<PAGE>
FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------------------
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _____________
Commission File Number: 0-18280
DIGITAL SOUND CORPORATION
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 95-3222624
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6307 Carpinteria Avenue, Carpinteria, California 93013
- ----------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (805) 566-2000
-------------------
Not Applicable
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of Registrant's common stock as of October
31, 1997 was 20,386,004
<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of September 30, 1997 3
and December 31, 1996
Statements of Operations for the 4
Three Months and Nine Months ended
September 30, 1997 and September 30, 1996
Statements of Cash Flows for the 5
Nine Months ended September 30, 1997
and September 30, 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
DIGITAL SOUND CORPORATION
-------------------------
BALANCE SHEETS
--------------
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash, cash equivalents and pledged case $ 2,895 $ 18,187
Accounts receivable, less allowance for doubtful
accounts of $394 and $600 at September 30, 1997
and December 31, 1996, respectively 5,539 5,695
Inventories 5,751 3,470
Other current assets 230 299
-------- --------
Total current assets 14,415 27,651
Property and equipment, at cost:
Computers and other equipment 11,794 11,077
Furniture and fixtures 1,001 982
Leasehold improvements 1,353 1,130
-------- --------
14,148 13,189
Less accumulated depreciation and amortization (10,426) (10,733)
-------- --------
3,722 2,456
Investment securities 1,775 --
Other assets 2,961 3,226
-------- --------
Total other assets 4,736 3,226
-------- --------
$ 22,873 $ 33,333
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 5,411 $ 3,639
Accrued payroll and related 2,869 1,986
Other accrued liabilities 1,862 1,681
-------- --------
Total current liabilities 10,142 7,306
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 15,000,000 shares
authorized; 2,631,579 issued and outstanding at
September 30, 1997 and December 31, 1996 5,000 5,000
Common stock, no par value, 50,000,000 shares
authorized; 20,386,004 and 20,224,540 shares
issued and outstanding at September 30, 1997
and December 31, 1996 respectively 69,082 68,975
Accumulated deficit (61,351) (47,948)
-------- --------
Total shareholders' equity 12,731 26,027
-------- --------
$ 22,873 $ 33,333
======== ========
</TABLE>
See accompanying notes
-3-
<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
STATEMENT OF OPERATIONS
-----------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 5,890 $ 6,369 $ 14,317 $16,174
Cost of sales 3,241 2,458 7,281 5,873
------- ------- -------- -------
Gross margin 2,649 3,911 7,036 10,301
Selling, general and administrative 4,481 3,295 12,304 9,741
Engineering and development 3,261 2,298 8,379 6,808
------- ------- -------- -------
7,742 5,593 20,683 16,549
------- ------- -------- -------
Income (loss) from operations (5,093) (1,682) (13,647) (6,248)
Interest and other income 4 248 244 884
------- ------- -------- -------
Income (loss) before provision for income taxes (5,089) (1,434) (13,403) (5,364)
Provision for income taxes: -- -- -- --
------- ------- -------- -------
Net income (loss) $(5,089) $(1,434) $(13,403) $(5,364)
======= ======= ======== =======
Net income (loss) per common and common
equivalent shares $ (.25) $ (.07) $ (.66) $ (.27)
======= ======= ======== =======
Weighted average common and common equivalent
shares outstanding 20,386 30,093 20,315 20,055
======= ======= ======== =======
</TABLE>
See accompanying notes
-4-
<PAGE>
DIGITAL SOUND CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities $(13,403) $(5,364)
Net income
Adjustments to reconcile net income to
net cash provided (used) by operations:
Depreciation and amortization 352 271
Changes in operating assets and liabilities:
Accounts receivable 156 (2,751)
Inventories (2,281) 826
Other current assets 69 153
Other assets (394) 2,226
Accounts payable 1,772 (839)
Accrued payroll and related 883 710
Other accrued liabilities 181 251
-------- -------
Net cash provided (used) by operations (12,665) (4,517)
-------- -------
Cash flows from investing activities:
Additions to investment securities (1,775)
Additions to property and equipment (959) (255)
-------- -------
Net cash used for investing activities (2,734) (255)
Cash flows from financing activities:
Net proceeds from issuance of common stock 107 108
-------- -------
Net decrease in cash and equivalents (15,292) 4,664
Cash and equivalents at beginning of period 18,187 23,503
-------- -------
Cash and equivalents at end of period $ 2,895 $18,839
======== =======
</TABLE>
See accompanying notes.
