Document:

exv10w4

 

Exhibit 10.4 

SHARE PURCHASE AGREEMENT

By and Between

JOHN D. HIGGINS

as the “Buyer” herein, on the one hand,

and

DIGITAL RECORDERS, INC.

as “DRI” herein, on the other hand

Dated as of June 23, 2005

 

 

SHARE PURCHASE AGREEMENT

     SHARE PURCHASE AGREEMENT, dated as of June 23, 2005, by and between JOHN D. HIGGINS (the
“Buyer”), on the one hand, and DIGITAL RECORDERS, INC. (“DRI”) on the other.

W I T N E S S E T H:

     WHEREAS, on or about June 23, 2005, the Buyer and DRI entered into a non-binding understanding
(the “Understanding”), under which DRI would sell to Buyer 50 restricted shares of DRI Series G
Redeemable Convertible Preferred Stock, par value $.10 per share, of DRI (the “Shares”); and

     WHEREAS, the Understanding contemplates that the parties will enter into a definitive
agreement and prepare such other documentation as the parties and their respective legal counsel
determine is appropriate; and

     WHEREAS, the parties intend that this Share Purchase Agreement (the “Agreement”), together
with the schedules, exhibits and other documents attached hereto, serve as the definitive agreement
between the parties with respect to the transactions described in the Understanding.

     NOW, THEREFORE, in consideration of the covenants, representations, warranties and mutual
agreements herein set forth, the Buyer and DRI hereby agree as follows:

ARTICLE I

THE SHARE PURCHASE AND ANCILLARY AGREEMENTS

     Section 1.1 Purchase of the Shares. Subject to and upon the terms and
conditions hereof and the representations, warranties and covenants contained herein, on the
Closing Date (as defined below) DRI shall sell, transfer, assign and deliver certificate(s)
representing the Shares to the Buyer, and the Buyer shall purchase the Shares from DRI, free and
clear of all liens, claims and encumbrances thereon (the “Purchase Transaction”). The Shares shall
have the rights, obligations and preferences set forth in the Certificate of Designation of Series
G Convertible Preferred Stock attached hereto as Exhibit 1.1.

 

 

     Section 1.2 Purchase Price.

     (a) Upon the terms and subject to the conditions herein set forth, DRI and the Buyer agree
that on the Closing Date DRI shall sell to the Buyer, and the Buyer shall purchase from DRI, the
Shares for an aggregate purchase price of $250,000 (the “Purchase Price”).

     (b) At the Closing, DRI shall deliver to the Buyer a certificate representing the Shares
against delivery by the Buyer to DRI of the Purchase Price. The certificate for the securities
comprising the Shares shall be registered in the name of Dolphin Offshore Partners, L.P.

     Section 1.3 Additional Warrant Shares. Additionally, DRI shall deliver to the
Buyer at the Closing a Stock Purchase Warrant, in the form set forth as Exhibit 1.3., with the
rights, obligations and preferences as set forth therein (the “Warrant Agreement”). The basic
terms of the Warrant Agreement shall provide Buyer with the right to purchase up to 35,714 shares
of common stock, par value $0.10 per share, of DRI (the “Warrant Stock”) at an exercise price of
$2.21 per share for a period of five (5) years, subject to the terms and conditions set forth in
the Warrant Agreement.

     Section 1.4 Registration Rights. At the Closing, the parties shall enter
into a Registration Rights Agreement, in the form set forth as Exhibit 1.4 (the “Registration
Rights Agreement”). Pursuant to the Registration Rights Agreement, DRI shall agree: (a) to file
with the Securities and Exchange Commission (the “SEC”) and use its best efforts to maintain the
effectiveness of a registration statement covering the resale by the Buyer of the shares of common
stock issuable upon conversion of the Shares (the “Conversion Shares”), and (b) to use its best
efforts to effect the registration of (1) the shares of common stock issuable upon conversion of
shares of DRI Series G Redeemable Convertible Preferred Stock issued as dividends on the Shares and
(2) the Warrant Stock with the SEC upon demand by the Buyer in certain circumstances, subject to
the terms and conditions set forth in the Registration Rights Agreement. The Warrant Agreement and
the Registration Rights Agreement are referred to collectively herein as the “Related Agreements”.

