Contract
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO DIGITAL RECORDERS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase up to 80,000 Shares of Common Stock of
DIGITAL RECORDERS, INC.
(subject to adjustment as provided herein)
DIGITAL RECORDERS, INC.
(subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No.
|
Issue Date: April 28, 2006 |
DIGITAL RECORDERS, INC., a corporation organized under the laws of the State of North Carolina
(the “Company”), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns
(the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company (as
defined herein) from and after the Issue Date of this Warrant and at any time or from time to time
before 5:00 p.m., New York time, through the close of business April 28, 2013 (the “Expiration
Date”), up to 80,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined),
$0.10 par value per share, at the applicable Exercise Price per share (as defined below). The
number and character of such shares of Common Stock and the applicable Exercise Price per share are
subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires, have the following
respective meanings:
(a) The term “Company” shall include Digital Recorders, Inc. and any person or entity
which shall succeed, or assume the obligations of, Digital Recorders, Inc. hereunder.
(b) The term “Common Stock” includes (i) the Company’s Common Stock, par value $0.10
per share; and (ii) any other securities into which or for which any of the securities
described in the preceding clause (i) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term “Other Securities” refers to any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the holder of
the Warrant at any time shall be entitled to receive, or shall have received, on the
exercise of the Warrant, in lieu of or in addition to Common Stock, or
B-1
which at any time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise.
(d) The “Exercise Price” applicable under this Warrant shall be $2.00 per share.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the date hereof through
and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this
Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the
form attached hereto as Exhibit A (the “Exercise Notice”), 80,000 shares of Common Stock of the
Company, subject to adjustment pursuant to Section 4.
1.2. Fair Market Value. For purposes hereof, the “Fair Market Value” of a share of
Common Stock as of a particular date (the “Determination Date”) shall mean:
(a) If the Company’s Common Stock is traded on the American Stock Exchange or another
national exchange or is quoted on the National or Capital Market of The Nasdaq Stock Market,
Inc.(“Nasdaq”), then the closing or last sale price, respectively, reported for the last
business day immediately preceding the Determination Date.
(b) If the Company’s Common Stock is not traded on the American Stock Exchange or
another national exchange or on the Nasdaq but is traded on the NASD Over the Counter
Bulletin Board, then the mean of the average of the closing bid and asked prices reported
for the last business day immediately preceding the Determination Date.
(c) Except as provided in clause (d) below, if the Company’s Common Stock is not
publicly traded, then as the Holder and the Company agree or in the absence of agreement by
arbitration in accordance with the rules then in effect of the American Arbitration
Association, before a single arbitrator to be chosen from a panel of persons qualified by
education and training to pass on the matter to be decided.
(d) If the Determination Date is the date of a liquidation, dissolution or winding up,
or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s
charter, then all amounts to be payable per share to holders of the Common Stock pursuant to
the charter in the event of such liquidation, dissolution or winding up, plus all other
amounts to be payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock
then issuable upon exercise of the Warrant are outstanding at the Determination Date.
1.3. Company Acknowledgment. The Company will, at the time of the exercise of this
Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to
afford to such holder any rights to which such holder shall continue to be entitled after such
exercise in accordance with the provisions of this Warrant. If the holder
shall fail to make any such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.
1.4. Trustee for Warrant Holders. In the event that a bank or trust company shall
have been appointed as trustee for the holders of this Warrant pursuant to Subsection 3.2, such
bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter
described) and shall accept, in its own name for the account of the Company or such successor
person as may be entitled thereto, all amounts otherwise payable to the Company or such successor,
as the case may be, on exercise of this Warrant pursuant to this Section 1.
2. Procedure for Exercise.
2.1. Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the
shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the
Holder as the record owner of such shares as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such shares in accordance herewith. As
soon as practicable after the exercise of this Warrant in full or in part, and in any event within
three (3) business days thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as
such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance
with applicable securities laws, a certificate or certificates for the number of duly and validly
issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such
Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such
holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market
Value of one full share, together with any other stock or other securities and property (including
cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1
or otherwise.
2.2. Exercise.
(a) Payment may be made either (i) in cash or by certified or official bank check
payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii)
by delivery of this Warrant, or shares of Common Stock and/or Common Stock receivable upon
exercise of this Warrant in accordance with the formula set forth in subsection (b) below,
or (iii) by a combination of any of the foregoing methods, for the number of Common Shares
specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any
adjustment in the total number of shares of Common Stock issuable to the Holder per the
terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of
duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or
Other Securities) determined as provided herein.