-5-
<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1997
------------------
(Unaudited)
NOTE 1. General
- ----------------
All interim financial data is unaudited, but in the opinion of the Company
such unaudited statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Nevertheless, the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading.
The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year.
Principles of consolidation. The consolidated financial statements include
the accounts of Digital Sound Corporation (the Company) and its wholly owned
subsidiaries Digital Sound International and Pulsepoint Communications Malaysia.
All significant intercompany transactions and balances have been eliminated.
Short term investments. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the
provisions of SFAS 115 for investments held as of December 31, 1995. The
adoption had no effect on the financial statements. Short term investments
(principally commercial paper and discount notes with maturity dates generally
within 90 days that are considered cash equivalents) are classified as "held to
maturity" based on the Company's positive intent and ability to hold the
securities until maturity. The securities are presented at amortized cost which
approximates fair value. Amortization and interest on securities classified as
"held to maturity" is included in investment income.
Cash, cash equivalents and pledged cash. The Company considers as cash
equivalents only those investments that are short-term, highly liquid, readily
convertible to cash, and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. The Company
classifies as cash equivalents only those investments with maturities of three
months or less. The Company pledged $1.0 million of cash and cash equivalents
to facilitate a construction loan for its landlord to build new office space in
its existing building. The Company anticipates these pledged funds to become
available for general use by November 30, 1997. The Company also pledged $1.3
million and $0.5 million of cash and cash equivalents, respectively, to
facilitate the BancBoston and Mellon US Lease agreements.
Operating Lease Agreements. Effective January 1997, the Company entered
into master lease agreements with BancBoston Leasing Inc and Mellon US Leasing
("the Lease Agreements"). The purpose of the Lease Agreements is to provide
sale/leaseback financing for the purpose of capital acquisitions for 1997. The
BancBoston sale/leaseback agreement is for a total of $3.0 million in capital
equipment purchases and the term of the lease is 48 months. The terms of the
BancBoston sale/leaseback agreement require cash collateral equal to the
acquisition cost of the equipment leased. The Company has utilized $1.275
million of the BancBoston sale/leaseback agreement as of September 30, 1997.
The Mellon US Leasing sale/leaseback agreement is for $1.0 million in equipment
purchases and the term of the lease is for 30 months. The sale/leaseback
agreement requires a Letter of Credit equal to 50% of the limit of the credit
line ($0.5 million) which has been pledged. Bank of America has provided the
Company with this Letter of Credit, which is 100% collateralized by the
Company's certificate of deposit. The Company has fully utilized the Mellon US
Leasing sale/leaseback agreement as of September 30, 1997.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Form 10-K for the
fiscal year ended December 31,1996, as filed with the Securities and Exchange
Commission.
-6-
<PAGE>
NOTE 2. Inventories
- --------------------
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method) or market:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Raw materials and purchased parts $3,141 $1,528
Work in process 2,458 1,815
Finished goods 152 127
------ ------
$5,751 $3,470
====== ======
</TABLE>
NOTE 3. Per Share Information
- ------------------------------
Earnings (loss) per common and common equivalent share are computed based
upon the weighted average number of outstanding shares of common stock and
common stock equivalents. Antidilutive common stock equivalents were excluded
from this calculation for the periods in which a loss was incurred.
NOTE 4. Subsequent Events
- --------------------------
On July 28, 1997, the Company entered into a Security and Loan Agreement
("the Credit Line") with Imperial Bank for the purpose of obtaining a credit
line of $5,000,000. The credit line was secured by substantially all of the
assets of the Company, and allowed for borrowings of up to the lesser of
$2,000,000 or an amount equal to 50% of eligible domestic accounts receivable.
Interest under the Credit Line was at the prime rate plus 0.5% (one-half per
cent). The Credit Line also allowed for borrowing up to the lesser of
$3,000,000 or an amount equal to 90% of eligible foreign accounts receivable and
inventory. Borrowings under the Credit Line were subject to certain financial
covenants and restrictions on receivables, financial guarantees, and other
related items.
