Document:

exv10w3

 

Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

     Registration Rights Agreement (this “Agreement”) executed this ___day of November,
2005 (“Effective Date”), by and between DIGITAL RECORDERS, INC., a North Carolina corporation (the
“Company”), and JOHN D. HIGGINS (the “Holder”).

     WHEREAS, it is contemplated under that certain Stock Purchase Agreement by and between the
Company and the Holder dated October 31, 2005 (as such may be amended from time to time, the
“Stock Purchase Agreement”) and that certain Stock Purchase Warrant dated as of the
Effective Date, 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 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 Securities 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 1.1 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 1.1 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 1.1, 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 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.

 

 

     1.2 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 if it is
determined that such registration would not be permitted under applicable securities laws or the
rules and regulations of the Commission.

     1.3 Expenses. The Company will pay all of its Registration Expenses in connection
with the registrations required by Section 1.1, including any Registration Statement that is not
deemed to be effected pursuant to the provisions of Section 1.4 hereof.

     1.4 Effective Registration Statement. A registration pursuant to Section 1.1 of this
Agreement shall not be deemed to have been effected (i) unless a Registration Statement with
respect thereto has been declared effective by the Commission, (ii) if after it has become
effective, such registration is interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any reason or (iii) the
Registration Statement does not remain continuously effective until termination of the Company’s
registration obligations pursuant to Section 5.2 hereof. If a registration pursuant to this
Article I is deemed not to have been effected as provided in this Section 1.4, then the Company
shall continue to be obligated to effect the registration required by Section 1.1.

     1.5 Obligations of the Holder.

          (a) In connection with any registration of Registrable Securities pursuant to Section
1.1, 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) The 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.

          (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.

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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 such Registration Statement;
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 such
Registration Statement, and (ii) comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration Statement during
such period in accordance with the intended methods of disposition by the 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 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

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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;

          (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

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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 1.3 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 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

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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
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

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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
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

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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.

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

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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 50 shares of Preferred Stock initially issued to the Holder pursuant to the 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 H 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.

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     “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 H 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 H Convertible Preferred Stock pursuant to Section 2 of the Certificate of Designation
setting forth the terms and provisions of the Series H 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
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.

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     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
	“Warrant Agreement”

	 	—
	 	Recitals

ARTICLE VII

MISCELLANEOUS

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

     7.2 Amendments and Waivers. Except as otherwise provided herein, no modification,
amendment or waiver of any provision of this Agreement will be effective against the Company or any
Holder of Registrable Securities, unless such modification, amendment or waiver is approved in
writing by the Company and the 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, to:

	 	Digital Recorders, Inc.
	 

	 	5949 Sherry Lane, Suite 1050
	 

	 	Dallas, TX 75225
	 
	 	 
	 

	 	Attention: CEO & President

11

 

	 	 	 
	If to Holder:

	 	John D. Higgins
	 

	 	105 High Farms Road
	 

	 	Glen Head, NY 11545

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

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

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

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

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

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

12

 

     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
November ___, 2005.

	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	Digital Recorders, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: David L. Turney
	 	 
	 

	 	 	 	Title: CEO, President and Chairman	 	 
	 
	 	 	 	 	 	 
	 	 	HOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 	 	JOHN D. HIGGINS	 	 

13exv10w4

 

Exhibit 10.4

CERTIFICATE OF DESIGNATION

OF

SERIES H CONVERTIBLE PREFERRED STOCK

OF

DIGITAL RECORDERS, INC.

Digital Recorders, Inc., a corporation organized and existing under the Business Corporation Act of
the State of North Carolina (hereinafter called the “Corporation”), hereby certifies that the
following resolution was adopted by the Board of Directors of the Corporation as required by
Section 55-6-02 of the Business Corporation Act by unanimous written consent dated October 31,
2005, and approved by the sole holder of the outstanding shares of the Corporation’s Series H
Convertible Preferred Stock, par value $.10 per share, as required by Section 55-10-04 of the
Business Corporation Act by written consent dated October 31, 2005;

RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this
Corporation (hereinafter called the “Board of Directors” or the “Board”) in accordance with the
provisions of the Articles of Incorporation of the Corporation (“Articles of Incorporation”), the
Board of Directors hereby certifies in their entirety the terms and provisions of the Series H
Convertible Preferred Stock (the “Preferred Stock”), shall have the designation and number of
shares, and the relative rights, preferences, and limitations thereof as follows:

	 	 	 
	Section 1.