ARTICLE II

CLOSING

     Section 2.1 The Closing. The closing of the sale and purchase of the Shares
contemplated hereby (the “Closing”) shall take place at a date and time to be specified by the
Buyer and

 

 

DRI (the “Closing Date”), but effective as of June 23, 2005. The Closing shall take place at the
offices of DRI in Research Triangle Park, North Carolina, or any other place mutually agreeable to
the parties, subject to the right of the parties to close by exchange of executed counterpart
documents on the Closing Date.

     Section 2.2 Deliveries By DRI. At the Closing, DRI shall deliver to the Buyer
or cause to be delivered to the Buyer the certificate or certificates representing the Shares
registered in the name of the Buyer or in such name as may be designated by the Buyer and the
Warrant Agreement and Registration Rights Agreement executed by DRI.

     Section 2.3 Deliveries by the Buyer. Buyer has delivered to Gray, Layton,
Kersh, Solomon, Sigmon, Furr & Smith, P.A. on behalf of DRI the sum of $250,000 (the “Investment
Funds”) in payment of the Purchase Price and a copy of the Registration Rights Agreement executed
by Buyer.

     Section 2.4 Further Assurances. DRI shall execute and deliver on the Closing
Date or thereafter any and all such other instruments, and take or cause to be taken all such
further action as may be necessary or appropriate to vest fully and confirm to the Buyer title to
and possession of the Shares delivered hereunder by DRI.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF DRI

     As a material inducement to the Buyer to (i) enter into this Agreement, and (ii) purchase and
acquire the Shares, DRI represents and warrants to the Buyer, except as disclosed in the Exhibits
to this Agreement or in the documents filed by DRI with the SEC (the “SEC Filings”) pursuant to the
requirements of the Securities Exchange Act of 1934 (the “1934 Act”), that:

     (a) DRI is a corporation duly organized, validly existing and in good standing under the laws
of North Carolina.

     (b) The audited financial statements of DRI for the year ended December 31, 2004 and unaudited
financial statements of DRI for the three months ended March 31, 2005 that have been filed with the
SEC Filings (hereinafter collectively referred to as the “DRI Financial Statements”) include, as
applicable to the relevant period, a balance sheet and related statements of net income (loss),
shareholders’ equity and cash flows for the

 

 

periods ended on such dates. The DRI Financial Statements fairly present the financial position,
results of operations and other information purported to be shown therein at the respective dates
and for the respective periods to which they apply. Since March 31, 2005, there has been no
material change in the nature of the business of DRI, nor any material adverse change in its
financial condition or property, nor have any warrants, options, shares of common stock or
securities or instruments convertible into or exchangeable for common stock been issued, and DRI
has incurred no material obligations or liabilities or made any commitments other than as disclosed
in the DRI Financial Statements, the SEC Filings, or otherwise to Buyer.

     (c) DRI is not a party to any material litigation, pending or threatened, nor has any claim
been made or, to the best knowledge of DRI’s executive officers, asserted against DRI nor are there
any proceedings threatened or pending before any federal, state or municipal government, or any
department, board, body or agency thereof, involving DRI that would, if resolved adversely to DRI,
have a material adverse effect on DRI or its financial condition or operations.

     (d) DRI is not in violation or default of any provision of its Articles of Incorporation or
Bylaws or of any provision of any material instrument or contract to which it is a party or by
which it is bound or, to the best knowledge of its executive officers, of any provision of any
federal, state or local judgment, writ, decree, order, law, statute, rule or government regulation,
applicable to it. The execution, delivery and performance of this Agreement or the Related
Agreements and the consummation of the transactions contemplated hereby and thereby will not result
in any such violation or be in conflict with or constitute, with or without the passage of time and
giving of notice, either a violation or default under any such provision or an event which results
in the creation of any lien, charge or encumbrance upon any asset of DRI. DRI has all requisite
power and authority to execute, deliver and perform this Agreement and the Related Agreements and
has all requisite power and authority to execute and deliver the certificates representing the
Shares. All necessary corporate proceedings of DRI have been duly taken to authorize the execution,
delivery and performance by DRI of this Agreement and the sale and issuance of the Shares. This
Agreement and the Related Agreements have been duly authorized, executed and delivered by DRI, are
the legal, valid and binding obligations of DRI, and are enforceable as to DRI in accordance with
their respective terms. No consent, authorization,

 

 

approval, order, license, certificate, or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or any court or other tribunal is required by
DRI for the execution, delivery or performance by DRI of this Agreement and the Related Agreements.
No consent of any party to any contract, agreement, instrument, lease, license, arrangement or
understanding to which DRI is a party, or to which any of its properties or assets are subject, is
required for the execution, delivery or performance of this Agreement and the Related Agreements.

