Document:

exv10w2

 

Exhibit 10.2

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 23, 2005, is issued to DOLPHIN
OFFSHORE PARTNERS, L.P. (the “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 240,000 fully paid and non-assessable shares of Common Stock, $.10 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 $2.21 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 22, 2010.

     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, but in increments of
no less than 50,000 shares, the purchase rights evidenced hereby. Such exercise shall be effected
by tender of 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, unless done by cashless
exercise.

     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.

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     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 Warrant Price payable per Share, but the aggregate Warrant
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 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 purchasable upon exercise hereof 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

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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 Section 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
reasonably 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.

     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 other than as set forth herein,
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 upon exercise of this
Warrant shall be subject to the registration rights set forth in the Registration Rights Agreement
of even date herewith by and between the Holder and the Company (the “Registration Rights
Agreement”), and the Holder shall be entitled to all rights and benefits thereof.

     10. Non-Cash Exercise. The rights represented by this Warrant may be exercised by a
written notice of exercise in the form attached hereto specifying that the holder of this Warrant
wishes to convert all or any portion of this Warrant (the “Conversion Right”) into a number
of Shares equal to the quotient obtained by dividing (x) the current market value of the Warrant
Shares subject to the portion of this Warrant being exercised (determined by subtracting the
aggregate Warrant Exercise Price for all such Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate current or closing market price of such Shares
issuable upon exercise of such portion of this Warrant immediately prior to the exercise of the
Conversion Right) by (y) the current or closing market price (as defined below) of one share of
Common Stock immediately prior to the exercise of the Conversion Right. For the purpose of any
computation under this Section 10, the current or closing market price per share of Common Stock at
any date shall be deemed to be the average of the daily closing prices for five (5) consecutive
trading days commencing ten (10) trading days before the date of such computation. The closing
price for each day shall be the last sale price for such day, in either case as reported in the
principal consolidated transaction reporting system with respect to securities listed or admitted
to trading on the NASDAQ National Market (or if the Common Stock is not listed on the NASDAQ, then
on the principal United States national securities exchange on which the Common Stock is listed or
quoted. If the Common Stock is not listed or quoted on any United States national securities
exchange, then the current or closing market
price per share of Common Stock shall be determined by the Board of Directors of Company in
good faith.

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     11. 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, provided that neither party may assign its rights or obligations hereunder with the prior
written consent of the other party.

     12. Governing Law. This Warrant shall be governed by the laws of the State of North
Carolina, excluding the conflicts of laws provisions thereof.

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

 	 
	 	By:  	/s/ David L. Turney
 	 
	 	 	David L. Turney 	 
	 	 	Chairman, Chief Executive Officer and President 	 

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EXERCISE NOTICE

Dated                     , ____

     The undersigned hereby irrevocably elects to exercise the Stock Purchase Warrant, dated June
23, 2005, 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 pursuant hereto in cash or
elects to purchase
                     shares of Common Stock in Company pursuant to non-cash conversion of the
Warrant as provided in Section 10 of the Warrant.

     Please issue the shares as to which this Warrant is exercised in accordance with the
instructions given below.

	 	 	 	 	 	 	 
	 	 	DOLPHIN OFFSHORE PARTNERS, L.P.	 	 
	 

	 	By:
	 	Dolphin Management Inc.
its managing general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 

INSTRUCTIONS FOR REGISTRATION OF SHARES

Register Shares in name of:                                                                                                                            

Address:                                                                                                                                                          

5exv10w3

 

Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

     Registration Rights Agreement (this “Agreement”) executed this 23rd day of June, 2005,
by and between DIGITAL RECORDERS, INC., a North Carolina corporation (the “Company”), and
DOLPHIN OFFSHORE PARTNERS, L.P. (the “Holder”).

     WHEREAS, it is contemplated under that certain Stock Purchase Agreement by and between the
Company and the Holder dated June 23, 2005 (as such may be amended from time to time, the
“Stock Purchase Agreement”) and that certain Stock Purchase Warrant dated as of June 23,
2005, by the Company in favor of the Holder (the “Warrant Agreement”), that the Company
provide the Holder with certain registration rights.

