Document:

exv10w4

 

EXHIBIT
10.4

STOCK PLEDGE AGREEMENT

     This Stock Pledge Agreement (this “Agreement”), dated as of March 15, 2006, among
Laurus Master Fund, Ltd. (the “Pledgee”), Digital Recorders, Inc., a North Carolina
corporation (the “Company”), and each of the other undersigned parties (other than the
Pledgee) (the Company and each such other undersigned party, a “Pledgor” and collectively,
the “Pledgors”).

BACKGROUND

     The Company has entered into a Security Agreement dated as of March 15, 2006 (as amended,
modified, restated or supplemented from time to time, the “Security Agreement”), pursuant
to which the Pledgee provides or will provide certain financial accommodations to the Company and
certain subsidiaries of the Company.

     In order to induce the Pledgee to provide or continue to provide the financial accommodations
described in the Security Agreement, each Pledgor has agreed to pledge and grant a security
interest in the collateral described herein to the Pledgee on the terms and conditions set forth
herein.

     NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration
the receipt of which is hereby acknowledged, the parties hereto agree as follows:

     1. Defined Terms. All capitalized terms used herein which are not defined shall have
the meanings given to them in the Security Agreement

     2. Pledge and Grant of Security Interest. To secure the full and punctual payment and
performance of (the following clauses (a) and (b), collectively, the “Obligations”) (a) the
obligations under the Security Agreement and the Ancillary Agreements referred to in the Security
Agreement the Security Agreement and the Ancillary Agreements, as each may be amended, restated,
modified and/or supplemented from time to time, collectively, the “Documents”) and (b) all
other obligations and liabilities of each Pledgor to the Pledgee whether now existing or hereafter
arising, direct or indirect, liquidated or unliquidated, absolute or contingent, due or not due and
whether under, pursuant to or evidenced by a note, agreement, guaranty, instrument or otherwise (in
each case, irrespective of the genuineness, validity, regularity or enforceability of such
Obligations, or of any instrument evidencing any of the Obligations or of any collateral therefor
or of the existence or extent of such collateral, and irrespective of the allowability, allowance
or disallowance of any or all of such in any case commenced by or against any Pledgor under Title
11, United States Code, including, without limitation, obligations of each Pledgor for
post-petition interest, fees, costs and charges that would have accrued or been added to the
Obligations but for the commencement of such case), each Pledgor hereby pledges, assigns,
hypothecates, transfers and grants a security interest to Pledgee in all of the following (the
“Collateral”):

          (a) the shares of stock set forth on Schedule A annexed hereto and expressly made a
part hereof (together with any additional shares of stock or other equity interests acquired

Stock Pledge Agreement

 

 

by any Pledgor, the “Pledged Stock”), the certificates representing the Pledged Stock
and all dividends, cash, instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged
Stock;

          (b) all additional shares of stock of any issuer (each, an “Issuer”) of the Pledged
Stock from time to time acquired by any Pledgor in any manner, including, without limitation, stock
dividends or a distribution in connection with any increase or reduction of capital,
reclassification, merger, consolidation, sale of assets, combination of shares, stock split,
spin-off or split-off (which shares shall be deemed to be part of the Collateral), and the
certificates representing such additional shares, and all dividends, cash, instruments and other
property or proceeds from time to time received, receivable or otherwise distributed in respect of
or in exchange for any or all of such shares; and

          (c) all options and rights, whether as an addition to, in substitution of or in exchange for
any shares of any Pledged Stock and all dividends, cash, instruments and other property or proceeds
from time to time received, receivable or otherwise distributed in respect of or in exchange for
any or all such options and rights.

     3. Delivery of Collateral. All certificates representing or evidencing the Pledged
Stock shall be delivered to and held by or on behalf of Pledgee pursuant hereto and shall be
accompanied by duly executed instruments of transfer or assignments in blank, all in form and
substance satisfactory to Pledgee. Each Pledgor hereby authorizes the Issuer upon demand by the
Pledgee to deliver any certificates, instruments or other distributions issued in connection with
the Collateral directly to the Pledgee, in each case to be held by the Pledgee, subject to the
terms hereof. Upon the occurrence and during the continuance of an Event of Default (as defined
below), the Pledgee shall have the right, during such time in its discretion and without notice to
the Pledgor, to transfer to or to register in the name of the Pledgee or any of its nominees any or
all of the Pledged Stock. In addition, the Pledgee shall have the right at such time to exchange
certificates or instruments representing or evidencing Pledged Stock for certificates or
instruments of smaller or larger denominations.

     4. Representations and Warranties of each Pledgor. Each Pledgor jointly and severally
represents and warrants to the Pledgee (which representations and warranties shall be deemed to
continue to be made until all of the Obligations have been paid in full and each Document and each
agreement and instrument entered into in connection therewith has been irrevocably terminated)
that:

          (a) the execution, delivery and performance by each Pledgor of this Agreement and the pledge
of the Collateral hereunder do not and will not result in any violation of any agreement,
indenture, instrument, license, judgment, decree, order, law, statute, ordinance or other
governmental rule or regulation applicable to any Pledgor;

          (b) this Agreement constitutes the legal, valid, and binding obligation of each Pledgor
enforceable against each Pledgor in accordance with its terms;

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          (c) (i) all Pledged Stock owned by each Pledgor is set forth on Schedule A hereto and
(ii) each Pledgor is the direct and beneficial owner of each share of the Pledged Stock;

          (d) all of the shares of the Pledged Stock have been duly authorized, validly issued and are
fully paid and nonassessable;

          (e) no consent or approval of any person, corporation, governmental body, regulatory authority
or other entity, is or will be necessary for (i) the execution, delivery and performance of this
Agreement, (ii) the exercise by the Pledgee of any rights with respect to the Collateral or (iii)
the pledge and assignment of, and the grant of a security interest in, the Collateral hereunder;