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

	 	Dividends and Distributions.

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

1

 

Corporation, at the close of business on the date that is fifteen (15) days
preceding the Payment Date thereof, provided, however, that the Board of Directors
may fix a different record date for any dividend payment, which date shall be not
less than ten (10) days nor more than sixty (60) days preceding the Payment Date
thereof. Dividends on shares of Series H Preferred Stock shall accrue (whether or
not declared) on a daily basis from and including the Commencement Date. Accrued
dividends for each Dividend Period (as hereinafter defined) shall be cumulative
(whether or not such dividends are declared) and shall compound on each Payment
Date. Such dividends shall accumulate to the extent not paid on the Payment Date
occurring on the last day of the Dividend Period for which they accrue, and any such
accrued and unpaid dividends for any past Dividend Period may be declared and paid
at any time, without reference to any regular Payment Date, to holders of record on
such date, not more than forty-five (45) days preceding the Payment Date thereof, as
may be fixed by the Board of Directors. For purposes of this paragraph, a “Dividend
Period” shall mean a quarterly dividend period commencing on the calendar day
immediately following the Commencement Date and immediately following each
subsequent Payment Date and ending on and including the next following Payment Date.
The Series H Preferred Stock shall rank pari passu with the Series E Redeemable
Nonvoting Convertible Preferred Stock (“Series E Preferred Stock”) and the Series G
Convertible Preferred Stock (the “Series G Preferred Stock”) and prior and superior
to the Series AAA Preferred Stock and the common stock, par value $.10 per share
(the “Common Stock”), of the Corporation with respect to the payment of dividends.
In the event any new shares of Series H Preferred Stock are issued during any
Dividend Period or any shares of Series H Preferred Stock are redeemed by the
Corporation or converted during any Dividend Period, the accrued dividends shall be
prorated in proportion to the number of days during that Dividend Period during
which such shares were outstanding. All accrued but unpaid dividends shall be paid
upon redemption or conversion of the shares of Series H Preferred Stock.

     (b) Such dividends shall be payable in additional shares of Series H Preferred
Stock. In the event that any payment of dividends in shares of Series H Preferred
Stock would require shareholder approval under the Nasdaq listing requirements, the
Corporation agrees to seek such approval, together with approval of all future
issuances of Series H Preferred Stock payable as dividends on the outstanding shares
of Series H Preferred Stock (if legally permissible), at the next regularly
scheduled meeting of shareholders after it has been determined that shareholder
approval would be required for the issuance of any shares as dividends on the next
scheduled Payment Date, if such shareholder approval shall not have previously been
sought. Dividends shall be paid in cash out of funds legally available therefor on
any Payment Date(s) that may arise between the date of such determination and the
meeting of shareholders at which the shareholders vote on such authorization, the
Series H Preferred Stock holder agreeing to recuse itself from this vote. In the
event the shareholders reject such authorization, such dividends will be paid in
shares of Series H Preferred Stock to the maximum extent that they may be so paid
without violating the limitations set forth in the

2

 

second sentence of this paragraph (b), and thereafter, such dividends shall be
paid in cash out of funds legally available therefor, commencing on the next Payment
Date.

     (c) The number of shares of Series H Preferred Stock (or fraction thereof)
issuable on each whole or fractional share of Series H Preferred Stock on each
Payment Date shall be equal to the quotient (rounded to four decimal places)
obtained by dividing (i) the dollar value of the dividend to be paid thereon by (ii)
the Liquidation Preference thereof.