     NOW THEREFORE, in consideration of the mutual covenants and agreements and for other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:

ARTICLE I

REQUIRED REGISTRATION

     1.1 Required Registration. Subject to Sections 1.5 and 5.2 hereof, the Company shall,
at its sole cost and expense, file a Registration Statement on or before August 23, 2005 and cause
a Registration Statement under the 1933 Act covering the resale by Holder of all of the Conversion
Shares and Warrant Stock to be declared effective by the Commission on or before October 23, 2005,
time being of the essence (the “Target Effective Date”). The Company will use its best efforts to
keep such Registration Statement current and effective for at least two (2) years from the date
hereof or until such earlier date as the Company’s registration obligations with respect to the
Conversion Shares terminate pursuant to Section 5.2 hereof.

     1.2 Demand Registration.

     (a) At any time during the period beginning on the date on which any Dividend Shares
become issuable (upon the initial issuance as dividends of shares of Preferred Stock
convertible into such Dividend Shares, as contemplated by clause (b) of the definition of
“Preferred Stock” contained in Section 6.1), and ending on the earlier of two years after
the final issue date of such shares of Preferred Stock or the date on which the Company’s
registration obligations with respect to the Dividend Shares terminate pursuant to Section
5.2 hereof, the Holder may request the Company to register under the Securities Act all, but
not less than all, of the Dividend Shares that the Holder then holds or has the right to
acquire and that constitute Registrable Securities, for sale by such Holder in the manner
specified in such request. The Company will use its best efforts to expeditiously effect
the registration of the Dividend Shares following such a request. The
Holder shall have the right to require such a registration one (1) time, provided that
if the requested registration is not effected as contemplated by Section 1.5, the Holder
shall continue to have the rights specified in this Section 1.2 until such registration is
effected in accordance herewith. The Company shall not be required to effect a registration

 

 

pursuant to a request under this Section 1.2 within six (6) months after the filing of a
registration statement relating to a public offering of securities by the Company. Any
Registration Statement filed pursuant hereto may include, in addition to the Dividend
Shares, such other shares of Common Stock or other securities of the Company for sale by the
Company or other security holders of the Company as the Company may deem appropriate,
provided that the inclusion of such additional securities does not unreasonably interfere
with the Holder’s ability to dispose of the Dividend Shares pursuant to such registration.
The Company may satisfy its obligations under this Section 1.2 by amending the Registration
Statement filed pursuant to Section 1.1 to add the Dividend Shares thereto, if appropriate
and permitted under applicable rules of the Commission.

     (b) If at the time of any request to register Dividend Shares pursuant to this Section
1.2 the Company is engaged in discussions or negotiations regarding a possible acquisition
or other significant corporate transaction that, in the good faith determination of the
Company’s Board of Directors, would be adversely affected by the requested registration to
the material detriment of the Company, then the Company may at its option direct that such
request be delayed for a period not in excess of sixty (60) days from the date of such
request, such right to delay a request to be exercised by the Company not more than once in
any one (1) year period.

     1.3 Piggyback Registration. If at any time the Company shall propose to register any
Common Stock, whether or not for sale for its own account, under the 1933 Act, by future
registrations on Form SB-2, S-1, S-2 or S-3 for future financings (but not Form S-4 or S-8) or any
successor or similar forms (except for any registrations in connection with an employee benefit
plan or dividend reinvestment plan or a merger, consolidation or other business combination) it
shall give written notice to the Holder of its intention to do so and of the Holder’s rights under
this Section 1.3 at least 30 days prior to the filing of a registration statement with respect to
such registration with the Commission. Upon the written request of the Holder made within 20 days
after the receipt of that notice, which request shall specify the Registrable Securities intended
to be registered and disposed of by such Investor, the Company shall, subject to the provisions
hereof, use its best efforts to include in such registration statement all Registrable Securities
that the Company has been so requested to register by Holder. If Holder decides not to include all
of its Registrable Securities in any registration statement thereafter filed by the Company, such
Investor shall nevertheless continue to have the right pursuant to this Section 1.3 to include any
Registrable Securities in any subsequent registration statement or registration statements as may
be filed by the Company with respect to offerings of its securities, upon all the terms and
conditions set forth herein. If, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the registration statement filed in
connection with a registration under this Section 2(g), the
Company shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such determination to each
Holder and upon giving that notice (i) in the case of a determination not to register, the Company
shall be relieved of its obligation to register any Registrable Securities in connection with such

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registration without prejudice and (ii) in the case of a determination to delay registering, the
Company shall be permitted to delay registering any Registrable Securities for the same period as
the delay in registering such other securities.