On October 30, 1997, the Company was in violation of certain of the
financial covenants of the Credit Line. There were no borrowings under the
Credit Line at that time. On October 31, 1997, the Company entered into an
amendment to its $5.0 million line of credit from Imperial Bank providing for a
relaxation of certain financial covenants. The amendments also allowed for
borrowing up to $5,000,000 or an amount equal to 65% of eligible accounts
receivable, foreign or domestic. The interested charged under the Credit Line
was increased to prime plus 2.0% (two per cent). Although there can be no
assurance, the Company expects to be in compliance with all covenants contained
in the amended agreement through the end of 1997. As of November 10, 1997,
borrowings under the line aggregated $0.5 million approximately. In connection
with the agreement, the Company issued a warrant to Imperial Bank for the
purchase of 300,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share. The terms of the warrant provide for "full ratchet"
antidilution for 180 days after its issuance and for "weighted average"
antidilution thereafter, subject to certain exceptions. In the event the
Company issues convertible preferred stock to investors on or before April 30,
1998 in a financing aggregating more than $1 million of gross proceeds, the
warrant will become exercisable for shares of the same class and series as those
issued in such financing, and the exercise price of the warrant will be adjusted
to reflect the price (on a fully converted basis) at which such shares were
issued to such investors, if such price is lower than the adjusted exercise
price of the warrant at the time of such issuance. The line expires in June
1998.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended September 30, 1997 Compared to Three Months Ended September
- ------------------------------------------------------------------------------
30, 1996
- --------
Net sales decreased 7.5% from $6.4 million in the 1996 quarter to $5.9
million in the 1997 quarter. Compared to the third quarter of 1996, sales into
the VIS market decreased by $0.5 million and sales into the CPE market
essentially stayed the same. Combined sales of the VoiceServer 1110,
VoiceServer 2110 and VoiceServer 3110 decreased by $3.0 million while sales of
system upgrades and enhancements and services increased $2.5 million.
Gross margin as a percentage of net sales decreased to 45.0% in the 1997
period as compared to 61.4% for the same period in 1996. System margins were
down from 58.1% in the 1996 period to 51.6% in the third quarter of 1997 and
system upgrades, enhancements and service margins were down from 66.3% in the
third quarter of 1996 to 48.9% in the comparable period in 1997. Margins
decreased because software sales were high in the same period in 1996; software
is a higher margin product than hardware. System upgrades and enhancements and
services were 39.7% of total sales in the third quarter of 1996 and 85.5% in the
comparable period in 1997.
Selling, general and administrative expenses increased from $3.3 million in
the 1996 period to $4.5 million in the 1997 period as the Company invested in
upgrading its personnel and capabilities primarily in Sales and Marketing. As a
result of these expenses and the lower volume in net sales, selling, general and
administrative expenses were higher as a percentage of sales (76.1%) in the 1997
quarter as compared to the 1996 quarter (51.7%).
Engineering and development expenses increased from $2.3 million in the
1996 quarter to $3.3 million in the 1997 quarter. Engineering and development
expenses reflect the Company's strategy of continued investment in new product
development and product enhancements. As a result of the increase in spending
for engineering development in 1997 and the lower volume in net sales,
engineering and development expenses were higher as a percentage of sales in the
1997 quarter (55.4%) as compared to the 1996 quarter (36.1%).
There was no provision for income taxes in the third quarter of 1997 due to
the loss from operations.
As a result of the above, the Company's net loss for the three months ended
September 30, 1997 was $5.1 million as compared to a net loss of $1.4 million
for the comparable period last year.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1996
- ----
Net sales decreased 11.5% from $16.2 million in the 1996 period to $14.3
million in the 1997 period. Compared to 1996, sales into the VIS market
decreased by $1.9 million and sales into the CPE market decreased by $0.1
million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and
VoiceServer 3110 decreased from those of the prior period by $3.3 million while
sales of system upgrades and enhancements and services increased $1.5 million.
Gross margin as a percentage of net sales decreased to 49.1% in the 1997
period as compared to 63.7% for the same period in 1996. System margins were
down from 48.3% in the 1996 period to 44.7% in 1997 and system upgrades,
enhancements and service margins were down from 73.9% in 1996 to 53.8% in the
comparable period in 1997. Margins were affected by lower than planned
manufacturing volume. System upgrades and enhancements and services were 60.3%
of total sales in 1996 and 78.5% in the comparable period in 1997.
Selling, general and administrative expenses increased from $9.7 million in
1996 to $12.3 million in 1997 as the Company invested in upgrading its personnel
and capabilities primarily in Sales and Marketing. As a result of these expenses
and the lower volume in net sales, selling, general and administrative expenses
were higher as a percentage of sales (85.9%) in 1997 as compared to the
comparable period in 1996 (60.2%).
-8-
<PAGE>
Engineering and development expenses increased from $6.8 million in 1996 to
$8.4 million in the 1997 period. Engineering and development expenses reflect
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1997 and the lower volume in net sales, engineering and
development expenses were higher as a percentage of sales in 1997 (58.5%) as
compared to the comparable period in 1996 (42.1%).