     (d) If the effectiveness of any registration statement filed by the Company to
permit the resale of shares of the Series H Preferred Stock (the “Registration
Statement”) is suspended or otherwise impaired for more than twenty (20) calendar
days in any twelve-month period (unless otherwise permitted in a Registration Rights
Agreement governing such registration), then the quarterly rate at which dividends
accrue on the Series H Preferred Stock then in effect shall increase by one-quarter
of one percent (0.25%) for each additional period of ten (10) days that the
Registration Statement is suspended or otherwise impaired. If the Corporation loses
its listing on the Nasdaq Stock Market, then the quarterly rate at which dividends
accrue on the Series H Preferred Stock then in effect shall increase by one-quarter
of one percent (0.25%) for each period of thirty days until the Corporation’s Common
Stock is again listed thereon. The maximum quarterly dividend rate, as adjusted
pursuant to this subsection (d), shall be three and one-half percent (3.5%).

     (e) If the average closing bid price for the Common Stock on the principal
public trading market for such stock does not exceed 2.5 times the then-current
Conversion Price (as hereinafter defined) for any period of seventy-five (75)
consecutive trading days, or if such closing bid price does not exceed 2.5 times the
then-current Conversion Price for a total of at least one hundred and fifty (150)
trading days (whether or not consecutive), in either case during the period
commencing on the Commencement Date and ending on October 31, 2010, then the
quarterly rate at which dividends accrue on the Series H Preferred Stock then in
effect shall be increased by one and one-half percent (1.5%) beginning on October
31, 2010, effective for the dividend payable on the November 10, 2010 Payment Date
and continuing for as long as any of the shares of Series H Preferred Stock remain
outstanding. Furthermore, holder may require, at its option, the payment of said
increased dividend to be paid in cash rather than in additional Series H Preferred
Shares.

	 	 	 
	Section 3.

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

3

 

	 	 	 
	 

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

	 	Liquidation.

     (a) The liquidation preference for the Series H Preferred Stock (the
“Liquidation Preference”) shall equal Five Thousand Dollars ($5,000.00) per share.
The Series H Preferred Stock shall be pari passu with Series E Preferred Stock and
the Series G Preferred Stock (collectively with the Series H Preferred Stock, the
“Preferred Stock”) and rank prior and superior to the Series AAA Preferred Stock and
the Common Stock with respect to payments upon liquidation, dissolution and winding
up. The Series AAA Preferred Stock, the Common Stock and any other class or series
of stock ranking junior to the Preferred Stock with respect to payments upon
liquidation, dissolution and winding up are referred to, collectively, herein as
“Junior Stock”.

     (b) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary (collectively, a “Liquidating Event”),
the Corporation shall pay or make adequate provision for the payment of all
indebtedness and other obligations of the Corporation. Thereafter, the remaining
assets of the Corporation shall be used to pay, prior to any distribution of any of
the assets of the Corporation to the holders of Junior Stock by reason of the
ownership thereof, an amount equal to the Liquidation Preference per share of the
Preferred Stock, plus an amount equal to accrued and unpaid dividends on such
shares, if any.

     (c) After all such Liquidation Preferences shall have been paid in full to each
holder of Preferred Stock (including accrued but unpaid dividends), each holder of
Junior Stock other than Common Stock shall be entitled to be paid from the remaining
assets of the Corporation such amounts, if any, to which such holder may be entitled
under any other provision of these Articles of Incorporation prior to any
distribution of any of the assets of the Corporation to the holders of Common Stock.

     (d) Any assets of the Corporation remaining after the payments specified in
paragraphs (b) and (c) above shall be distributed pro rata with respect to the
outstanding shares of Common Stock.