     1.4 Restriction on Registration. Notwithstanding the foregoing, the Company shall not
be required to effect a registration pursuant to the foregoing provisions of Section 1.1, 1.2 or
1.3 if it is determined that such registration would not be permitted under applicable securities
laws or the rules and regulations of the Commission.

     1.5 Expenses. The Company will pay all of its Registration Expenses in connection
with the registrations required by Sections 1.1, 1.2 and 1.3, including any Registration Statement
that is not deemed to be effected pursuant to the provisions of Section 1.6 hereof.

     1.6 Effective Registration Statement. A registration pursuant to Section 1.1, 1.2 or
1.3 of this Agreement shall not be deemed to have been effected (i) unless a Registration Statement
with respect thereto has been declared effective by the Commission, (ii) if after it has become
effective, such registration is interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any reason or (iii) the
Registration Statement does not remain continuously effective until termination of the Company’s
registration obligations pursuant to Section 5.2 hereof. If a registration pursuant to this
Article I is deemed not to have been effected as provided in this Section 1.6, then the Company
shall continue to be obligated to effect the registration required by Section 1.1 or 1.2.

     1.7 Obligations of the Holder.

     (a) In connection with any registration of Registrable Securities pursuant to Section
1.1, 1.2 or 1.3, the Holder shall furnish to the Company in a timely manner all information
regarding itself and the distribution of such Registrable Securities as may be required to
be included in the Registration Statement and as the Company may from time to time
reasonably request in order to effect the registration of such Registrable Securities, and
shall otherwise cooperate with the Company to the extent reasonably necessary to effect such
registration.

     (b) Each Holder agrees, that upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph (f) of Article II hereof, the
Holder will forthwith discontinue disposition of Registrable Securities covered by any
Registration Statement or Prospectus until the Holder’s receipt of the copies of the
supplemented or amended Prospectus contemplated by such paragraph (f), or until it is
advised in writing by the Company that the use of the applicable Prospectus may be resumed,
and has received copies of any additional or supplemental filings that are incorporated by
reference in such Prospectus, and, if so directed by the Company, the
Holder will deliver to the Company (at the Company’s expense) all copies, other than
permanent file copies then in the Holder’s possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.

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     (c) If any Registrable Securities are to be sold in an underwritten offering, the
Holder shall complete and execute all questionnaires, powers of attorney, indemnities,
underwriting agreements (including customary indemnities by the selling stockholders) and
other documents reasonably and customarily required under the terms of such underwriting
arrangements.

ARTICLE II

REGISTRATION PROCEDURES

     Whenever any Registrable Securities are to be registered pursuant to this Agreement, the
Company will use best efforts to effect the registration of such Registrable Securities for sale in
accordance with the intended method or methods of disposition thereof as quickly as possible, and
pursuant thereto the Company will as expeditiously as reasonably possible:

     (a) prepare and file with the Commission a Registration Statement with respect to such
Registrable Securities and use its best efforts to cause such Registration Statement to
become and remain effective for the period contemplated by Section 1.1 or 1.2;
provided, that as promptly as practicable before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, the Company will (i) furnish to counsel
selected by the Holder copies of all such documents proposed to be filed, and (ii) notify
the Holder of (x) any request by the Commission to amend such Registration Statement or
amend or supplement any Prospectus, or (y) any stop order issued or threatened by the
Commission, and take all reasonable actions required to prevent the entry of such stop order
or to promptly remove it if entered;

     (b) (i) prepare and file with the Commission such amendments and supplements to such
Registration Statement and the Prospectus used in connection therewith as may be necessary
to keep such Registration Statement effective for the period contemplated by Section 1.1 or
1.2, and (ii) comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the Holder set forth in such
Registration Statement;

     (c) furnish to the Holder, without charge, such number of conformed copies of such
Registration Statement, each amendment and supplement thereto, the Prospectus included in
such Registration Statement (including each preliminary Prospectus and, in each case,
including all exhibits) and such other documents as the Holder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by it;

     (d) use its best efforts to register or qualify such Registrable Securities under such
other securities or blue sky laws of such jurisdictions in the United States as the
Holder shall reasonably request, to keep such registration or qualification in effect
for so long as such Registration Statement remains in effect and do any and all other acts
and things which may be reasonably necessary or advisable to enable the Holder to consummate
the disposition in such jurisdictions of the Registrable Securities owned by