There was no provision for income taxes in the first three quarters of 1997
due to the loss from operations.
As a result of the above, the Company's net loss for the nine months ended
September 30, 1997 was $13.4 million as compared to a net loss of $5.4 million
for the comparable period last year.
Factors That May Affect Future Results
- --------------------------------------
Digital Sound operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
The voice processing and messaging industry is highly competitive, with
rapid technological advances and constantly improving price/performance. As the
markets in which the Company operates continue to grow, the Company is
experiencing an increase in competition, and it expects this trend to continue.
The Company is not one of the largest providers of voice processing and
messaging equipment in the industry. Some of the Company's competitors have
substantially greater technical, marketing and financial resources and, in some
markets, a larger installed base of customers and a wider range of available
applications software.
The voice processing and messaging industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. The Company and the industry are, in general, dependent on the U.S.
domestic telephone companies for a large percentage of revenue. The suppliers
to the telephone company market, which is primarily comprised of 7 regional Bell
operating companies and GTE, have largely been decided for first generation
voice processing requirements.
The market for voice processing and messaging systems is in a period of
transition. Budgetary constraints, uncertainties resulting from the
introduction of new technologies in the telecommunications environment and
changes in the government regulations have increased uncertainties in the
market. Significant changes in the domestic U.S. industry as a result of the
1996 Telecommunications act make planning decisions more difficult and increase
the risk inherent in the planning process.
The Company's operating results may fluctuate for a number of reasons. The
Company has short delivery cycles and as a result does not have a large order
backlog, which makes the forecasting of revenue inherently uncertain. This
uncertainty is compounded because each quarter's revenue results predominantly
from orders booked and shipped during the third month of the quarter. Because
the Company plans its operating expenses, many of which are relatively fixed in
the short term, on the basis of its anticipated revenues, even a relatively
small revenue shortfall may cause a period's results to be substantially below
expectations. Such a revenue shortfall could arise from any number of factors,
including lower than expected demand, supply constraints, delays in the
availability of new products, overall economic conditions or natural disasters.
The international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations and international reseller networks and international service and
support of the Company's products, difficulties or delays in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory, economic
or political changes in international markets. Although the majority of
international transactions are performed through confirmed letters of credit,
due to the competitive environment in the international marketplace, certain
international customers may require longer payment terms; and as a result, days
sales outstanding may periodically extend beyond ninety days on amounts due from
these customers.
-9-
<PAGE>
The development of new technologies and products is increasingly complex
and uncertain, which increases the risk of delays. The introduction of new
systems requires close collaboration and continued technological advancement
involving multiple hardware and software design, manufacturing, marketing and
sales teams within the Company as well as teams at outside suppliers of key
components. The failure of any one of these elements could cause the Company's
new products to fail to meet specifications or to miss the aggressive timetables
that the Company establishes. As the variety and complexity of the Company's
product families increase, the process of planning production and inventory
levels also becomes more difficult. The Company expects to continue investing
heavily in supporting the development effort required to bring new technologies
and products to the market. To support this, substantial financial resources
will be expended.
The Company believes that its production capacity should be sufficient to
support anticipated unit volumes for the foreseeable future. The Company is
primarily engaged in the final assembly and testing of the hardware equipment.
The Company currently buys the majority of its subassembly inventory from a
limited number of suppliers. The failure of these suppliers to provide such
subassemblies on a timely basis and within specifications could have a
materially adverse effect on the Company's business. If the Company is unable
to obtain certain key components, or to effectively forecast customer demand or
manage its inventory, increased inventory obsolescence or reduced utilization of
production capacity could adversely impact the Company's gross margins and
results of operations.
The Company has historically derived a significant portion of its revenue
and operating profit from a relatively small number of customers. Thru
September 30, 1997, the Company derived 57.1% of its revenue from a single
customer. International proposals for large system installations typically
involve a lengthy and complex bidding and selection process, and the ability of
the Company to obtain a particular proposal award is inherently difficult to
predict. The Company believes that the opportunities for these installations
will continue to grow and intends to continue to expand its research and
development, manufacturing, sales and marketing and product support capabilities
in anticipation of such growth. However, the timing and scope of these
opportunities and the pricing and margins associated with any eventual proposal
award are difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may, accordingly, exhibit a
higher degree of volatility than the operating results of other companies in its
industry that have adopted different strategies. Although the Company is
actively pursuing a number of opportunities both in and out of the United
States, both the timing of any eventual opportunities and the probability of the
Company's receipts of significant purchase orders are uncertain. The degree of
dependence by the Company on large orders, and the investment required to enable
the Company to perform such orders, without assurance of continuing order flow
from the same customers and predictability of gross margins on any future
orders, increase the risk associated with its business.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance.