          (f) there are no pending or, to the best of Pledgor’s knowledge, threatened actions or
proceedings before any court, judicial body, administrative agency or arbitrator which may
materially adversely affect the Collateral;

          (g) each Pledgor has the requisite power and authority to enter into this Agreement and to
pledge and assign the Collateral to the Pledgee in accordance with the terms of this Agreement;

          (h) each Pledgor owns each item of the Collateral and, except for the pledge and security
interest granted to Pledgee hereunder, the Collateral shall be, immediately following the closing
of the transactions contemplated by the Documents, free and clear of any other security interest,
mortgage, pledge, claim, lien, charge, hypothecation, assignment, offset or encumbrance whatsoever
(collectively, “Liens”);

          (i) there are no restrictions on transfer of the Pledged Stock contained in the certificate of
incorporation or by-laws (or equivalent organizational documents) of the Issuer or otherwise which
have not otherwise been enforceably and legally waived by the necessary parties;

          (j) none of the Pledged Stock has been issued or transferred in violation of the securities
registration, securities disclosure or similar laws of any jurisdiction to which such issuance or
transfer may be subject;

          (k) the pledge and assignment of the Collateral and the grant of a security interest under
this Agreement vest in the Pledgee all rights of each Pledgor in the Collateral as contemplated by
this Agreement; and

          (l) The Pledged Stock constitutes one hundred percent (100%) of the issued and outstanding
shares of capital stock of each Issuer.

     5. Covenants. Each Pledgor jointly and severally covenants that, until the
Obligations shall be indefeasibly satisfied in full and each Document and each agreement and
instrument entered into in connection therewith is irrevocably terminated:

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          (a) No Pledgor will sell, assign, transfer, convey, or otherwise dispose of its rights in or
to the Collateral or any interest therein; nor will any Pledgor create, incur or permit to exist
any Lien whatsoever with respect to any of the Collateral or the proceeds thereof other than that
created hereby.

          (b) Each Pledgor will, at its expense, defend Pledgee’s right, title and security interest in
and to the Collateral against the claims of any other party.

          (c) Each Pledgor shall at any time, and from time to time, upon the written request of
Pledgee, execute and deliver such further documents and do such further acts and things as Pledgee
may reasonably request in order to effectuate the purposes of this Agreement including, but without
limitation, delivering to Pledgee, upon the occurrence of an Event of Default, irrevocable proxies
in respect of the Collateral in form satisfactory to Pledgee. Until receipt thereof, upon an Event
of Default that has occurred and is continuing beyond any applicable grace period, this Agreement
shall constitute Pledgor’s proxy to Pledgee or its nominee to vote all shares of Collateral then
registered in each Pledgor’s name.

          (d) No Pledgor will consent to or approve the issuance of (i) any additional shares of any
class of capital stock or other equity interests of the Issuer; or (ii) any securities convertible
either voluntarily by the holder thereof or automatically upon the occurrence or nonoccurrence of
any event or condition into, or any securities exchangeable for, any such shares, unless, in either
case, such shares are pledged as Collateral pursuant to this Agreement.

     6. Voting Rights and Dividends. In addition to the Pledgee’s rights and remedies set
forth in Section 8 hereof, in case an Event of Default shall have occurred and be continuing beyond
any applicable cure period, the Pledgee shall (i) be entitled to vote the Collateral, (ii) be
entitled to give consents, waivers and ratifications in respect of the Collateral (each Pledgor
hereby irrevocably constituting and appointing the Pledgee, with full power of substitution, the
proxy and attorney-in-fact of each Pledgor for such purposes) and (iii) be entitled to collect and
receive for its own use cash dividends paid on the Collateral. No Pledgor shall be permitted to
exercise or refrain from exercising any voting rights or other powers if, in the reasonable
judgment of the Pledgee, such action would have a material adverse effect on the value of the
Collateral or any part thereof; and, provided, further, that each Pledgor shall
give at least five (5) days’ written notice of the manner in which such Pledgor intends to
exercise, or the reasons for refraining from exercising, any voting rights or other powers other
than with respect to any election of directors and voting with respect to any incidental matters.
Following the occurrence of an Event of Default, all dividends and all other distributions in
respect of any of the Collateral, shall be delivered to the Pledgee to hold as Collateral and
shall, if received by any Pledgor, be received in trust for the benefit of the Pledgee, be
segregated from the other property or funds of any other Pledgor, and be forthwith delivered to the
Pledgee as Collateral in the same form as so received (with any necessary endorsement).

     7. Event of Default. An “Event of Default” under this Agreement shall occur upon the
happening of any of the following events:

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          (a) An “Event of Default” under any Document or any agreement or note related to any Document
shall have occurred and be continuing beyond any applicable cure period;

          (b) Any Pledgor shall default in the performance of any of its obligations under any Document,
including, without limitation, this Agreement, and such default shall not be cured during the cure
period applicable thereto;

          (c) Any representation or warranty of any Pledgor made herein, in any Document or in any
agreement, statement or certificate given in writing pursuant hereto or thereto or in connection
herewith or therewith shall be false or misleading in any material respect;

          (d) Any portion of the Collateral is subjected to a levy of execution, attachment, distraint
or other judicial process or any portion of the Collateral is the subject of a claim (other than by
the Pledgee) of a Lien or other right or interest in or to the Collateral and such levy or claim
shall not be cured, disputed or stayed within a period of fifteen (15) business days after the
occurrence thereof; or

          (e) Any Pledgor shall (i) apply for, consent to, or suffer to exist the appointment of, or the
taking of possession by, a receiver, custodian, trustee, liquidator or other fiduciary of itself or
of all or a substantial part of its property, (ii) make a general assignment for the benefit of
creditors, (iii) commence a voluntary case under any state or federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to
take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to
have dismissed, within thirty (30) days, any petition filed against it in any involuntary case
under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the
foregoing.