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it; provided,
however, that the Company will not be required to (i) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but for this clause
(d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction;

     (e) use its best efforts (if the offering is underwritten) to furnish to the Holder a
signed copy, addressed to the Holder (and the underwriters, if any) of an opinion of counsel
for the Company or special counsel to the selling stockholder, dated the effective date of
such Registration Statement (and, if such Registration Statement includes an underwritten
public offering, dated the date of the closing under the underwriting agreement), covering
substantially the same matters with respect to such Registration Statement (and the
Prospectus included therein) as are customarily covered in opinions of issuer’s counsel
delivered to the underwriters in underwritten public offerings, and such other legal matters
as the Holder (or the underwriters, if any) may reasonably request;

     (f) notify the Holder, at a time when a Prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event known to the Company as a
result of which the Prospectus included in such Registration Statement, as then in effect,
contains an untrue statement of a material fact or omits to state any fact required to be
stated therein or necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and, at the request of the Holder, the Company
will prepare and furnish to the Holder a reasonable number of copies of a supplement to or
an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such Prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the circumstances
under which they were made;

     (g) cause all such Registrable Securities to be listed on each securities exchange and
quotation system on which similar securities issued by the Company are then listed and to
enter into such customary agreements as may be required in furtherance thereof, including,
without limitation, listing applications and indemnification agreements in customary form;

     (h) provide a transfer agent and registrar for all such Registrable Securities not
later than the effective date of such Registration Statement;

     (i) make available for inspection by the Holder, any underwriter participating in any
disposition pursuant to such Registration Statement and any attorney, accountant or other
agent retained by the Holder or any such underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company’s officers, directors, employees and independent accountants to supply all
information reasonably requested by the Holder, any such underwriter, attorney, accountant
or agent in connection with such Registration Statement to enable them to conduct a
reasonable investigation within the meaning of the Securities Act;

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     (j) subject to other provisions hereof, use its best efforts to cause such Registrable
Securities covered by such Registration Statement to be registered with or approved by such
other governmental agencies or authorities or self-regulatory organizations as may be
necessary to enable the sellers thereof to consummate the disposition of such Registrable
Securities; and

     (k) promptly notify the Holder of the issuance of any stop order by the Commission or
the issuance by any state securities commission or other regulatory authority of any order
suspending the qualification or exemption from qualification of any of the Registrable
Securities under state securities or “blue sky” laws, and use every reasonable effort to
obtain the lifting at the earliest possible time of any stop order suspending the
effectiveness of any Registration Statement or of any order preventing or suspending the use
of any preliminary Prospectus.

ARTICLE III

REGISTRATION EXPENSES

     3.1 Registration Expenses. All Registration Expenses will be borne as provided in
Section 1.5 of this Agreement.

     3.2 Sellers’ Expenses. The Company shall have no obligation to pay (a) any
underwriting discounts or commissions or stock transfer taxes attributable to the sale of
Registrable Securities, which expenses will be borne by all sellers of securities included in such
registration in proportion to the aggregate selling price of the securities to be so registered, or
(b) any fees or expenses of attorneys for the Holder or any other selling stockholder.

ARTICLE IV

INDEMNIFICATION

     4.1 Company’s Indemnification Obligations. The Company agrees to indemnify and hold
harmless the Holder and each other Person, if any, who controls the Holder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively, the “Holder
Indemnitees”):

     (a) against any and all loss, liability, claim, damage or expense arising out of or
based upon an untrue statement or alleged untrue statement of a material fact contained in
any Registration Statement (or any amendment or supplement thereto), including all documents
incorporated therein by reference, or in any preliminary Prospectus or Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were made, not
misleading;

     (b) against any and all loss, liability, claim, damage and expense to the extent of the
aggregate amount paid in settlement of any litigation, investigation or proceeding

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by any
governmental agency or body, commenced or threatened, or of any claim based upon any such
untrue statement or omission or any such alleged untrue statement or omission, if such
settlement is effected with the written consent of the Company; and