(b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of
one share of Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the portion
thereof being exercised) by surrender of this Warrant at the principal office of the Company
together with the properly endorsed Exercise Notice in which event the
Company shall issue to the Holder a number of shares of Common Stock computed using the
following formula:
X=
|
Y(A-B) | |||
| A |
| Where X = | the number of shares of Common Stock to be issued to the Holder | |
| Y = | the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being exercised (at the date of such calculation) | |
| A = | the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation) | |
| B = | the Exercise Price per share (as adjusted to the date of such calculation) |
3. Effect of Reorganization, Etc.; Adjustment of Exercise Price.
3.1. Reorganization, Consolidation, Merger, Etc. In case at any time or from time to
time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other
person, or (c) transfer all or substantially all of its properties or assets to any other person
under any plan or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and adequate provision shall
be made by the Company whereby the Holder, on the exercise hereof as provided in Section 1 at any
time after the consummation of such reorganization, consolidation or merger or the effective date
of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other
Securities) issuable on such exercise prior to such consummation or such effective date, the stock
and other securities and property (including cash) to which such Holder would have been entitled
upon such consummation or in connection with such dissolution, as the case may be, if such Holder
had so exercised this Warrant, immediately prior thereto, all subject to further adjustment
thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company following the
transfer of all or substantially all of its properties or assets, the Company, concurrently with
any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be
delivered to the Holder the stock and other securities and property (including cash, where
applicable) receivable by the Holder pursuant to Section 3.1, or, if the Holder shall so instruct
the Company, to a bank or trust company specified by the Holder and having its principal office in
New York, NY as trustee for the Holder (the “Trustee”).
3.3. Continuation of Terms. Upon any reorganization, consolidation, merger or
transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant
shall continue in full force and effect and the terms hereof shall be applicable to the shares of
stock and other securities and property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective date of dissolution
following any such transfer, as the case may be, and shall be binding upon the issuer of any such
stock or other securities, including, in the case of any such transfer, the person
acquiring all or substantially all of the properties or assets of the Company, whether or not
such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In
the event this Warrant does not continue in full force and effect after the consummation of the
transactions described in this Section 3, then the Company’s securities and property (including
cash, where applicable) receivable by the Holder will be delivered to the Holder or the Trustee as
contemplated by Section 3.2.
4. Extraordinary Events Regarding Common Stock. In the event that the Company shall
(a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding
Common Stock or any preferred stock issued by the Company (b) subdivide its outstanding shares of
Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of
shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with
the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding immediately prior to
such event and the denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be the Exercise Price
then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4. The number of
shares of Common Stock that the Holder shall thereafter, on the exercise hereof as provided in
Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the
number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be
issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would
otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the
Exercise Price in effect on the date of such exercise (taking into account the provisions of this
Section 4).
5. Certificate as to Adjustments. In each case of any adjustment or readjustment in
the shares of Common Stock (or Other Securities) issuable on the exercise of this Warrant, the
Company at its expense will promptly cause its Chief Financial Officer or other appropriate
designee to compute such adjustment or readjustment in accordance with the terms of this Warrant
and prepare a certificate setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based, including a statement of (a) the
consideration received or receivable by the Company for any additional shares of Common Stock (or
Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of
Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise
Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in
effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as
provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the
Holder and any Warrant agent of the Company (appointed pursuant to Section 11 hereof).
6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company will at
all times reserve and keep available, solely for issuance and delivery on the exercise of this
Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of
this Warrant.
7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities
laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder
hereof (a “Transferor”) in whole or in part. On the surrender for exchange of this Warrant, with
the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement
Form”) and together with evidence reasonably satisfactory to the Company demonstrating compliance
with applicable securities laws, which shall include, without limitation, the provision of a legal
opinion from the Transferor’s counsel (at the Company’s expense) that such transfer is exempt from
the registration requirements of applicable securities laws, the Company at its expense (but with
payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the
order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or
the transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”), calling in
the aggregate on the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation,
on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver,
in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The Holder has been granted certain registration rights by
the Company. These registration rights are set forth in a Registration Rights Agreement entered
into by the Company and Holder dated as of the date hereof, as the same may be amended, modified
and/or supplemented from time to time.