     8. Remedies. In case an Event of Default shall have occurred and is continuing, the
Pledgee may:

          (a) Transfer any or all of the Collateral into its name, or into the name of its nominee or
nominees;

          (b) Exercise all corporate rights with respect to the Collateral including, without
limitation, all rights of conversion, exchange, subscription or any other rights, privileges or
options pertaining to any shares of the Collateral as if it were the absolute owner thereof,
including, but without limitation, the right to exchange, at its discretion, any or all of the
Collateral upon the merger, consolidation, reorganization, recapitalization or other readjustment
of the Issuer thereof, or upon the exercise by the Issuer of any right, privilege or option
pertaining to any of the Collateral, and, in connection therewith, to deposit and deliver any and
all of the Collateral with any committee, depository, transfer agent, registrar or other designated
agent upon such terms and conditions as it may determine, all without liability except to account
for property actually received by it; and

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          (c) Subject to any requirement of applicable law, sell, assign and deliver the whole or, from
time to time, any part of the Collateral at the time held by the Pledgee, at any private sale or at
public auction, with or without demand, advertisement or notice of the time or place of sale or
adjournment thereof or otherwise (all of which are hereby waived, except such notice as is required
by applicable law and cannot be waived), for cash or credit or for other property for immediate or
future delivery, and for such price or prices and on such terms as the Pledgee in its sole
discretion may determine, or as may be required by applicable law.

          Each Pledgor hereby waives and releases any and all right or equity of redemption, whether
before or after sale hereunder. At any such sale, unless prohibited by applicable law, the Pledgee
may bid for and purchase the whole or any part of the Collateral so sold free from any such right
or equity of redemption. All moneys received by the Pledgee hereunder, whether upon sale of the
Collateral or any part thereof or otherwise, shall be held by the Pledgee and applied by it as
provided in Section 10 hereof. No failure or delay on the part of the Pledgee in exercising any
rights hereunder shall operate as a waiver of any such rights nor shall any single or partial
exercise of any such rights preclude any other or future exercise thereof or the exercise of any
other rights hereunder. The Pledgee shall have no duty as to the collection or protection of the
Collateral or any income thereon nor any duty as to preservation of any rights pertaining thereto,
except to apply the funds in accordance with the requirements of Section 10 hereof. The Pledgee
may exercise its rights with respect to property held hereunder without resort to other security
for or sources of reimbursement for the Obligations. In addition to the foregoing, Pledgee shall
have all of the rights, remedies and privileges of a secured party under the Uniform Commercial
Code of New York (the “UCC”) regardless of the jurisdiction in which enforcement hereof is sought.

     9. Private Sale. Each Pledgor recognizes that the Pledgee may be unable to effect (or
to do so only after delay which would adversely affect the value that might be realized from the
Collateral) a public sale of all or part of the Collateral by reason of certain prohibitions
contained in the Securities Act, and may be compelled to resort to one or more private sales to a
restricted group of purchasers who will be obliged to agree, among other things, to acquire such
Collateral for their own account, for investment and not with a view to the distribution or resale
thereof. Each Pledgor agrees that any such private sale may be at prices and on terms less
favorable to the seller than if sold at public sales and that such private sales shall be deemed to
have been made in a commercially reasonable manner. Each Pledgor agrees that the Pledgee has no
obligation to delay sale of any Collateral for the period of time necessary to permit the Issuer to
register the Collateral for public sale under the Securities Act.

     10. Proceeds of Sale. The proceeds of any collection, recovery, receipt,
appropriation, realization or sale of the Collateral shall be applied by the Pledgee as follows:

          (a) First, to the payment of all costs, reasonable expenses and charges of the Pledgee and to
the reimbursement of the Pledgee for the prior payment of such costs, reasonable expenses and
charges incurred in connection with the care and safekeeping of the Collateral (including, without
limitation, the reasonable expenses of any sale or any other disposition of any of the Collateral),
attorneys’ fees and reasonable expenses, court costs, any other fees or expenses incurred or
expenditures or advances made by Pledgee in the protection, enforcement or exercise of its rights,
powers or remedies hereunder;

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          (b) Second, to the payment of the Obligations, in whole or in part, in such order as the
Pledgee may elect, whether or not such Obligations is then due;

          (c) Third, to such persons, firms, corporations or other entities as required by applicable
law including, without limitation, Section 9-615(a)(3) of the UCC; and

          (d) Fourth, to the extent of any surplus to the Pledgors or as a court of competent
jurisdiction may direct.

          In the event that the proceeds of any collection, recovery, receipt, appropriation,
realization or sale are insufficient to satisfy the Obligations, each Pledgor shall be jointly and
severally liable for the deficiency plus the costs and fees of any attorneys employed by Pledgee to
collect such deficiency.

     11. Waiver of Marshaling. Each Pledgor hereby waives any right to compel any
marshaling of any of the Collateral.

     12. No Waiver. Any and all of the Pledgee’s rights with respect to the Liens granted
under this Agreement shall continue unimpaired, and Pledgor shall be and remain obligated in
accordance with the terms hereof, notwithstanding (a) the bankruptcy, insolvency or reorganization
of any Pledgor, (b) the release or substitution of any item of the Collateral at any time, or of
any rights or interests therein, or (c) any delay, extension of time, renewal, compromise or other
indulgence granted by the Pledgee in reference to any of the Obligations. Each Pledgor hereby
waives all notice of any such delay, extension, release, substitution, renewal, compromise or other
indulgence, and hereby consents to be bound hereby as fully and effectively as if such Pledgor had
expressly agreed thereto in advance. No delay or extension of time by the Pledgee in exercising
any power of sale, option or other right or remedy hereunder, and no failure by the Pledgee to give
notice or make demand, shall constitute a waiver thereof, or limit, impair or prejudice the
Pledgee’s right to take any action against any Pledgor or to exercise any other power of sale,
option or any other right or remedy.