     (c) against any and all reasonable expense incurred by them in connection with
investigating, preparing or defending against any litigation, or investigation or proceeding
by any governmental agency or body, commenced or threatened, or any claim based upon any
such untrue statement or omission or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under clause (a) or (b) above

provided, that this indemnity does not apply to any loss, liability, claim, damage or
expense to the extent arising out of an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Holder expressly for use in the preparation of any Registration
Statement (or any amendment or supplement thereto), including all documents incorporated therein by
reference, or in any preliminary Prospectus or Prospectus (or any amendment or supplement thereto);
and provided further, that the Company will not be liable to the Holder or any
other Holder Indemnitee under the indemnity agreement in this Section 4.1, with respect to any
preliminary Prospectus or the final Prospectus or the final Prospectus as amended or supplemented,
as the case may be, to the extent that any such loss, liability, claim, damage or expense of such
Holder Indemnitee results from the fact that the Holder sold Registrable Securities to a Person to
whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of
the final Prospectus or of the final Prospectus as then amended or supplemented, whichever is most
recent, if the Company has previously and timely furnished copies thereof to the Holder.

     4.2 Holder’s Indemnification Obligations. In connection with any Registration
Statement in which the Holder is participating, the Holder agrees to indemnify and hold harmless
(in the same manner and to the same extent as set forth in Section 4.1 of this Agreement) the
Company and each Person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act with respect to any statement or alleged statement
in or omission or alleged omission from such Registration Statement, any preliminary, final or
summary Prospectus contained therein, or any amendment or supplement thereto, if such statement or
alleged statement or omission or alleged omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Holder. The obligations of each Holder
pursuant to this Section 4.2 (if there are more than one) are to be several and not joint (however,
husband and wife are to be treated as one Holder); provided, that with respect to each
claim pursuant to this Section 4.2, each such Holder’s maximum liability under this Section shall
be limited to an amount equal to the net proceeds actually received by such Holder (after deducting
any underwriting discount and expenses) from the sale of
Registrable Securities being sold pursuant to such Registration Statement or Prospectus by
such Holder.

     4.3 Notices; Defense; Settlement. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding involving a claim

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referred to in Section 4.1 or Section 4.2 of this Agreement, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give written notice to the
latter of the commencement of such action; provided, that the failure of any indemnified
party to give notice as provided herein shall not relieve the indemnifying party of its obligations
under Section 4.1 or Section 4.2 of this Agreement except to the extent that the indemnifying party
is actually prejudiced by such failure to give notice. In case any such action is brought against
an indemnified party, the indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified, to the extent that
it may wish, and after notice from the indemnifying party to such indemnified party of its election
so to assume the defense thereof with counsel mutually satisfactory to the indemnifying party and
the indemnified party, the indemnifying party will not be liable to such indemnified party for any
legal or other expenses subsequently incurred by the latter in connection with the defense thereof,
unless in such indemnified party’s reasonable judgment, upon the advice of counsel, a conflict of
interest between such indemnified and indemnifying parties may exist in respect of such claim, in
which case the indemnifying party shall not be liable for the fees and expenses of (i) more than
one counsel for all holders of Registrable Securities, selected by the Holder or (ii) more than one
counsel for the Company in connection with any one action or separate but similar or related
actions. An indemnifying party who is not entitled to, or elects not to, assume the defense of a
claim will not be obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party, based on advice of counsel, a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of
such additional counsel or counsels. The indemnifying party will not, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which indemnification may
be sought hereunder (whether or not such indemnified party or any Person who controls such
indemnified party is a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of such indemnified party from all
liability arising out of such claim, action, suit or proceeding. Notwithstanding anything to the
contrary set forth herein, and without limiting any of the rights set forth above, in any event,
any party will have the right to retain, at its own expense, counsel with respect to the defense of
a claim.

     4.4 Indemnity Provision. The Company and the Holder shall provide for the foregoing
indemnity (with appropriate modifications) in any underwriting agreement with respect to any
required registration or other qualification of securities under any Federal or state law or
regulation of any governmental authority other than the Securities Act.