The Company routinely receives communications from third parties asserting
patent or other rights covering the Company's products and technologies. Based
upon the Company's evaluation, it may take no action or it may seek to obtain a
license. In any given case there is a risk that a license will not be available
with terms that the Company considers reasonable, or that litigation will ensue.
The Company expects that, as the number of hardware and software patents issued
continues to increase, and as the Company's business grows, the volume of these
third party communications will also increase.
-10-
<PAGE>
Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, is located near major
earthquake faults which have experienced earthquakes in the past. While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major earthquake or other disaster affecting one or more of the
Company's facilities, it is likely that insurance proceeds would not cover all
of the costs incurred and, therefore, the operations and operating results of
the Company could be adversely affected.
Due to the factors noted above and elsewhere in management's discussion and
analysis of financial condition and results of operations, the Company's future
earnings and Common Stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in a fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's Common Stock. Furthermore, the Company participates in a
highly dynamic industry which often results in volatility of the Company's
Common Stock price.
Finally, the Company has not been operating profitably. The Company's
strategy has been to develop new technology and to expand its marketing
capabilities, with the goal of creating successful new products and marketing
them effectively, thereby returning the Company to profitability. The Company's
on-going investments in technology and marketing require funds and the Company's
financial resources are limited so that the Company's funds will be exhausted if
the Company is unable to raise additional working capital. See "Liquidity and
Capital Resources" below.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended September 30, 1997, net working capital decreased
by $16.0 million to $4.3 million compared to $20.3 million at December 31, 1996.
The level of net working capital resulted principally from a reduction in cash
of $15.3 million, an increase in accounts payable of $1.8 million and an
increase in accrued payroll and other accrued liabilities of $1.0 million. The
decrease in cash reflects the level of the Company's sales combined with the
Company's continued commitment to investment in certain strategic long-term
initiatives focusing on the development of new products, and the strengthening
of the Company' marketing and sales capabilities. The Company's goal is for
these initiatives to begin showing concrete results by no later than the end of
1997. The level of sales achieved by the Company during the first nine months
of 1997 and before has been insufficient to provide the Company with net cash
from operations, and the Company does not expect to generate net cash from
operations in 1997. The Company's strategic initiatives will not succeed in
enabling the Company to generate net cash from operations before the Company's
cash resources have been substantially depleted. The Company is actively
seeking additional financing from a variety of potential sources. Any such
financing is likely to involve a substantial issuance of equity securities or
securities convertible into equity securities and is likely to have a
substantial dilutive effective on the current holders of the Company's Common
Stock and to involve covenants and conditions that would provide various rights
and preferences to the investors in any such financing that would not be shared
by the current holders of the Company's Common Stock. There can be no assurance
that the Company will be able to obtain such additional financing in a timely
manner on terms favorable to the Company, or at all. If the Company is unable
to obtain such financing, it may be required to undertake strategic or
restructuring alternatives that could provide little or not return to the
current holders of the Company's Common Stock.
At September 30, 1997, the Company had cash and investments of $4.7 million
and no long term debt. $1.8 million of this cash was held as collateral under
the sale/leaseback agreements and is classified as "Investment securities" on
the Company's balance sheet for the period ending September 30, 1997. An
additional $1.0 million is held as collateral for a construction loan obtained
by the landlord of the Company's Carpinteria facility. The Company expects this
$1.0 million to be accessible by November 30, 1997, but there can be no
guarantee that this will be the case. During the first three quarters of 1997,
net cash used by operations was $ 12.7 million. Through September 30, 1997
capital expenditures were $ 1.0 million. The Company has never paid any cash
dividends on its stock and anticipates that, for the foreseeable future, it will
continue to retain any earnings for use in the operation of its business.
-11-
<PAGE>
PART II - OTHER INFORMATION
----------------------------
DIGITAL SOUND CORPORATION
-------------------------
Item 1. Legal Proceedings
-----------------
As reported in Note 10 to the Company's financial statements included in
the Company's 1996 Annual Report to Shareholders and incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31,1996, the Company is involved in patent litigation with Theis Research, Inc.
No material developments have occurred in 1997.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
10.49 Line of Credit Agreement between Registrant and Imperial Bank dated
July 28, 1997.
10.50 Security and Loan Agreement Domestic Facility by and between
Registrant and Imperial Bank dated July 28, 1997.