     (e) If upon any Liquidating Event, the assets of the Corporation shall be
insufficient to pay all the holders of any class or series of capital stock the full
amount to which they are entitled pursuant to this Section 4, then the following
rules shall apply: (i) each holder of shares of the class or series shall be paid
his pro rata share, which shall equal the product determined by multiplying the
aggregate amount to be paid to all holders of that class or series by a fraction (x)
whose numerator equals the number of shares of that class or series owned by the
shareholder, and (y) whose denominator equals the number of issued and

4

 

outstanding shares of that class or series, and (ii) in any case in which the
owner of two or more series or classes of capital stock shall have equal priority to
any distribution, each holder shall be paid his pro rata share, which shall equal
the product determined by multiplying the aggregate amount available for payment to
all holders of the series or classes with equal priority, by a fraction (x) whose
numerator equals the amount such shareholder would receive if the Corporation had
adequate funds to pay the Liquidation Preferences of the shares of the series or
classes having equal priorities owned by the shareholder, and (y) whose denominator
equals the aggregate Liquidation Preferences of all issued and outstanding shares of
the series or classes having equal priorities.

     (f) For the purposes of this Section 4, any merger or consolidation of the
Corporation into or with any other corporation or entity, or a sale, conveyance,
mortgage, transfer, license, pledge, lease or other disposition of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation unless (i) the
shareholders of the Corporation immediately prior thereto shall, immediately
thereafter, hold as a group the right to cast at least a majority of the votes of
all holders of voting securities of the resulting or surviving corporation or entity
on any matter on which any such holders of voting securities shall be entitled to
vote; or (ii) the holders of Series H Preferred Stock shall determine, by vote of
the holders of a majority of the outstanding shares of such series, voting as a
separate class, that it shall not be so deemed.

     (g) For purposes of this Section 4, if any asset distributed to shareholders
upon liquidation of the Corporation consists of property other than cash, the amount
of such distribution shall be deemed to be the fair market value thereof at the time
of such distribution, as determined in good faith by the Board of Directors of the
Corporation.

     (h) Written notice of any Liquidating Event stating a payment date, the place
where such payment shall be made, the amount of each payment in liquidation and the
amount of accrued dividends to be paid, shall be given by first class mail, postage
prepaid, not less than ten (10) days prior to the payment date stated therein, to
each shareholder of record (whether or not the shareholder is to receive any
payment) at such shareholder’s address as shown in the records of the Corporation.

	 	 	 
	Section 5.

	 	Redemption.

     (a) The holders of the Series H Preferred Stock shall not have the right to
cause the Corporation to redeem shares of their Series H Preferred Stock at any
time.

     (b) If the rate at which quarterly dividends accrue on the Series H Preferred
Stock is increased by one and one-half percent (1.5%) pursuant to Section 2(e),
then, from and after October 31, 2010, the Corporation shall have

5

 

the right, but not the obligation, exercisable at any time and from time to
time, to redeem all or any portion of the outstanding shares of Series H Preferred
Stock. All redemptions of less than all outstanding shares of Series H Preferred
Stock shall be effected on a pro rata basis.

     (c) The redemption price to be paid by the Corporation for any shares of Series
H Preferred Stock shall equal the Liquidation Preference for those shares, plus an
amount equal to the cash value of all accrued but unpaid dividends thereon. Upon
payment of such redemption price, the Corporation shall have no further obligation
with respect to payment of accrued and unpaid dividends.

     (d) At least thirty (30) days prior to any redemption, the Corporation will
provide to the holders of shares to be redeemed written notice (the “Redemption
Notice”) of the number of shares to be redeemed (the “Redemption Shares”), the
redemption price and the redemption date (the “Redemption Date”). Such notice shall
be sent to the address for each holder of Series H Preferred Stock on the records of
the Corporation. Upon receipt of any Redemption Notice, holders of Series H
Preferred Stock shall send to the Corporation stock certificate(s) duly endorsed for
transfer representing the Redemption Shares as provided in the Redemption Notice for
receipt by the Corporation on or before the Redemption Date. Upon receipt of stock
certificate(s) representing the Redemption Shares endorsed as provided above (but
not prior to the Redemption Date), the Corporation will send to the holders of the
Redemption Shares payment of the redemption price as stated in the Redemption
Notice, and if not all the shares represented by the stock certificate(s) provided
to the Corporation are to be redeemed, stock certificate(s) representing the shares
that have not been redeemed.