     13. Expenses. The Collateral shall secure, and each Pledgor shall pay to Pledgee on
demand, from time to time, all reasonable costs and expenses, (including but not limited to,
reasonable attorneys’ fees and costs, taxes, and all transfer, recording, filing and other charges)
of, or incidental to, the custody, care, transfer, administration of the Collateral or any other
collateral, or in any way relating to the enforcement, protection or preservation of the rights or
remedies of the Pledgee under this Agreement or with respect to any of the Obligations.

     14. The Pledgee Appointed Attorney-In-Fact and Performance by the Pledgee. Upon the
occurrence of an Event of Default, each Pledgor hereby irrevocably constitutes and appoints the
Pledgee as such Pledgor’s true and lawful attorney-in-fact, with full power of substitution, to
execute, acknowledge and deliver any instruments and to do in such Pledgor’s name, place and stead,
all such acts, things and deeds for and on behalf of and in the name of such Pledgor, which such
Pledgor could or might do or which the Pledgee may deem necessary, desirable or convenient to
accomplish the purposes of this Agreement, including, without limitation, to execute such
instruments of assignment or transfer or orders and to register, convey or otherwise transfer title
to the Collateral into the Pledgee’s name. Each Pledgor hereby ratifies and confirms

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all that said attorney-in-fact may so do and hereby declares this power of attorney to be
coupled with an interest and irrevocable. If any Pledgor fails to perform any agreement herein
contained, the Pledgee may itself perform or cause performance thereof, and any costs and expenses
of the Pledgee incurred in connection therewith shall be paid by the Pledgors as provided in
Section 10 hereof.

     15. Waivers. THE PARTIES HERETO DESIRES THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE
JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEN IN CONNECTION WITH THIS AGREEMENT, ANY OTHER DOCUMENT
OR THE TRANSACTIONS RELATED HERETO OR THERETO.

     16. Recapture. Notwithstanding anything to the contrary in this Agreement, if the
Pledgee receives any payment or payments on account of the Obligations, which payment or payments
or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver, or any other party under the United
States Bankruptcy Code, as amended, or any other federal or state bankruptcy, reorganization,
moratorium or insolvency law relating to or affecting the enforcement of creditors’ rights
generally, common law or equitable doctrine, then to the extent of any sum not finally retained by
the Pledgee, each Pledgor’s obligations to the Pledgee shall be reinstated and this Agreement shall
remain in full force and effect (or be reinstated) until payment shall have been made to Pledgee,
which payment shall be due on demand.

     17. Captions. All captions in this Agreement are included herein for convenience of
reference only and shall not constitute part of this Agreement for any other purpose.

     18. Miscellaneous.

          (a) This Agreement constitutes the entire and final agreement among the parties with respect
to the subject matter hereof and may not be changed, terminated or otherwise varied except by a
writing duly executed by the parties hereto.

          (b) No waiver of any term or condition of this Agreement, whether by delay, omission or
otherwise, shall be effective unless in writing and signed by the party sought to be charged, and
then such waiver shall be effective only in the specific instance and for the purpose for which
given.

          (c) In the event that any provision of this Agreement or the application thereof to any
Pledgor or any circumstance in any jurisdiction governing this Agreement shall, to any extent, be
invalid or unenforceable under any applicable statute, regulation, or rule of law, such provision
shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform to such statute, regulation or rule of law, and the remainder of this

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          Agreement and the application of any such invalid or unenforceable provision to parties,
jurisdictions, or circumstances other than to whom or to which it is held invalid or unenforceable
shall not be affected thereby, nor shall same affect the validity or enforceability of any other
provision of this Agreement.

          (d) This Agreement shall be binding upon each Pledgor, and each Pledgor’s successors and
assigns, and shall inure to the benefit of the Pledgee and its successors and assigns.

          (e) Any notice or other communication required or permitted pursuant to this Agreement shall
be given in accordance with the Security Agreement.

          (f) THIS AGREEMENT AND THE OTHER DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

          (g) EACH PLEDGOR HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN ANY PLEDGOR, ON THE ONE HAND, AND THE PLEDGEE, ON THE OTHER HAND,
PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS, PROVIDED, THAT EACH PLEDGOR
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PLEDGEE FROM BRINGING SUIT OR TAKING
OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE INDEBTEDNESS, TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE INDEBTEDNESS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF THE PLEDGEE. EACH PLEDGOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH PLEDGOR HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS. EACH PLEDGOR HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT
AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH PLEDGOR AT THE
ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON
THE EARLIER OF THE SUCH PLEDGOR’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE
U.S. MAILS, PROPER POSTAGE PREPAID.

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          (h) It is understood and agreed that any person or entity that desires to become a Pledgor
hereunder, or is required to execute a counterpart of this Agreement after the date hereof pursuant
to the requirements of any Document, shall become a Pledgor hereunder by (x) executing a Joinder
Agreement in form and substance satisfactory to the Pledgee, (y) delivering supplements to such
exhibits and annexes to such Documents as the Pledgee shall reasonably request and/or set forth in
such joinder agreement and (z) taking all actions as specified in this Agreement as would have been
taken by such Pledgor had it been an original party to this Agreement, in each case with all
documents required above to be delivered to the Pledgee and with all documents and actions required
above to be taken to the reasonable satisfaction of the Pledgee.

          (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed
an original and all of which when taken together shall constitute one and the same agreement. Any
signature delivered by a party by facsimile transmission shall be deemed an original signature
hereto.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first
written above.