     (e) DRI has not in the past year received notice from any of its trading markets to the effect
that it is not in compliance with the listing or maintenance requirements thereof.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE BUYER

     As a material inducement to DRI to enter into this Agreement and the Related Agreements and to
sell and issue the Shares, the Buyer represents and warrants to DRI that:

     (a) The Buyer is voluntarily entering this Agreement with full power and authority.

     (b) Neither the execution and delivery of this Agreement or the Registration Rights Agreement
nor the consummation of the transactions herein or therein contemplated, will conflict with or
result in the breach of, or accelerate the performance required by, any terms of any agreement, or
result in the creation of any lien, charge or encumbrance upon any of the properties or assets of
the Buyer under the terms of any such agreement.

     (c) All action on the part of the Buyer necessary for the authorization, execution and
delivery of this Agreement and the Registration Rights Agreement and the performance of all
obligations of the Buyer hereunder or thereunder has been taken and this Agreement and the
Registration Rights Agreement constitute valid and legally binding obligations of the Buyer
enforceable in accordance with their respective terms, subject to bankruptcy, insolvency and other
laws of general application relating to or affecting creditors’ rights, and general principles of
equity.

     (d) The Buyer is acquiring the Shares, and will acquire the Conversion Shares and the Warrant
Stock, upon payment for and delivery thereof, for its own account for investment and not

 

 

with a view to the distribution or public resale thereof within the meaning of the Securities Act
of 1933 (the “1933 Act”). The Buyer further agrees that DRI may cause to be set forth on the
certificates for the Shares to be delivered to the Buyer hereunder and any Conversion Shares and
Warrant Stock subsequently acquired by the Buyer a legend in substantially the following form:

     These securities have not been registered under the Securities Act of 1933, as
amended, and may be offered and sold only if registered pursuant to the provisions
of that Act or if, in the opinion of counsel to the seller an exemption from
registration thereunder is available, the availability of which must be established
to the satisfaction of Digital Recorders, Inc.

     DRI shall not be obligated to recognize any purported transfer by the Buyer of the Shares
unless accompanied by an opinion of the Buyer’s counsel in form and substance reasonably
satisfactory to counsel for DRI to the effect that such transfer is not in violation of the 1933
Act.

     (e) The Buyer is an “accredited investor” as defined in Regulation D promulgated under the
1933 Act. The Buyer has substantial experience in evaluating and investing in private placement
transactions of preferred stock in companies similar to DRI, has actually made a past investment in
DRI and is familiar with the company and its management, has been a long time director of DRI, and
the Buyer has the capacity to protect its own interests. The Buyer is aware that the purchase of
the Shares, the Conversion Shares and the Warrant Stock involves substantial risk. The Buyer is in
a financial position that will allow it to hold such securities for an indefinite period, to bear
the economic risk of ownership and to withstand a complete loss of its investment.

     (f) The Buyer acknowledges that neither DRI nor any person acting on behalf of DRI has made
any representations or warranties to the Buyer except as expressly set forth in this Agreement or
the Related Agreements.

 

 

ARTICLE V

COVENANTS OF THE PARTIES

     Section 5.1 Conduct of Business. From the date hereof until the Closing,
except as permitted by this Agreement, reflected in the Exhibits hereto or as otherwise consented
to by the Buyer in writing, DRI shall:

     (a) Carry on its business only in the ordinary course, in substantially the same manner in
which it previously has been conducted;

     (b) Comply with all registration, filing and reporting requirements of the 1934 Act; and

     (c) Use its best efforts to maintain a listing of the common stock with The Nasdaq Stock
Market, Inc. (“Nasdaq”).