     4.5 Contribution Based on Relative Fault. In order to provide for just and equitable
contribution if a claim for indemnification pursuant to the indemnification provisions of this
Article IV is made but it is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) that such indemnification may not be enforced in such case, and the
express provisions hereof provide for indemnification in such case, then the indemnifying party

8

 

shall contribute to the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Section 4.1 or Section 4.2 of this Agreement in such
proportion as is appropriate to reflect the relative fault of the indemnifying party on the one
hand, and the indemnified party on the other, in connection with statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations, including, without limitation, the relative benefits received by each
parties from the offering of the securities covered by such Registration Statement, the parties’
relative knowledge and access to information concerning the matter with respect to which the claim
was asserted and the opportunity to correct and prevent any statement or omission. The relative
fault shall be determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a material fact relates
to information supplied by the indemnifying party or the indemnified party and the parties’
relative intent, knowledge, access to information and opportunity to correct or prevent such untrue
statements or omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 4.5 were to be determined by pro rata or per capita
allocation or by any other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this Section 4.5. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities referred to in the
first sentence of this Section 4.5 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating or defending any
action or claim (which shall be limited as provided in Section 4.3 of this Agreement if the
indemnifying party has assumed the defense of any such action in accordance with the provisions
thereof) which is the subject of this Section 4.5. Promptly after receipt by an indemnified party
under this Section 4.5 of notice of the commencement of any action against such party in respect of
which a claim for contribution may be made against an indemnifying party under this Section 4.5,
such indemnified party shall notify the indemnifying party in writing of the commencement thereof
if the notice specified in Section 4.3 of this Agreement has not been given with respect to such
action; provided, that the omission to so notify the indemnifying party shall not relieve
the indemnifying party from any liability which it may otherwise have to any indemnified party
under this Section 4.5, except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice. The Company and the Holder agree with each other, and will agree with
the underwriters of the Registrable Securities, if requested by such underwriters, that (i) the
underwriters’ portion of such contribution shall not exceed the underwriting discount and (ii) that
the amount of such contribution by the Holder shall not exceed an amount equal to the net proceeds
actually received by the Holder from the sale of Registrable Securities in the offering to which
the losses, liabilities, claims, damages or expenses of the indemnified parties relate. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such fraudulent
misrepresentation.

     4.6 Payments. The indemnification required by this Article IV shall be made by
periodic payments of the amount thereof during the course of the investigation or defense, as and
when expense, loss, damage or liability is incurred.

9

 

ARTICLE V

TRANSFER AND TERMINATION OF REGISTRATION RIGHTS; 

     5.1 Transfer of Rights. The Holder identified in the preamble of this Agreement may
transfer its rights to register such Holder’s Registrable Securities hereunder to any transferee of
such Registrable Securities, provided that such rights may not be transferred (a) to any person or
entity who or which is engaged in an activity or business directly competitive with any activity or
business of the Company or any subsidiary of the Company as presently conducted; or (b) to any
person or entity without the Company’s prior written consent, which shall not be unreasonably
withheld; and provided further that the proposed transferee enters into a written agreement with
the Company, agreeing to be bound by the terms and conditions hereof. As used in Agreement,
“Holder” shall refer to the Holder identified in the preamble of this Agreement and to each
permitted transferee of such Holder’s rights pursuant to this Section 5.1, as the context requires;
provided that no Holder other than the Holder identified in the preamble of this Agreement shall
have the right to make any transfer or assignment of rights under this Agreement.

     5.2 Termination of Rights. The registration rights of any Holder of such rights
hereunder and the registration obligations of the Company hereunder with respect to Registrable
Securities will terminate on the earliest date at which such Registrable Securities have been sold
or may be sold pursuant to the exemption from registration provided under Rule 144(k) promulgated
under the Securities Act.

ARTICLE VI

DEFINITIONS

     6.1 Terms. As used in this Agreement, the following defined terms shall have the
meanings set forth below:

     “Business Day” means a day other than Saturday, Sunday or any day on which banks
located in the State of New York are authorized or obligated to close.

     “Commission” means the United States Securities and Exchange Commission.

     “Common Stock” means the common stock, par value $.10 per share, of the Company, any
securities into which such common stock shall have been changed or any securities resulting from
any reclassification or recapitalization of such common stock, and all other securities (other than
Preferred Stock) of any class or classes (however designated) of the Company the holders of which
have the right, without limitation as to amount, after payment on any securities entitled to a
preference on dividends or other distributions upon any dissolution, liquidation or winding up,
either to all or to a share of the balance of payments upon such dissolution, liquidation or
winding up.