	 	 	 	 	 	 	 
	 	 	DIGITAL RECORDERS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	LAURUS MASTER FUND, LTD.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title	 	 	 	 

Stock Pledge Agreement

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SCHEDULE A to the Stock Pledge Agreement

Pledged Stock

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Stock	 	 	 	 	 	Number	 	% of
	 	 	 	 	Class of	 	Certificate	 	 	 	 	 	of	 	outstanding
	Pledgor	 	Issuer	 	Stock	 	Number	 	Par Value	 	Shares	 	Shares
	Digital Recorders,
Inc.

	 	Digital Audio

Corporation
	 	Common
	 	 	1	 	 	 	N/A	 	 	 	100	 	 	 	100	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Digital Recorders,
Inc.

	 	TwinVision of North
America, Inc.
	 	Common
	 	 	1	 	 	 	N/A	 	 	 	100	 	 	 	100	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Digital Recorders,
Inc.

	 	Robinson Turney
International, Inc.
	 	Common
	 	CS-003
	 	$	.01	 	 	 	100	 	 	 	100	 

Stock Pledge Agreementexv10w5

 

EXHIBIT
10.5

REGISTRATION RIGHTS AGREEMENT

          This Registration Rights Agreement (this “Agreement”) is made and entered into as of March 15,
2006, by and between Digital Recorders, Inc., a North Carolina corporation (the “Company”), and
Laurus Master Fund, Ltd. (the “Purchaser”).

          This Agreement is made pursuant to the Security Agreement, dated as of the date hereof, by and
among the Purchaser, the Company and various subsidiaries of the Company (as amended, modified or
supplemented from time to time, the “Security Agreement”), and pursuant to the Warrants referred to
therein.

          The Company and the Purchaser hereby agree as follows:

     1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in
the Security Agreement shall have the meanings given such terms in the Security Agreement. As used
in this Agreement, the following terms shall have the following meanings:

          “Commission” means the Securities and Exchange Commission.

          “Common Stock” means shares of the Company’s common stock, par value $0.10 per share.

          “Effectiveness Date” means, (i) with respect to the Registration Statement required to be
filed in connection with the Warrants issued on the date hereof, a date no later than one hundred
fifty (150) days following such date and (ii) with respect to each additional Registration
Statement required to be filed hereunder (if any), a date no later than thirty (30) days following
the applicable Filing Date.

          “Effectiveness Period” has the meaning set forth in Section 2(a).

          “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor
statute.

          “Filing Date” means, with respect to (1) the Registration Statement required to be filed in
connection with the shares of Common Stock issuable to the Holder upon exercise of a Warrant, the
date which is one hundred twenty (120) days after the issuance of such Warrant, and (2) the
Registration Statement required to be filed in connection with the shares of Common Stock issuable
to the Holder as a result of adjustments to the Exercise Price made pursuant to Section 4 of the
Warrant or otherwise, thirty (30) days after the occurrence of such event or the date of the
adjustment of the Exercise Price.

          “Holder” or “Holders” means the Purchaser or any of its affiliates or transferees to the
extent any of them hold Registrable Securities, other then those purchasing Registrable Securities
in a market transaction.

          “Indemnified Party” has the meaning set forth in Section 5(c).

Registration Rights Agreement

 

 

          “Indemnifying Party” has the meaning set forth in Section 5(c).

          “Proceeding” means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition), whether commenced or
threatened.

          “Prospectus” means the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any 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 Registrable 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 shares of Common Stock issuable upon exercise of the
Warrants.

          “Registration Statement” means each registration statement required to be filed hereunder,
including the Prospectus therein, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material
incorporated by reference or deemed to be incorporated by reference in such registration statement.

          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by
the Commission having substantially the same effect as such Rule.

          “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by
the Commission having substantially the same effect as such Rule.

          “Securities Act” means the Securities Act of 1933, as amended, and any successor statute.

          “Security Agreement” has the meaning given to such term in the Preamble hereto.

          “Trading Market” means any of the NASD Over The Counter Bulletin Board, NASDAQ Capital Market,
the NASDAQ National Market, the American Stock Exchange or the New York Stock Exchange

          “Warrants” means the Common Stock purchase warrants issued in connection with the Security
Agreement, whether on the date thereof or thereafter.

     2. Registration.

          (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a
Registration Statement covering the Registrable Securities for a selling

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2

 

stockholder resale offering to be made on a continuous basis pursuant to Rule 415. Each
Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register
for resale the Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith). The Company shall cause each Registration
Statement to become effective and remain effective as provided herein. The Company shall use its
best efforts to cause each Registration Statement to be declared effective under the Securities Act
as promptly as possible after the filing thereof, but in any event no later than the Effectiveness
Date. The Company shall use its reasonable commercial efforts to keep each Registration Statement
continuously effective under the Securities Act until the date which is the earlier date of when
(i) all Registrable Securities covered by such Registration Statement have been sold or (ii) all
Registrable Securities covered by such Registration Statement may be sold immediately without
registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as
determined by the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company’s transfer agent and the affected Holders (each, an
“Effectiveness Period”).

          (b) Within three business days of the Effectiveness Date, the Company shall cause its counsel
to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating
that the shares are subject to an effective registration statement and can be reissued free of
restrictive legend upon notice of a sale by the Purchaser and confirmation by the Purchaser that it
has complied with the prospectus delivery requirements, provided that the Company has not advised
the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket
opinion required by this Section 2(b) shall be delivered to the Purchaser within the time frame set
forth above.