     Section 5.2 Access and Information. DRI shall give to the Buyer and its
representatives full access at all reasonable times prior to the Closing to the properties, books
and records of DRI and furnish such information and documents in its possession relating to DRI as
the Buyer may reasonably request, subject to the agreement by the Buyer to maintain the
confidentiality of, and not to trade in the securities of DRI while in the possession of, any
material nonpublic information of DRI.

     Section 5.3 No Short Sales. The Buyer shall not make any short sale of, or
enter into any other hedging transactions with respect to, DRI’s common stock prior to the earlier
of (i) effectiveness of the Registration Statement required to be filed by DRI for the benefit of
the Buyer pursuant to the Registration Rights Agreement or (ii) failure of the Company to timely
file such Registration Statement under the terms of the Registration Rights Agreement.

     Section 5.4 Repayment of Bodin Note. DRI shall cause such portion of the
Investment Funds as are necessary to satisfy in full all outstanding obligations under the Bodin
promissory note to be paid directly to the obligee from the trust account of Gray, Layton, Kersh,
Solomon, Sigmon, Furr & Smith, P.A.

ARTICLE VI

CONDITIONS TO EACH PARTY’S OBLIGATION TO CLOSE

     In addition to those specific conditions set forth in Articles VII and VIII below, the
obligations of the Buyer and

 

 

DRI to consummate the transactions described herein shall be subject to the following. No
government regulatory body or agency shall have instituted court action or legal proceedings
seeking preliminary or permanent injunctive relief prohibiting the Buyer’s purchase of the Shares
or the execution or performance of this Agreement or the Related Agreements.

ARTICLE VII

CONDITIONS TO DRI’S OBLIGATION TO CLOSE

     DRI’s obligation to complete the transactions provided for herein shall be subject to the
performance by the Buyer of all its agreements to be performed hereunder on or before the Closing,
and to the further conditions that:

     (a) the representations and warranties of the Buyer contained in Article IV hereof are true
and correct in all material respects as of the Closing with the same effect as if made on and as of
such date and the officers of the Buyer shall so certify thereto.

     (b) The issuance of the Shares to Buyer without registration shall be permitted under an
available exemption from registration under the 1933 Act, and such issuance, and the consummation
of the other transactions contemplated by this Agreement and the Related Agreements, shall not
violate any law or any rule or regulation of the SEC or Nasdaq.

ARTICLE VIII

CONDITIONS TO THE BUYER’S OBLIGATION TO CLOSE

     The Buyer’s obligation to complete the transactions provided for herein shall be subject to
the performance by DRI of all agreements to be performed hereunder on or before the Closing, and to
the further conditions that:

     (a) The representations and warranties of DRI contained in Article III and the covenants of
DRI contained in Article V hereof are true and correct and have been performed or satisfied in all
material respects as of the Closing with the same effect as if made or performed on and as of such
date and DRI shall so certify to the Buyer.

     (b) There shall have been no material adverse change in the operating results, financial
condition, properties or business prospects of DRI since March 31, 2005.

 

 

ARTICLE IX

TERMINATION, AMENDMENT AND WAIVER

     Section 9.1 Termination. This Agreement and each agreement contemplated hereby
may be terminated at any time prior to the Closing by the mutual written consent of the Buyer and
DRI.

     Section 9.2 Effect of Termination. In the event of termination of this
Agreement or any agreement contemplated hereby, this Agreement or any such other agreement shall
forthwith become void and there shall be no liability or obligation hereunder or thereunder on the
part of any party hereto.

     Section 9.3 Amendment. This Agreement, or any agreement contemplated hereby,
may not be amended except by an instrument in writing signed on behalf of each of the parties
thereto.

ARTICLE X

INDEMNIFICATION AND CONTRIBUTION

     Section 10.1 Indemnity. Subject to the conditions set forth below, DRI agrees
to indemnify and hold harmless the Buyer, its officers, directors, partners, employees, agents, and
counsel, and each person, if any, who controls the Buyer within the meaning of Section 15 of the
1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage, and
expense whatsoever (which shall include, for all purposes of this Article X, but not be limited to,
attorneys’ fees and any and all expense whatsoever incurred in investigating, preparing, or
defending against any litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when incurred, arising out of,
resulting from, based upon, or in connection with any breach of any representation, warranty,
covenant, or agreement of DRI contained in this Agreement. The foregoing agreement to indemnify
shall be in addition to any liability DRI may otherwise have, including liabilities arising under
this Agreement.