     “Conversion Shares” means (i) the shares of Common Stock issued or issuable upon
conversion of the 336 shares of Preferred Stock initially issued to the Holder pursuant to the

10

 

Stock Purchase Agreement, (ii) any additional shares of Common Stock issued or issuable upon
conversion of shares of Preferred Stock hereafter issued as dividends on shares of Preferred Stock
(as contemplated by clause (b) of the definition of “Preferred Stock” below), the issuance of which
does not require approval by the Company’s shareholders, and (iii) any securities issued or
issuable with respect to such shares of Common Stock pursuant to the adjustment provisions
contained in the Company’s Articles of Incorporation governing the Preferred Stock in connection
with a stock split or combination of shares, recapitalization, merger, consolidation, or other
reorganization.

     “Dividend Shares” means (i) the shares of Common Stock, if any, issued or issuable
upon conversion of shares of Preferred Stock hereafter issued as dividends on outstanding shares of
Series G Convertible Preferred Stock and which do not constitute Conversion Shares, and (ii) any
securities issued or issuable with respect to such shares of Common Stock pursuant to the
adjustment provisions contained in the Company’s Articles of Incorporation governing the Preferred
Stock in connection with a stock split or combination of shares, recapitalization, merger,
consolidation, or other reorganization.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar
Federal statute then in effect, and any reference to a particular section thereof shall include a
reference to the equivalent section, if any, of any such similar Federal statute, and the rules and
regulations thereunder.

     “Person” means any individual, corporation, partnership, association, trust or other
entity or organization, including a government or political subdivision or an agency or
instrumentality thereof.

     “Preferred Stock” means the shares of Series G Convertible Preferred Stock of the
Company (a) issued and sold to the Holder by the Company pursuant to the Stock Purchase Agreement
on or before the date hereof and (b) issued to the Holder as dividends on outstanding shares of
Series G Convertible Preferred Stock pursuant to Section 2 of the Certificate of Designation
setting forth the terms and provisions of the Series G Convertible Preferred Stock.

     “Prospectus” means the prospectus included in any Registration Statement (including
without limitation, a prospectus that discloses information previously omitted from a prospectus
filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under
the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the
terms of the offering of any portion of the securities covered by such Registration Statement, and
all other amendments and supplements to the prospectus, including post-effective amendments, and
all material incorporated by reference or deemed to be incorporated by reference in such
prospectus.

     “Registrable Securities” means the Conversion Shares, Warrant Stock and the Dividend
Shares, provided that, as to any particular Registrable Securities, such securities will cease to
be Registrable Securities when they have been (x) effectively registered under the Securities Act
and disposed of in accordance with the Registration Statement covering them or (y) transferred

11

 

pursuant to Rule 144 (or any similar rule then in force) under the Securities Act or otherwise
transferred and, in each case, new certificates for them not bearing a restrictive Securities Act
legend have been delivered by the Company and can be sold without complying with the registration
requirements of the Securities Act.

     “Registration Expenses” means, with respect to any registration required hereunder,
all of the reasonable costs and expenses incurred in connection with such registration, other than
(i) underwriting discounts and commissions; (ii) transfer taxes; and (iii) all attorney’s fees for
selling stockholders’ attorneys.

     “Registration Statement” means any registration statement of the Company which covers
any of the Registrable Securities pursuant to the provisions of this Agreement, including the
Prospectus, amendments and supplements to such registration statement, including post-effective
amendments, all exhibits and all material incorporated by reference in such registration statement.

     “Securities Act” means the Securities Act of 1933, as amended, or any similar Federal
statute then in effect, and any reference to a particular section thereof shall include a reference
to a comparable section, if any, of any such similar Federal statute, and the rules and regulations
thereunder.

     “Warrant Stock” shall have the meaning set forth in the Warrant Agreement.

     6.2 Defined Terms in Corresponding Sections. The following defined terms, when used
in this Agreement, shall have the meaning ascribed to them in the corresponding Sections of this
Agreement listed below:

	 	 	 	 	 
	“Agreement”

	 	—
	 	Preamble
	“Company”

	 	—
	 	Preamble
	“Holder Indemnitees”

	 	—
	 	Section 4.1
	“Holder”

	 	—
	 	Preamble and Section 5.1
	“Stock Purchase Agreement”

	 	—
	 	Recitals
	“Target Effective Date”

	 	—
	 	Section 1.1
	“Warrant Agreement”

	 	—
	 	Recitals

ARTICLE VII

MISCELLANEOUS

     7.1 Remedies. In the event of a breach by any party to this Agreement of its
obligations under this Agreement, any party injured by such breach, in addition to being entitled
to exercise all rights granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Agreement. The parties agree that the provisions of this
Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate

12

 

compensation for
any loss and that any defense in any action for specific performance that a remedy at law would be
adequate is waived.