10.51 First Amendment and Waiver to Digital Sound Corporation Credit Terms
and Conditions by and between Registrant and Imperial Bank dated
October 30, 1997.
10.52 First Amendment to Security and Loan Agreement, Domestic Credit by
and between Registrant and Imperial Bank dated October 30, 1997.
10.53 Warrant Purchase Agreement by and between Registrant and Imperial
Bank dated October 30, 1997.
10.54 Antidilution Agreement by and between Registrant and Imperial Bank
dated October 30, 1997.
10.55 Registration Rights Agreement by and between Registrant and Imperial
Bank dated October 30, 1997
b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
-12-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 11, 1997.
DIGITAL SOUND CORPORATION
By /s/ Mark C. Ozur
-------------------------
Mark C. Ozur
President, Chief Executive Officer
By /s/ B. Robert Suh
--------------------------
B. Robert Suh
Vice President, Finance and Chief
Financial Officer
<PAGE>
EXHIBIT 10.49
July 28, 1997
IMPERIAL BANK
695 Town Center Drive
Costa Mesa, California 92626
Subject: Credit Terms and Conditions
Gentlemen:
To induce you ("Bank") to make loans to Digital Sound Corporation (herein called
"Borrower"), and in consideration of any loan or loans you, in your sole
discretion, may make to Borrower, Borrower warrants and agrees as follows:
Borrower Represents and Warrants that:
Existence and Rights. Borrower is a corporation and Borrower is duly organized
and existing and in good standing under the laws of the State of California,
without limit as to the duration of its existence and is authorized and in good
standing to do business in the State of California; Borrower has powers and
adequate authority, rights and franchises to own its property and to carry on
its business as now conducted, and is duly qualified and in good standing in
each State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement. Borrower has
no investment in any other business entity except as shown in the attached
Schedule A-1.
Agreement Authorized. The execution, delivery and performance of this Agreement
are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
No Conflict. The execution, delivery and performance of this Agreement are not
in contravention of or in conflict with any agreement, indenture or undertaking
to which Borrower is a party or by which it or any of its property may be bound
or affected, and do not cause any lien, charge or other encumbrance to be
created or imposed upon any such property by reason thereof.
Litigation. There is no litigation or other proceeding pending or threatened
against or affecting Borrower other than the litigation disclosed in Borrower's
1996 10-K filing, and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority. Borrower also agrees to notify you in writing of any
future litigation threatened against or affecting borrower.
Financial Condition. The balance sheet of Borrower as of June 30, 1997, and the
related profit and loss statement for the six months ended on that date, a copy
of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to you in connection with
this request for credit are true and correct, and said balance sheet and profit
and loss statement truly present the financial condition of Borrower as of the
date thereof and the results of operations for the period covered thereby, and
has been prepared in accordance with generally accepted accounting principles on
a basis consistently maintained. Since such date there have been no material
adverse changes in the financial condition or business of Borrower. Borrower
has no knowledge of any liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrower has not entered into any special
commitments or substantial contracts which are not reflected in said balance
sheet, other than in the ordinary and normal course of its business, which may
have a materially adverse effect upon its financial condition, operations or
business as now conducted.
Title to Assets. Borrower has good title to its assets, and the same are not
subject to any liens or encumbrances other than those permitted by Section C.3
hereof.
<PAGE>
Tax Status. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
Trademarks, Patents. Borrower, as of the date hereof, possesses all necessary
trademarks, trade names, copyrights, patents, patent rights, and licenses to
conduct its business as now operated, without any known conflict with the valid
trademarks, trade names, copyrights, patents and license rights of others.
Regulation U. The proceeds of the notes have not been used to purchase or carry
margin stock (as defined within Regulation U of the Board of Governors of the
Federal Reserve system).
Borrower agrees that so long as it is indebted to you, under borrowings, or
other indebtedness, it will, unless you shall otherwise consent in writing:
Rights and Facilities. Maintain and preserve all rights, franchises and other
authority adequate for the conduct of its business; maintain its properties,
equipment and facilities in good order and repair; conduct its business in an
orderly manner without voluntary interruption and, if a corporation or
partnership, maintain and preserve its existence.
Insurance. Maintain public liability, property damage and workers' compensation
insurance and insurance on all its insurable property against fire and other
hazards with responsible insurance carriers to the extent usually maintained by
similar businesses and/or in the exercise of good business judgment. Borrower
shall provide evidence of property insurance in amounts and types acceptable to
Bank and Bank shall be named as Loss Payee in a Lender's Loss Payable
Endorsement form 438BFU or equivalent
Copyright Filings. Maintain updated and appropriate filings with the United
States Copyright Office on all software currently being licensed or sold.