ARTICLE XI

NOTICES

     Any notice given under this Agreement shall be deemed to have been given sufficiently if in
writing and sent by registered or certified mail, return receipt requested and

 

 

postage prepaid, by receipt confirmed facsimile transmission, or by tested telex, telegram or cable
addressed as follows:

	 	 	 
	If to DRI:

	 	Digital Recorders, Inc.
	 

	 	5949 Sherry Lane, Suite 1050
	 

	 	Dallas, TX 75225
	 

	 	Attn: CEO & President
	 

	 	Fax: 214-378-8437
	 
	 	 
	With a copy to:

	 	Mr. David M. Furr
	 

	 	Gray, Layton, Kersh, Solomon,
	 

	 	           Sigmon, Furr & Smith, P.A.
	 

	 	Post Office Box 2636
	 

	 	Gastonia, NC 28053-2636
	 

	 	Fax: 704-866-8010
	 
	 	 
	If to the Buyer:

	 	John D. Higgins
	 

	 	105 High Farms Road
	 

	 	Glen Head, NY 11545

or to any other address or addresses which may hereafter be designated by any party by notice given
in such manner. All notices shall be deemed to have been given as of the date of receipt.

ARTICLE XII

CERTIFICATES OF OFFICERS AND DIRECTORS

     DRI shall provide to the Buyer a certificate at the Closing verifying the representations and
warranties made by DRI. Any certificate or other document executed by any officer of DRI and
delivered to the Buyer or its counsel shall be deemed a representation and warranty by such officer
on behalf of DRI as to the statements made therein.

ARTICLE XIII

COUNTERPARTS

     This Agreement may be executed in any number of counterparts, each of which when executed and
delivered shall be an original, but all of such counterparts shall constitute one and the same
instrument.

ARTICLE XIV

MERGER CLAUSE AND COSTS, FEES AND EXPENSES

     This Agreement supersedes all prior agreements and understandings between the parties and may
not be changed or

 

 

terminated orally, and no attempted change, termination or waiver of any of the provisions hereof
shall be binding unless in writing and signed by the parties hereto. Each party shall pay its own
expenses incident to the preparation, execution and delivery of this Agreement and the consummation
of the transactions described herein including, without limitation, all fees of counsel,
accountants and other professional fees and expenses. DRI represents and warrants that there is no
placement fee, structuring fee, or commission payable in this transaction.

ARTICLE XV

SEVERABILITY

     In the event that any provision of this Agreement is determined to be partially or wholly
invalid, illegal or unenforceable, then such provision shall be deemed to be modified or restricted
to the extent necessary to make such provision valid, binding and enforceable or, if such a
provision cannot be modified or restricted in a manner so as to make such provision valid, binding
and enforceable, then such provision shall be deemed to be excised from this Agreement and the
validity, binding effect and enforceability of the remaining provisions of this Agreement shall not
be affected or impaired in any manner.

ARTICLE XVI

BENEFIT

     The terms and conditions of this Agreement shall inure to the benefit of, and shall be binding
upon, the successors and assigns of the parties hereto, and the persons and entities referred to in
Article X who are entitled to indemnification or contribution and their respective successors,
legal representatives and assigns and no other person shall have or be construed to have any legal
or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or the
Registration Rights Agreement or any provision herein or therein contained.

ARTICLE XVII

WAIVER

     The failure of any party to insist upon the strict performance of any of the provisions of
this Agreement shall not be considered as a waiver of any subsequent default of the same or similar
nature. Time is of the essence in this Agreement.

 

 

ARTICLE XVIII

HEADINGS

     The headings for the sections of this Agreement are inserted for convenience in reference only
and shall not constitute a part hereof.

ARTICLE XIX

SURVIVAL

     The respective agreements, representations, warranties, covenants and other statements of the
Buyer and DRI set forth in this Agreement shall survive and remain in full force and effect for a
period of one (1) year from the Closing, regardless of any investigation or inspection made on
behalf of the Buyer or DRI.

ARTICLE XX

GOVERNING LAW

     This Agreement shall be governed by and construed according to the laws of the State of North
Carolina, without giving effect to conflict of laws.