     7.2 Amendments and Waivers. Except as otherwise provided herein, no modification,
amendment or waiver of any provision of this Agreement will be effective against the Company or any
Holder of Registrable Securities, unless such modification, amendment or waiver is approved in
writing by the Company and the Holder(s) representing a majority of the Registrable Securities then
outstanding. The failure of any party to enforce any of the provisions of this Agreement will in
no way be construed as a waiver of such provisions and will not affect the right of such party
thereafter to enforce each and every provision of this Agreement in accordance with its terms.

     7.3 Successors and Assigns. All covenants and agreements in this Agreement by or on
behalf of any of the parties hereto will bind and inure to the benefit of the respective successors
and permitted assigns of the parties hereto whether so expressed or not.

     7.4 Notices. All notices, requests and other communications hereunder must be in
writing and will be deemed to have been duly given only if delivered personally against written
receipt or mailed by pre-paid registered or certified mail, return receipt requested or mailed by
overnight courier prepaid to the parties at the following addresses:

	 	 	 
	If to the Company:

	 	Digital Recorders, Inc.
	 

	 	5949 Sherry Lane, Suite 1050
	 

	 	Dallas, TX 75225
	 

	 	Attention: CEO & President
	 
	 	 
	If to Holder:

	 	Dolphin Offshore Partners, L.P.
	 

	 	c/o Dolphin Asset Management Corp.
	 

	 	129 East 17th Street
	 

	 	New York, NY 10003

All such notices, requests and other communications will (i) if delivered personally to the address
as provided in this Section 7.4, be deemed given upon delivery, (ii) if delivered by mail in the
manner described above to the address as provided in this Section 7.4, be deemed given on the
earlier of the tenth full Business Day following the day of mailing or upon receipt, and (iii) if
delivered by overnight courier to the address provided in this Section 7.4, be deemed given on the
earlier of the third Business Day following the date sent by such overnight courier or upon
receipt. Any party from time to time may change its address, facsimile number or other information
for the purpose of notices to that party by giving notice specifying such change to the other
parties hereto.

     7.5 Headings. The headings used in this Agreement have been inserted for convenience
of reference only and do not define or limit the provisions hereof.

13

 

     7.6 Gender. Whenever the pronouns “he” or “his” are used herein they shall also be
deemed to mean “she” or “hers” or “it” or “its” whenever applicable. Words in the singular shall
be read and construed as though in the plural and words in the plural shall be construed as though
in the singular in all cases where they would so apply.

     7.7 Invalid Provisions. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any present or future law, and if the rights or obligations of any
party hereto under this Agreement will not be materially and adversely affected thereby, (i) such
provision will be fully severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof, (iii) the remaining
provisions of this Agreement will remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance herefrom and (iv) in lieu of such
illegal, invalid or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible.

     7.8 Governing Law. This Agreement shall be governed by and construed in accordance
with the domestic laws of the State of North Carolina, without giving effect to any choice of law
or conflict of law provision or rule (whether of the State of North Carolina or any other
jurisdiction) that would cause the application of the laws of any jurisdiction other than the State
of North Carolina.

     7.9 Counterparts. This Agreement may be executed in any number of counterparts, each
of which will be deemed an original, but all of which together will constitute one and the same
instrument.

     7.10 Termination of Prior Agreement. This Agreement is being entered into for the
purpose of amending and restating in its entirety the Original Agreement, and the Original
Agreement is hereby terminated and superceded in its entirety by this Agreement and shall have no
further force or effect.

14

 

     IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date
first above written, intending the same, to the extent legally permissible, to be effective as of
June 23, 2005.

	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	Digital Recorders, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	           /s/ David L. Turney	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: David L. Turney

Title: CEO, President and Chairman	 	 
	 
	 	 	 	 	 	 
	 	 	HOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	Dolphin Offshore Partners, L.P.	 	 
	 

	 	By:
	 	Dolphin Management Inc.

its managing general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Peter E. Salas	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Peter E. Salas

Title: General Partner	 	 

15

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