     3. Registration Procedures. If and whenever the Company is required by the provisions hereof
to effect the registration of any Registrable Securities under the Securities Act, the Company
will, as expeditiously as possible:

          (a) prepare and file with the Commission a Registration Statement with respect to such
Registrable Securities, respond as promptly as possible to any comments received from the
Commission, and use its best efforts to cause such Registration Statement to become and remain
effective for the Effectiveness Period with respect thereto, and promptly provide to the Purchaser
copies of all filings and Commission letters of comment relating thereto;

          (b) 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 comply with the
provisions of the Securities Act with respect to the disposition of all Registrable Securities
covered by such Registration Statement and to keep such Registration Statement effective until the
expiration of the Effectiveness Period applicable to such Registration Statement;

          (c) furnish to the Purchaser such number of copies of the Registration Statement and the
Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may
request to facilitate the public sale or disposition of the Registrable Securities covered by such
Registration Statement;

Registration Rights Agreement

3

 

          (d) use its best efforts to register or qualify the Purchaser’s Registrable Securities covered
by such Registration Statement under the securities or “blue sky” laws of such jurisdictions within
the United States as the Purchaser may reasonably request, provided, however, that the Company
shall not for any such purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;

          (e) list the Registrable Securities covered by such Registration Statement with any securities
exchange on which the Common Stock of the Company is then listed;

          (f) immediately notify the Purchaser at any time when a Prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event of which the
Company has knowledge as a result of which the Prospectus contained 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
light of the circumstances then existing; and

          (g) make available for inspection by the Purchaser and any attorney, accountant or other agent
retained by the Purchaser, all publicly available, non-confidential financial and other records,
pertinent corporate documents and properties of the Company, and cause the Company’s officers,
directors and employees to supply all publicly available, non-confidential information reasonably
requested by the attorney, accountant or agent of the Purchaser.

     4. Registration Expenses. Expenses relating to the Company’s compliance with Sections 2 and 3
hereof, including, without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel and independent public accountants for the Company, fees and expenses
(including reasonable counsel fees) incurred in connection with complying with state securities or
“blue sky” laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of,
and disbursements incurred by, one counsel for the Holders are called “Registration Expenses”.
Selling commissions applicable to the sale of Registrable Securities, including any fees and
disbursements of any special counsel to the Holders beyond those included in Registration Expenses,
are called “Selling Expenses.” The Company shall only be responsible for all Registration
Expenses.

     5. Indemnification.

          (a) In the event of a registration of any Registrable Securities under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless each Holder, and its
officers, directors and each other person, if any, who controls such Holder within the meaning of
the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which
such Holder, or such persons may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact contained in any
Registration Statement under which such Registrable Securities were registered under the Securities
Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein,
or any amendment or supplement thereof, or arise out of or

Registration Rights Agreement

4

 

are based upon the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, and will reimburse
such Holder, and each such person for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case if and to
the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in conformity with
information furnished by or on behalf of the Purchaser or any such person in writing specifically
for use in any such document.

          (b) In the event of a registration of the Registrable Securities under the Securities Act
pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its
officers, directors and each other person, if any, who controls the Company within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which
the Company or such persons may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact which was
furnished in writing by the Purchaser to the Company expressly for use in (and such information is
contained in) the Registration Statement under which such Registrable Securities were registered
under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus
contained therein, or any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the Company and each
such person for any reasonable legal or other expenses incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action, provided,
however, that the Purchaser will be liable in any such case if and only to the extent that
any such loss, claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity with information
furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any
such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be
required to indemnify any person or entity in excess of the amount of the aggregate net proceeds
received by the Purchaser in respect of Registrable Securities in connection with any such
registration under the Securities Act.

          (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an
“Indemnified Party”) of notice of the commencement of any action, such Indemnified Party shall, if
a claim for indemnification in respect thereof is to be made against a party hereto obligated to
indemnify such Indemnified Party (an “Indemnifying Party”), notify the Indemnifying Party in
writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any
liability which it may have to such Indemnified Party other than under this Section 5(c) and shall
only relieve it from any liability which it may have to such Indemnified Party under this Section
5(c) if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such
action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of
the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such
Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its
election so to assume and undertake the

Registration Rights Agreement

5

 

defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under
this Section 5(c) for any legal expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof; if the Indemnified Party retains its own counsel, then the
Indemnified Party shall pay all fees, costs and expenses of such counsel, provided,
however, that, if the defendants in any such action include both the Indemnified Party and
the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to those available to
the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to
conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right
to select one separate counsel and to assume such legal defenses and otherwise to participate in
the defense of such action, with the reasonable expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the Indemnifying Party as
incurred.

          (d) In order to provide for just and equitable contribution in the event of joint liability
under the Securities Act in any case in which either (i) the Purchaser, or any officer, director or
controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5
but it is judicially determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact that this Section 5
provides for indemnification in such case, or (ii) contribution under the Securities Act may be
required on the part of the Purchaser or such officer, director or controlling person of the
Purchaser in circumstances for which indemnification is provided under this Section 5; then, and in
each such case, the Company and the Purchaser will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from others) in such
proportion so that the Purchaser is responsible only for the portion represented by the percentage
that the public offering price of its securities offered by the Registration Statement bears to the
public offering price of all securities offered by such Registration Statement, provided,
however, that, in any such case, (A) the Purchaser will not be required to contribute any
amount in excess of the public offering price of all such securities offered by it pursuant to such
Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within
the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.

     6. Representations and Warranties.

          (a) The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and,
except with respect to certain matters which the Company has disclosed to the Purchaser on
Schedule 12(u) to the Security Agreement, the Company has timely filed all proxy
statements, reports, schedules, forms, statements and other documents required to be filed by it
under the Exchange Act. The Company has filed (i) its Annual
Report on Form 10-K for the fiscal
year ended December 31, 2004 and (ii) its Quarterly Report on Form 10-Q for the fiscal quarters
ended March 31, 2005, June 30, 2005 and September 30, 2005 (collectively, the “SEC Reports”).
Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of
its respective form and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under which

Registration Rights Agreement

6

 

they were made, not misleading. The financial statements of the Company included in the SEC
Reports comply as to form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with generally
accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of unaudited interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition, the results of
operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of,
and for, the periods presented in each such SEC Report.