ARTICLE XXI

ARBITRATION

     All disputes arising in connection with this Agreement shall be finally settled by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration Association by one
or more arbitrators.

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and
year first above written.

	 	 	 	 	 
	 	 	THE BUYER:
	 
	 	 	 	 
	 

	 	By
	 	/s/ John D. Higgins
	 

	 	 	 	 
	 	 	Print Name: John D. Higgins

	 	 	 	 	 	 	 
	 

	 	DRI:	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	DIGITAL RECORDERS, INC.
	 
	 	 	 	 	 	 
	 	 	By	 	/s/David L. Turney
	 	 	 	 	 
	 	 	Print Name: David L. Turney
	 	 	 	 	Title: Chairman, Chief
Executive Officer and Presidentexv10w5

 

Exhibit 10.5

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR
APPLICABLE STATE SECURITIES LAWS (“STATE ACTS”), AND SHALL NOT BE SOLD, HYPOTHECATED, OR OTHERWISE
TRANSFERRED, UNLESS SUCH TRANSFER IS MADE IN COMPLIANCE WITH THE ACT AND THE STATE ACTS.

STOCK PURCHASE WARRANT

     This Stock Purchase Warrant (this “Warrant”), dated June 23, 2005, is issued to JOHN D.
HIGGINS (the “Holder”), by DIGITAL RECORDERS, INC., a North Carolina corporation (the “Company”).

     1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the
Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at
such other place as the Company shall notify the Holder hereof in writing), to purchase from the
Company 35,714 fully paid and non-assessable shares of Common Stock, $.10 par value (the “Common
Stock”), of the Company (as adjusted pursuant to Section 7 hereof, the “Shares”) for the purchase
price specified in Section 2 below.

     2. Purchase Price. The purchase price for the Shares is $2.21 per share. Such price
shall be subject to adjustment pursuant to Section 7 hereof (such price, as adjusted from time to
time, is herein referred to as the “Warrant Price”).

     3. Exercise Period. This Warrant is exercisable in whole or in part at any time from
the date hereof through June 22, 2010.

     4. Method of Exercise. While this Warrant remains outstanding and exercisable in
accordance with Section 3 above, the Holder may exercise, in whole or in part, but in increments of
no less than 10,000 shares, the purchase rights evidenced hereby. Such exercise shall be effected
by tender of a duly executed copy of the form of Exercise Notice attached hereto, to the Secretary
of the Company at its principal offices, and the payment to the Company of an amount equal to the
aggregate purchase price for the number of Shares being purchased unless done by cashless exercise.

     5. Certificates for Shares. Upon the exercise of the purchase rights evidenced by
this Warrant, one or more certificates for the number of Shares so purchased shall be issued as
soon as practicable thereafter, and in any event within thirty (30) days of the delivery of the
subscription notice.

     6. Reservation of Shares. The Company covenants that it will at all times keep
available such number of authorized shares of its Common Stock, free from all preemptive rights
with respect thereto, which will be sufficient to permit the exercise of this Warrant for the full
number of Shares specified herein. The Company further covenants that such Shares, when
issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid
and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof.

1

 

     7. Adjustment of Warrant Price and Number of Shares. The number and kind of
securities purchasable upon exercise of this Warrant and the Warrant Price shall be subject to
adjustment from time to time as follows:

          (a) Stock Dividends, Subdivisions, Combinations and Other Issuances. If the Company
shall at any time prior to the expiration of this Warrant subdivide its Common Stock, by stock
split or otherwise, combine its Common Stock or issue additional shares of its Common Stock as a
dividend with respect to any shares of its Common Stock, the number of Shares issuable on the
exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision
or stock dividend and proportionately decreased in the case of a combination. Appropriate
adjustments shall also be made to the Warrant Price payable per Share, but the aggregate Warrant
Price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall
remain the same. Any adjustment under this Section 7(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective or as of the record date of
such dividend, or, in the event that no record date is fixed, upon the making of such dividend.

