 4, then the
following rules shall apply: (i) each holder of shares of the class or series
shall be paid his pro rata share, which shall equal the product determined by
multiplying the aggregate amount to be paid to all holders of that class or
series by a fraction (x) whose numerator equals the number of shares of that
class or series owned by the shareholder, and (y) whose denominator equals the
number of issued and

4

--------------------------------------------------------------------------------

 

outstanding shares of that class or series, and (ii) in any case in which the
owner of two or more series or classes of capital stock shall have equal
priority to any distribution, each holder shall be paid his pro rata share,
which shall equal the product determined by multiplying the aggregate amount
available for payment to all holders of the series or classes with equal
priority, by a fraction (x) whose numerator equals the amount such shareholder
would receive if the Corporation had adequate funds to pay the Liquidation
Preferences of the shares of the series or classes having equal priorities owned
by the shareholder, and (y) whose denominator equals the aggregate Liquidation
Preferences of all issued and outstanding shares of the series or classes having
equal priorities.
     (f) For the purposes of this Section 4, any merger or consolidation of the
Corporation into or with any other corporation or entity, or a sale, conveyance,
mortgage, transfer, license, pledge, lease or other disposition of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation unless (i) the
shareholders of the Corporation immediately prior thereto shall, immediately
thereafter, hold as a group the right to cast at least a majority of the votes
of all holders of voting securities of the resulting or surviving corporation or
entity on any matter on which any such holders of voting securities shall be
entitled to vote; or (ii) the holders of Series H Preferred Stock shall
determine, by vote of the holders of a majority of the outstanding shares of
such series, voting as a separate class, that it shall not be so deemed.
     (g) For purposes of this Section 4, if any asset distributed to
shareholders upon liquidation of the Corporation consists of property other than
cash, the amount of such distribution shall be deemed to be the fair market
value thereof at the time of such distribution, as determined in good faith by
the Board of Directors of the Corporation.
     (h) Written notice of any Liquidating Event stating a payment date, the
place where such payment shall be made, the amount of each payment in
liquidation and the amount of accrued dividends to be paid, shall be given by
first class mail, postage prepaid, not less than ten (10) days prior to the
payment date stated therein, to each shareholder of record (whether or not the
shareholder is to receive any payment) at such shareholder’s address as shown in
the records of the Corporation.

     
Section 5.
  Redemption.

     (a) The holders of the Series H Preferred Stock shall not have the right to
cause the Corporation to redeem shares of their Series H Preferred Stock at any
time.
     (b) If the rate at which quarterly dividends accrue on the Series H
Preferred Stock is increased by one and one-half percent (1.5%) pursuant to
Section 2(e), then, from and after October 31, 2010, the Corporation shall have

5

--------------------------------------------------------------------------------

 

the right, but not the obligation, exercisable at any time and from time to
time, to redeem all or any portion of the outstanding shares of Series H
Preferred Stock. All redemptions of less than all outstanding shares of Series H
Preferred Stock shall be effected on a pro rata basis.
     (c) The redemption price to be paid by the Corporation for any shares of
Series H Preferred Stock shall equal the Liquidation Preference for those
shares, plus an amount equal to the cash value of all accrued but unpaid
dividends thereon. Upon payment of such redemption price, the Corporation shall
have no further obligation with respect to payment of accrued and unpaid
dividends.
     (d) At least thirty (30) days prior to any redemption, the Corporation will
provide to the holders of shares to be redeemed written notice (the “Redemption
Notice”) of the number of shares to be redeemed (the “Redemption Shares”), the
redemption price and the redemption date (the “Redemption Date”). Such notice
shall be sent to the address for each holder of Series H Preferred Stock on the
records of the Corporation. Upon receipt of any Redemption Notice, holders of
Series H Preferred Stock shall send to the Corporation stock certificate(s) duly
endorsed for transfer representing the Redemption Shares as provided in the
Redemption Notice for receipt by the Corporation on or before the Redemption
Date. Upon receipt of stock certificate(s) representing the Redemption Shares
endorsed as provided above (but not prior to the Redemption Date), the
Corporation will send to the holders of the Redemption Shares payment of the
redemption price as stated in the Redemption Notice, and if not all the shares
represented by the stock certificate(s) provided to the Corporation are to be
redeemed, stock certificate(s) representing the shares that have not been
redeemed.
     The Corporation shall have no obligation to make any payment for Redemption
Shares until the owner of the Redemption Shares complies in full with the
procedures set forth above. Notwithstanding failure by any shareholder to comply
with the procedures set forth in the preceding paragraph and the consequent
failure by the Corporation to pay the redemption price for the Redemption
Shares, the Redemption Shares shall, from and after the Redemption Date stated
in the Redemption Notice, cease to be issued and outstanding shares of capital
stock of the Corporation and the former owner shall not be entitled to vote,
receive dividends or exercise any other rights of a shareholder on account of
the Redemption Shares. From and after the Redemption Date the sole obligation of
the Corporation on account of the Redemption Shares shall be to pay the
redemption price stated in the Redemption Notice, together with interest at the
rate equal to the dividend rate in effect on the Redemption Date in the event of
late payment.
     (e) Holders of outstanding shares of Series H Preferred Stock shall have
the right to convert such shares into shares of Common Stock in accordance with
Section 6 hereof at any time before the close of business on the fifth Business
Day preceding the Redemption Date specified for such shares. Without

6

--------------------------------------------------------------------------------

 

limiting any rights of the Corporation, the Corporation may reduce the number of
shares that it has elected to redeem as specified in a Redemption Notice by a
number equivalent to the number of shares of Series H Preferred Stock converted
into Common Stock during the period beginning on the date of the Redemption
Notice and ending on the Redemption Date.
     (f) All shares of the Series H Preferred Stock that shall have been
redeemed as herein provided shall no longer be deemed to be outstanding. Any
shares of Series H Preferred Stock so redeemed shall be retired and canceled and
shall not be reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series H
Preferred Stock accordingly.