          (b) The
Common Stock is listed for trading on the NASDAQ Capital Market and satisfies all
requirements for the continuation of such listing, and the Company shall do all things necessary
for the continuation of such listing. The Company has not received any notice that its Common
Stock will be delisted from the NASDAQ Capital Market (except for prior notices which have been
fully remedied) or that the Common Stock does not meet all requirements for the continuation of
such listing

          (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or solicited any offers
to buy any security under circumstances that would cause the offering of the Securities pursuant to
the Security Agreement to be integrated with prior offerings by the Company for purposes of the
Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor
will the Company or any of its affiliates or subsidiaries take any action or steps that would cause
the offering of the Common Stock to be integrated with other offerings (other than such concurrent
offering to the Purchaser).

          (d) The Warrants and the shares of Common Stock that the Purchaser may acquire pursuant to the
Warrants are all restricted securities under the Securities Act as of the date of this Agreement.
The Company will not issue any stop transfer order or other order impeding the sale and delivery of
any of the Registrable Securities at such time as such Registrable Securities are registered for
public sale or an exemption from registration is available, except as required by federal or state
securities laws.

          (e) The Company understands the nature of the Registrable Securities issuable upon the
exercise of each Warrant and recognizes that the issuance of such Registrable Securities may have a
potential dilutive effect. The Company specifically acknowledges that its obligation to issue the
Registrable Securities is binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the Company.

          (f) Except for agreements made in the ordinary course of business, there is no agreement that
has not been filed with the Commission as an exhibit to a registration statement or to a form
required to be filed by the Company under the Exchange Act, the breach of which could reasonably be
expected to have a material and adverse effect on the Company and its

Registration Rights Agreement

7

 

subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to
enter into and perform any of its obligations under this Agreement in any material respect.

          (g) The Company will at all times have authorized and reserved a sufficient number of shares
of Common Stock for the full exercise of the Warrants.

     7. Miscellaneous.

          (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their
respective obligations under this Agreement, each Holder or the Company, as the case may be, in
addition to being entitled to exercise all rights granted by law and under this Agreement,
including recovery of damages, will be entitled to specific performance of its rights under this
Agreement.

          (b) No Piggyback on Registrations. Except as and to the extent set forth on Schedule 7(b)
hereto, neither the Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the Company in any Registration Statement other
than the Registrable Securities, and the Company shall not after the date hereof enter into any
agreement providing any such right for inclusion of shares in the Registration Statement to any of
its security holders. Except as and to the extent specified in Schedule 7(b) hereto, the
Company has not previously entered into any agreement granting any registration rights with respect
to any of its securities to any Person that have not been fully satisfied.

          (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus
delivery requirements of the Securities Act as applicable to it in connection with sales of
Registrable Securities pursuant to any Registration Statement.

          (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation
Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable
Securities under the applicable Registration Statement until such Holder’s receipt of the copies of
the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing
(the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that are incorporated or
deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company
may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of
this Agreement, a “Discontinuation Event” shall mean (i) when the Commission notifies the Company
whether there will be a “review” of such Registration Statement and whenever the Commission
comments in writing on such Registration Statement (the Company shall provide true and complete
copies thereof and all written responses thereto to each of the Holders); (ii) any request by the
Commission or any other Federal or state governmental authority for amendments or supplements to
such Registration Statement or Prospectus or for additional information; (iii) the issuance by the
Commission of any stop order suspending the effectiveness of such Registration Statement covering
any or all of the Registrable Securities or the initiation of any Proceedings for that purpose;
(iv) the receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable Securities for sale in any

Registration Rights Agreement

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jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and/or (v)
the occurrence of any event or passage of time that makes the financial statements included in such
Registration Statement ineligible for inclusion therein or any statement made in such Registration
Statement or Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to such Registration
Statement, Prospectus or other documents so that, in the case of such Registration Statement or
Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit
to state any 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.

          (e) Piggy-Back Registrations. If at any time [during any Effectiveness Period][after the date
hererof] there is not an effective Registration Statement covering all of the Registrable
Securities required to be covered [during such Effectiveness Period][hereunder] and the Company
shall determine to prepare and file with the Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or
their then equivalents relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in connection with stock option
or other employee benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen (15) days after receipt of such notice, any such Holder shall
so request in writing, the Company shall include in such registration statement all or any part of
such Registrable Securities such Holder requests to be registered, to the extent the Company may do
so without violating registration rights of others which exist as of the date of this Agreement,
subject to customary underwriter cutbacks applicable to all holders of registration rights and
subject to obtaining any required consent of any selling stockholder(s) to such inclusion under
such registration statement.

          (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the same shall be in writing and signed by the
Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of certain Holders and that does not directly or indirectly
affect the rights of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; provided, however,
that the provisions of this sentence may not be amended, modified, or supplemented except in
accordance with the provisions of the immediately preceding sentence.

          (g) Notices. Any notice or request hereunder may be given to the Company or the Purchaser at
the respective addresses set forth below or as may hereafter be specified in a notice designated as
a change of address under this Section 7(g). Any notice or request hereunder shall be given by
registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal
Express or other national overnight next day carrier (collectively, “Courier”) or telecopy
(confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed
to have been given when delivered to any party to whom it is addressed, in the case of those by
mail or overnight mail, deemed to have been given three (3)

Registration Rights Agreement

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business days after the date when deposited in the mail or with the overnight mail carrier, in
the case of a Courier, the next business day following timely delivery of the package with the
Courier, and, in the case of a telecopy, when confirmed. The address for such notices and
communications shall be as follows:

	 	 	 	 	 
	 

	 	If to the Company:
	 	Digital Recorders, Inc.
	 