          (b) Reclassification, Reorganization, Merger, Sale or Consolidation. In the event of
any reclassification, capital reorganization or other change in the Common Stock of the Company
(other than as a result of a subdivision, combination or stock dividend provided for in Section
7(a) above) or in the event of a consolidation or merger of the Company with or into, or the sale
of all or substantially all of the properties and assets of the Company to, any person, and in
connection therewith consideration is payable to holders of Common Stock in cash, securities or
other property, then as a condition of such reclassification, reorganization or change,
consolidation, merger or sale, lawful provision shall be made, and duly executed documents
evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at
any time prior to the expiration of this Warrant to purchase, at a total price equal to that
payable upon the exercise of this Warrant immediately prior to such event, the kind and amount of
cash, securities or other property receivable in connection with such reclassification,
reorganization or change, consolidation, merger or sale, by a holder of the same number of shares
of Common Stock as were purchasable upon exercise hereof by the Holder immediately prior to such
reclassification, reorganization or change, consolidation, merger or sale. In any such case,
appropriate provisions shall be made with respect to the rights and interest of the Holder so that
the provisions hereof shall thereafter be applicable with respect to any cash, securities or
property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company
merges or consolidates with, or sells all or substantially all of its property and assets to, any
other person, and consideration is payable to holders of Common Stock in exchange for their Common
Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii)
in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be
entitled to receive distributions on the date of such event on an equal basis with holders of
Common Stock as if this Warrant had been exercised immediately prior to such event, less the
Warrant Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and
cease, and this Warrant shall expire. In case of any such merger, consolidation or sale of assets,
the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up
of the Company, the Company shall promptly, after receipt of this surrendered Warrant, make
payment by delivering a check in such amount as is appropriate (or, in the case of consideration

2

 

other than cash, such other consideration as is appropriate) to such person as it may be directed
in writing by the Holder surrendering this Warrant.

          (c) Certain Distributions. In case the Company shall fix a record date for the making
of a dividend or distribution of cash, securities or property to all holders of Common Stock
(excluding any dividends or distributions referred to in Section 7(a) or 7(b) above), the number of
Shares purchasable upon an exercise of this Warrant after such record date shall be adjusted to
equal the product obtained by multiplying the number of Shares purchasable upon an exercise of this
Warrant immediately prior to such record date by a fraction, the numerator of which shall be the
Warrant Price immediately prior to such distribution, and the denominator of which shall be the
Warrant Price immediately prior to such distribution, less the fair market value per Share, as
reasonably determined by the Holder, of the cash, securities or property so distributed. Such
adjustment shall be made successively whenever any such distribution is made and shall become
effective on the effective date of distribution.

     8. Pre-Exercise Rights. Prior to exercise of this Warrant, the Holder shall not be
entitled to any rights of a shareholder with respect to the Shares other than as set forth herein,
including without limitation, the right to vote such Shares, receive preemptive rights or be
notified of shareholder meetings, and the Holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company.

     9. Registration Rights. The Shares of Common Stock issuable upon exercise of this
Warrant shall be subject to the registration rights set forth in the Registration Rights Agreement
of even date herewith by and between the Holder and the Company (the “Registration Rights
Agreement”), and the Holder shall be entitled to all rights and benefits thereof.

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

3

 

exercise; otherwise, it shall be deemed null and void if prohibited under the then prevailing
statutes, rules and regulations.

     11. Successors and Assigns. The terms and provisions of this Warrant shall inure to
the benefit of, and be binding upon, the Company and the Holder and their respective successors and
assigns, provided that neither party may assign its rights or obligations hereunder with the prior
written consent of the other party.

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

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

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

4

 

	 	 	 	 	 

EXERCISE NOTICE

Dated                     , ____

     The undersigned hereby irrevocably elects to exercise the Stock Purchase Warrant, dated June
23, 2005, issued by Digital Recorders, Inc., a North Carolina corporation (the “Company”) to the
undersigned to the extent of purchasing
                     shares of Common Stock and hereby makes payment
of $                     in payment of the aggregate Warrant Price of such shares pursuant hereto in cash or
elects to purchase
                     shares of Common Stock in Company pursuant to non-cash conversion of the
Warrant as provided in Section 10 of the Warrant (if legally available).

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

By:                                                            

INSTRUCTIONS FOR REGISTRATION OF SHARES

Register Shares in name of:                                                                                                                                                      

Address:                                                                                                                                                                                   

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