     The Corporation shall have no obligation to make any payment for Redemption
Shares until the owner of the Redemption Shares complies in full with the procedures
set forth above. Notwithstanding failure by any shareholder to comply with the
procedures set forth in the preceding paragraph and the consequent failure by the
Corporation to pay the redemption price for the Redemption Shares, the Redemption
Shares shall, from and after the Redemption Date stated in the Redemption Notice,
cease to be issued and outstanding shares of capital stock of the Corporation and
the former owner shall not be entitled to vote, receive dividends or exercise any
other rights of a shareholder on account of the Redemption Shares. From and after
the Redemption Date the sole obligation of the Corporation on account of the
Redemption Shares shall be to pay the redemption price stated in the Redemption
Notice, together with interest at the rate equal to the dividend rate in effect on
the Redemption Date in the event of late payment.

     (e) Holders of outstanding shares of Series H Preferred Stock shall have the
right to convert such shares into shares of Common Stock in accordance with Section
6 hereof at any time before the close of business on the fifth Business Day
preceding the Redemption Date specified for such shares. Without

6

 

limiting any rights of the Corporation, the Corporation may reduce the number
of shares that it has elected to redeem as specified in a Redemption Notice by a
number equivalent to the number of shares of Series H Preferred Stock converted into
Common Stock during the period beginning on the date of the Redemption Notice and
ending on the Redemption Date.

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

	 	 	 
	Section 6.

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

     (a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 6, any or all shares of Series H Preferred Stock, at the
option of the holder, may be converted at any time or from time to time prior to the
fifth Business Day preceding any Redemption Date established for such shares, into a
number of fully paid and nonassessable shares (calculated as to each conversion to
the largest whole share) of Common Stock determined by multiplying the number of
whole and fractional shares of Series H Preferred Stock to be converted by a
fraction, the numerator of which is the Liquidation Preference of a share of Series
H Preferred Stock and the denominator of which is the conversion price then in
effect for the Series H Preferred Stock (the “Conversion Price”). Initially, the
Conversion Price is $2.08 per share; provided, however, that the Conversion Price
shall be subject to adjustment in accordance with the provisions in Section 6(d)
below.

     (b) Automatic Conversion. The outstanding shares of Series H Preferred
Stock shall automatically convert to shares of Common Stock in the circumstances
described in either of the following subparagraphs, as follows:

If the closing bid price for the Common Stock on The Nasdaq Stock Market (or
other exchange or market on which the Common Stock may from time to time be
traded) for any period of twenty (20) consecutive trading days exceeds
$5.63, then all outstanding shares of Series H Preferred Stock shall
automatically convert, at the close of the market on the last trading day in
such period, into a number of fully paid and nonassessable shares
(calculated to the largest whole share) of Common Stock determined by
multiplying the number of shares of Series H Preferred Stock then
outstanding by a fraction, the numerator of which is the Liquidation
Preference of a share of Series H Preferred Stock and the

7

 

denominator of which is the then applicable Conversion Price, provided that
the resale of the shares issuable upon conversion shall have been registered
or shall be subject to available exemption under applicable security laws.

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

     (d) Adjustments to Conversion Price.

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

8

 

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

     (e) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 6, the
Corporation at its expense, shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to each holder of Series H Preferred
Stock a certificate setting forth such adjustment or readjustment in accordance with
the terms hereof and furnish to each holder of Series H Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series H Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series H
Preferred Stock.

     (f) No Impairment. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action (other than actions taken in good faith), avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in carrying out all the
provisions of this Section 6 and in taking all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the Series H
Preferred Stock against impairment.

     (g) Reservation of Stock. The Corporation shall, at all times when the
Series H Preferred Stock shall be outstanding, reserve and keep available out of its
authorized but unissued stock, (i) for the purpose of effecting the conversion of
the Series H Preferred Stock, such number of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding Series H Preferred Stock and (ii) for the purpose of paying accrued
dividends in the form of shares of Series H Preferred Stock, such number of its duly
authorized shares of Series H Preferred Stock as shall from time to time be
sufficient to pay such dividends.

9

 

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

10

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