	 	 	 	 
	 

	 	Attention:
	 	David L. Turney
	 
	 	 	 	 
	 

	 	 	 	Chief Executive Officer
	 

	 	 	 	Facsimile:214.378.8347
	 
	 	 	 	 
	 

	 	 	 	with a copy to:
	 
	 	 	 	 
	 

	 	 	 	Gray, Layton, Kersh, Solomon, Sigmon, Furr &
	 

	 	 	 	Smith, P.A.
	 
	 	 	 	 
	 

	 	 	 	516 South New Hope Road
	 
	 	 	 	 
	 

	 	 	 	P.O. Box 2636
	 
	 	 	 	 
	 

	 	 	 	Gastonia, North Carolina 28053-2636
	 
	 	 	 	 
	 

	 	 	 	Attention: David Furr
	 

	 	 	 	Facsimile: 704.866.8010
	 
	 	 	 	 
	 

	 	If to a Purchaser:
	 	To the address set forth under such Purchaser
	 

	 	 	 	name on the signature pages hereto.
	 
	 	 	 	 
	 

	 	If to any other Person who is	 	 
	 

	 	then the registered Holder:
	 	To the address of such Holder as it
	 

	 	 	 	appears in the stock transfer books of the Company

or such other address as may be designated in writing hereafter in accordance with this Section
7(g) by such Person.

          (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon
the successors and permitted assigns of each of the parties and shall inure to the benefit of each
Holder. The Company may not assign its rights or obligations hereunder without the prior written
consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and
to the Persons as permitted under the Security Agreement.

          (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding

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obligation of the party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the original thereof.

          (j) Governing Law, Jurisdiction and Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. The
Company hereby consents and agrees that the state or federal courts located in the County of New
York, State of New York shall have exclusion jurisdiction to hear and determine any Proceeding
between the Company, on the one hand, and the Purchaser, on the other hand, pertaining to this
Agreement or to any matter arising out of or related to this Agreement; provided, that the
Purchaser and the Company acknowledge that any appeals from those courts may have to be heard by a
court located outside of the County of New York, State of New York, and further
provided, that nothing in this Agreement shall be deemed or operate to preclude the
Purchaser from bringing a Proceeding in any other jurisdiction to collect the obligations, to
realize on the Collateral or any other security for the obligations, or to enforce a judgment or
other court order in favor of the Purchaser. The Company expressly submits and consents in advance
to such jurisdiction in any Proceeding commenced in any such court, and the Company hereby waives
any objection which it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens. The Company hereby waives personal service of the summons, complaint
and other process issued in any such Proceeding and agrees that service of such summons, complaint
and other process may be made by registered or certified mail addressed to the Company at the
address set forth in Section 7(g) and that service so made shall be deemed completed upon the
earlier of the Company’s actual receipt thereof or three (3) days after deposit in the U.S. mails,
proper postage prepaid. The parties hereto desire that their disputes be resolved by a judge
applying such applicable laws. Therefore, to achieve the best combination of the benefits of the
judicial system and of arbitration, the parties hereto waive all rights to trial by jury in any
Proceeding brought to resolve any dispute, whether arising in contract, tort, or otherwise between
the Purchaser and/or the Company arising out of, connected with, related or incidental to the
relationship established between then in connection with this Agreement. If either party hereto
shall commence a Proceeding to enforce any provisions of this Agreement, the Security Agreement or
any other Ancillary Agreement, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.

          (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any
remedies provided by law.

          (l) Severability. If any term, provision, covenant or restriction of this Agreement is held
by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder
of the terms, provisions, covenants and restrictions set forth herein shall remain in full force
and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall
use their reasonable efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the parties that

Registration Rights Agreement

11

 

they would have executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

          (m) Headings. The headings in this Agreement are for convenience of reference only and shall
not limit or otherwise affect the meaning hereof.

[Balance of page intentionally left blank; signature page follows]

Registration Rights Agreement

12

 

          IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the
date first written above.

	 	 	 	 	 
	 	 	DIGITAL RECORDERS, INC.
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 

	 	Title:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	LAURUS MASTER FUND, LTD.
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 

	 	Title:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	Address for Notices:
	 
	 	 	825 Third Avenue, 14th Floor
	 	 	New York, New York 10022
	 	 	Attention: David Grin
	 	 	Facsimile: 212-541-4434

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13

 

EXHIBIT A

                                        , 200                    

[Continental Stock Transfer

& Trust Company

Two Broadway

New York, New York 10004

Attn: William Seegraber]

                    Re:          Digital Recorders, Inc. Registration Statement on Form [S-3]

Ladies and Gentlemen:

     As counsel to Digital Recorders, Inc. , a North Carolina corporation (the “Company”), we have
been requested to render our opinion to you in connection with the resale by the individuals or
entitles listed on Schedule A attached hereto (the “Selling Stockholders”), of an aggregate
of                     shares (the “Shares”) of the Company’s Common Stock.

     A Registration Statement on Form [S-3] under the Securities Act of 1933, as amended (the
“Act”), with respect to the resale of the Shares was declared effective by the Securities and
Exchange Commission on [date]. Enclosed is the Prospectus dated [date]. We understand that the
Shares are to be offered and sold in the manner described in the Prospectus.

     Based upon the foregoing, upon request by the Selling Stockholders at any time while the
registration statement remains effective, it is our opinion that the Shares have been registered
for resale under the Act and new certificates evidencing the Shares upon their transfer or
re-registration by the Selling Stockholders may be issued without restrictive legend. We will
advise you if the registration statement is not available or effective at any point in the future.

Very truly yours,

[Company counsel]

Registration Rights Agreement

 

 

Schedule A to Exhibit A

	 	 	 	 	 	 
	 	 	 	 	 	Shares
	Selling Stockholder	 	R/N/O	 	 	Being Offered

Registration Rights Agreement

 

 

SCHEDULE 7(b)

Registration Rights Agreement

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