10. Maximum Exercise. Notwithstanding anything herein to the contrary, in no event
shall the Holder be entitled to exercise any portion of this Warrant in excess of that portion of
this Warrant upon exercise of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised portion of the Warrant or the
unexercised or unconverted portion of any other security of the Holder subject to a limitation on
conversion analogous to the limitations contained herein) and (2) the number of shares of Common
Stock issuable upon the exercise of the portion of this Warrant with respect to which the
determination of this proviso is being made, would result in beneficial ownership by the Holder and
its Affiliates of any amount greater than 4.99% of the then outstanding shares of Common Stock
(whether or not, at the time of such exercise, the Holder and its Affiliates beneficially own more
than 4.99% of the then outstanding shares of Common Stock). As used herein, the term “Affiliate”
means any person or entity that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a person or entity, as such terms are
used in and construed under Rule 144 under the Securities Act. For purposes of the proviso to the
second preceding sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except
as otherwise provided in clause (1) of such proviso. The limitations set forth herein (x) may be
waived by the Holder upon provision of no less than sixty-one (61) days prior notice to the Company
and (y) shall automatically become
null and void following notice to the Company upon the occurrence and during the continuance
of an Event of Default (as defined in the Purchase Agreement dated as of the date hereof among the
Holder and the Company (as amended, modified, restated and/or supplemented from time to time, the
“Purchase Agreement”)), except that at no time shall the number of shares of Common Stock
beneficially owned by the Holder exceed 19.99% of the outstanding shares of Common Stock.
Notwithstanding anything contained herein to the contrary, the number of shares of Common Stock
issuable by the Company and acquirable by the Holder at a price below $1.79 per share pursuant to
the terms of this Warrant, the Purchase Agreement, any Related Agreement (as defined in the
Purchase Agreement) or otherwise, shall not exceed an aggregate of 1,953,725 shares of Common Stock
(subject to appropriate adjustment for stock splits, stock dividends, or other similar
recapitalizations affecting the Common Stock) (the “Maximum Common Stock Issuance”), unless the
issuance of Common Shares hereunder in excess of the Maximum Common Stock Issuance shall first be
approved by the Company’s shareholders. If at any point in time and from time to time the number
of shares of Common Stock issued pursuant to the terms of this Warrant, the Purchase Agreement, any
Related Agreement (as defined in the Purchase Agreement) or otherwise, together with the number of
shares of Common Stock that would then be issuable by the Company to the Holder in the event of a
conversion pursuant to the terms of this Warrant, the Purchase Agreement, any Related Agreement (as
defined in the Purchase Agreement) or otherwise, would exceed the Maximum Common Stock Issuance but
for this Section 10, the Company shall promptly call a shareholders meeting to solicit shareholder
approval for the issuance of the shares of Common Stock hereunder in excess of the Maximum Common
Stock Issuance.
11. Warrant Agent. The Company may, by written notice to the each Holder of the
Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the
exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and
replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
12. Transfer on the Company’s Books. Until this Warrant is transferred on the books
of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for
all purposes, notwithstanding any notice to the contrary.
13. Notices, Etc. All notices and other communications from the Company to the Holder
shall be mailed by first class registered or certified mail, postage prepaid, at such address as
may have been furnished to the Company in writing by such Holder or, until any such Holder
furnishes to the Company an address, then to, and at the address of, the last Holder who has so
furnished an address to the Company.
14. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. THIS WARRANT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY
THIS WARRANT SHALL BE BROUGHT ONLY IN THE STATE
COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK; PROVIDED,
HOWEVER, THAT THE HOLDER MAY CHOOSE TO WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE
OF NEW YORK. The individuals executing this Warrant on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to
recover from the other party its reasonable attorneys’ fees and costs. In the event that any
provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such provision which may
prove invalid or unenforceable under any law shall not affect the validity or enforceability of any
other provision of this Warrant. The headings in this Warrant are for purposes of reference only,
and shall not limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or enforceability of
any other provision hereof. The Company acknowledges that legal counsel participated in the
preparation of this Warrant and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied in the
interpretation of this Warrant to favor any party against the other party.
15. Sale Limitation. Notwithstanding anything contained herein to the contrary, the
Holder shall not be entitled to sell an shares of Common Stock of the Company received by the
Holder upon the exercise all or any portion of this Warrant or any other common stock purchase
warrant issued by the Company to the Holder on or prior to the date hereof, prior to the three
hundred sixty fifth day (365) following the date hereof. The sale limitation described in this
Section 15 shall automatically become null and void without any notice to any Company upon the
occurrence and during the continuance of an Event of Default.
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IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
| DIGITAL RECORDERS, INC. | ||||||
WITNESS: |
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| By: | ||||||
| Name: | ||||||
| Title: | ||||||