Borrower shall notify Bank of its updated filings with the United States
Copyright Office within 30 days of the end of each fiscal quarter, and shall
provide Bank or Bank's legal counsel with all necessary information for Bank to
prepare copyright mortgages on such updated filings.
Taxes and Other Liabilities. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
The same are being contested in good faith and by appropriate proceedings in
such manner as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder; and
It shall have set aside on its books reserves (segregated to the extent required
by generally accepted accounting practice) deemed by it adequate with respect
thereto.
Financial Covenants.
Maintain on a quarterly basis a minimum tangible net worth (meaning the excess
of all assets, excluding any value for goodwill, trademarks, patents,
copyrights, proprietary rights, leaseholds, organization expense and other
similar intangible items, over its liabilities less subordinated debt) of not
less than $14,000,000; increasing to $15,000,000 for the quarter ending December
31, 1997, and thereafter;
maintain on a quarterly basis a ratio of total liabilities to tangible net worth
of not greater than .80 to one;
maintain on a quarterly basis net current assets (i.e., working capital) of not
less than $8,000,000, increasing to $9,000,000 beginning with the quarter ending
March 31, 1998, and thereafter;
maintain on a monthly basis unencumbered cash of $6,000,000 through September
30, 1997; $3,000,000 thereafter until borrower achieves two consecutive quarters
of profitability, after which this covenant will be eliminated;
maintain on a quarterly basis a quick ratio (defined as the ratio of cash plus
cash equivalents plus accounts receivable to current liabilities) of not less
than 1.40 to one; and
Not sustain a loss of more than $12,000,000 for the year ending December
31,1997, and shall not incur two consecutive quarterly losses beginning with the
quarter ending March 31, 1998.
Records and Reports. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis consistently
maintained; permit your representatives to have access to,
<PAGE>
and to examine its properties, books and records at all reasonable times during
normal business hours; and furnish you:
As soon as available, and in any event within 25 days after the close of each
month of each fiscal year of Borrower, commencing with the month next ending, a
balance sheet, profit and loss statement and reconciliation of Borrower's
capital accounts as of the close of such period and covering operations for the
portion of Borrower's fiscal year ending on the last day of such period, all in
reasonable detail and stating in comparative form the figures for the
corresponding date and period in the previous fiscal year, prepared in
accordance with generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of Borrower,
subject, however, to year-end audit adjustments;
As soon as available, and in any event within 90 days after the close of each
fiscal year of Borrower, a report of audit of Company as of the close of and for
such fiscal year, all in reasonable detail and stating in comparative form the
figures as of the close of and for the previous fiscal year, with the review of
accountants satisfactory to you;
All 8-K filings within fifteen (15) days of filing with the Securities and
Exchange Commission, and its 10-Q reports as filed with the Securities and
Exchange Commission within forty-five (45) days of the end of each fiscal
quarter; promptly after the same are available, copies of all such proxy
statements, financial statements and reports as Borrower shall send to its
stockholders, if any, and copies of all other such reports which Borrower may
file with the Securities and Exchange Commission or any governmental authority
at any time substituted therefor;
Within 90 days after the end of each fiscal year of Borrower, a certificate of
chief financial officer or partner of Borrower, stating that Borrower has
performed and observed each and every covenant contained in this Letter to be
performed by it and that no event has occurred and no condition then exists
which constitutes an event of default hereunder or would constitute such an
event of default upon the lapse of time or upon the giving of notice and the
lapse of time specified herein; or, if any such event has occurred or any such
condition exists, specifying the nature thereof;
Promptly after the receipt thereof by Borrower, copies of any detailed audit
reports submitted to Borrower by independent accountants in connection with each
annual or interim audit of the accounts of Borrower made by such accountants;
Such other information relating to the affairs of Borrower as you reasonably may
request from time to time.
Borrower agrees that so long as it is indebted to you, it will not, without your
written consent:
Type of Business; Make any substantial change in the character of its business.
Outside Indebtedness. Create, incur, assume or permit to exist any indebtedness
for borrowed moneys other than loans from you except obligations now existing as
shown in the attached Schedule C-2, excluding those being refinanced by your
bank; or sell or transfer, either with or without recourse, any accounts or
notes receivable or any moneys due to become due. Bank will not unreasonably
withhold its accommodation of Borrower's solicitation of debt to be
subordinated, in form and substance satisfactory to Bank, to the obligations of
Borrower to Bank.