     
Section 6.
  Conversion of Series H Preferred Stock. Each holder of shares of Series H
Preferred Stock shall have the right to convert all or any portion of such
shares as such holder desires to convert, and in certain circumstances such
shares shall be automatically converted, into shares of the Common Stock of the
Corporation, as follows:

     (a) Optional Conversion. Subject to and in compliance with the provisions
of this Section 6, any or all shares of Series H Preferred Stock, at the option
of the holder, may be converted at any time or from time to time prior to the
fifth Business Day preceding any Redemption Date established for such shares,
into a number of fully paid and nonassessable shares (calculated as to each
conversion to the largest whole share) of Common Stock determined by multiplying
the number of whole and fractional shares of Series H Preferred Stock to be
converted by a fraction, the numerator of which is the Liquidation Preference of
a share of Series H Preferred Stock and the denominator of which is the
conversion price then in effect for the Series H Preferred Stock (the
“Conversion Price”). Initially, the Conversion Price is $2.08 per share;
provided, however, that the Conversion Price shall be subject to adjustment in
accordance with the provisions in Section 6(d) below.
     (b) Automatic Conversion. The outstanding shares of Series H Preferred
Stock shall automatically convert to shares of Common Stock in the circumstances
described in either of the following subparagraphs, as follows:
If the closing bid price for the Common Stock on The Nasdaq Stock Market (or
other exchange or market on which the Common Stock may from time to time be
traded) for any period of twenty (20) consecutive trading days exceeds $5.63,
then all outstanding shares of Series H Preferred Stock shall automatically
convert, at the close of the market on the last trading day in such period, into
a number of fully paid and nonassessable shares (calculated to the largest whole
share) of Common Stock determined by multiplying the number of shares of
Series H Preferred Stock then outstanding by a fraction, the numerator of which
is the Liquidation Preference of a share of Series H Preferred Stock and the

7

--------------------------------------------------------------------------------

 

denominator of which is the then applicable Conversion Price, provided that the
resale of the shares issuable upon conversion shall have been registered or
shall be subject to available exemption under applicable security laws.
     (c) Mechanics of Conversion. Before any holder of Series H Preferred Stock
shall be entitled to convert the same into full shares of Common Stock, unless
the conversion is an automatic conversion, the holder shall surrender the
certificate or certificates therefor, duly endorsed for transfer, at the office
of the Corporation or any transfer agent of the Corporation and shall give
written notice to the Corporation at such office that he elects to convert the
same, such notice to state the name or names and addresses to which certificates
for Common Stock will be issued. No fractional shares of Common Stock shall be
issued upon conversion of Series H Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then-effective Conversion
Price. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series H Preferred Stock, or to a third
party such holder may designate in writing, a certificate or certificates for
the number of whole shares of Common Stock to which he shall be entitled and a
check payable to the holder in the amount of any cash amounts payable in lieu of
fractional shares as aforesaid, and if less than all the shares of Series H
Preferred Stock represented by such certificates are converted, a certificate
representing the shares of Series H Preferred Stock not converted. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series H Preferred Stock
to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
     (d) Adjustments to Conversion Price.

  (i)   Adjustments for Subdivisions, Common Stock Dividends, Combinations or
Consolidations of Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided or increased by stock split or stock dividend, into a
greater number of shares of Common Stock, the Conversion Price then in effect
shall concurrently with the effectiveness of such subdivision or payment of such
stock dividend, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
then in effect shall concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.     (ii)   Adjustments for
Reclassification, Exchange and Substitution. If the Common Stock issuable upon
conversion of the Series H

8

--------------------------------------------------------------------------------

 

      Preferred Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the Series H Preferred Stock shall
thereafter be convertible into, in lieu of the shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock that would have been obtainable in exchange
for the shares of Common Stock that were issuable upon conversion of the
Series H Preferred Stock immediately before that change.

     (e) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Price pursuant to this Section 6, the
Corporation at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series H Preferred Stock a certificate setting forth such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series H Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series H Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of Series H Preferred Stock.
     (f) No Impairment. The Corporation will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action (other than actions taken in good faith), avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in carrying out all the
provisions of this Section 6 and in taking all such action as may be necessary
or appropriate in order to protect the conversion rights of the holders of the
Series H Preferred Stock against impairment.
     (g) Reservation of Stock. The Corporation shall, at all times when the
Series H Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, (i) for the purpose of effecting the
conversion of the Series H Preferred Stock, such number of its duly authorized
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding Series H Preferred Stock and (ii) for the purpose
of paying accrued dividends in the form of shares of Series H Preferred Stock,
such number of its duly authorized shares of Series H Preferred Stock as shall
from time to time be sufficient to pay such dividends.

9

--------------------------------------------------------------------------------

 

     (h) Cancellation of Series H Preferred Stock. All shares of the Series H
Preferred Stock that shall have been surrendered for conversion as herein
provided shall no longer be deemed to be outstanding. Any shares of the Series H
Preferred Stock so converted shall be retired and canceled and shall not be
reissued, and the Corporation may from time to time take such appropriate action
as may be necessary to reduce the authorized Series H Preferred stock
accordingly.

10