Liens and Encumbrances. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
liens for taxes not delinquent and liens in your favor, except as shown in the
attached Schedule C-3
Loans, Investments, Secondary Liabilities. Make any loans or advances to any
person or other entity other than in the ordinary course and normal course of
its business as now conducted or make any investment in the securities of any
person or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
Acquisition or Sale of Business; Merger or Consolidation. Purchase or otherwise
acquire the assets or business of any person or other entity; or liquidate,
dissolve, merge or consolidate, or commence any proceedings therefor; or sell
any assets except in the ordinary and normal course of its business as now
conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
<PAGE>
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
Dividends, Stock Payments. If a corporation, declare or pay any dividend (other
than dividends payable in common stock of Borrower) or make any other
distribution on any of its capital stock now outstanding or hereafter issued or
purchase, or redeem or retire any of such stock.
Lease Liability. Make or incur liability for aggregate rent payments greater
than $100,000 per year under leases of real property and/or personal property
beyond Borrower's obligations as shown in the attached Schedule C-7.
The occurrence of any of the following events of default shall, at your option,
terminate your commitment to lend and make all sums of principal and interest
then remaining unpaid on all Borrower's indebtedness to you immediately due and
payable, all without demand, presentment or notice, all of which are hereby
expressly waived:
Failure to Pay. Failure to pay any installment of principal of or interest on
any indebtedness of Borrower to you.
Breach of Covenant. Failure of Borrower to perform any other term or condition
of this Letter of Inducement binding upon Borrower or any other written
agreement between Borrower and Bank.
Breach of Warranty. Any of Borrower's material representations or material
warranties made herein or any statement or certificate at any time given in
writing pursuant hereto or in connection herewith shall be false or misleading
in any material respect.
Insolvency; Receiver or Trustee. Borrower shall become insolvent; or admit its
inability to pay its debts as they mature; or make an assignment for the benefit
of creditors; or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business.
Judgments, Attachments. Any money judgment, writ or warrant of attachment, or
similar process shall be entered or filed against Borrower or any of its assets
and shall remain unvacated, unbonded or unstayed for a period of 10 days or in
any event later than five days prior to the date of any proposed sale
thereunder.
Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against Borrower and, if instituted
against it, shall be consented to.
Miscellaneous Provisions.
Failure or Indulgence Not Waiver. No failure or delay on the part of Imperial
Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that Imperial Bank may make hereunder, are cumulative to,
and not exclusive of, any rights or remedies otherwise available.
Notice of Default. Promptly notify Imperial Bank in writing of the occurrence
of any event of default hereunder upon the notice and lapse of time.
Business Accounts. Borrower shall maintain all primary business accounts at
Imperial Bank.
4) Governing Law. This Agreement shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
5) Judicial Reference.
<PAGE>
Other than (i) nonjudicial foreclosure and all matters in connection therewith
regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this
Agreement, which controversy, dispute or claim is not settled in writing within
thirty (30) days after the "Claim Date" (defined as the date on which a party
subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "Court"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP (S)170.6. The referee shall (a) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (b) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any decision
rendered by the referee will be final, binding and conclusive and judgment shall
be entered pursuant to CCP (S)644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of
the referee as provided herein, the Superior Court is empowered to issue
temporary and/or provisional remedies, as appropriate.
Except as expressly set forth in this Agreement, the referee shall determine the
manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding.
All proceedings and hearings conducted before the referee, except for trial,
shall be conducted without a court reporter except that when any party so
requests, a court reporter will be used at any hearing conducted before the
referee. The party making such a request shall have the obligation to arrange
for and pay for the court reporter. The costs of the court reporter at the trial
shall be borne equally by the parties.
The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
In the event that the enabling legislation which provides for appointment of a
referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration. The arbitration will
be conducted by a retired judge of the Court, in accordance with the California
Arbitration Act, (S)1280 through (S)1294.2 of the CCP as
<PAGE>
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
Digital Sound Corporation
BY: /s/ B. Robert Suh
Vice President and CFO
<PAGE>
EXHIBIT 10.50
SECURITY AND LOAN AGREEMENT
Domestic Credit
(Accounts Receivable)
This Agreement is entered into between DIGITAL SOUND CORPORATION, a California
corporation, (herein called "Borrower") and IMPERIAL BANK (herein called
"Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
50 % of Eligible Accounts
and in no event more than $2,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of one-half &
00/100 percent (0.5%) per annum in excess of the rate of interest which
Bank has announced as its prime lending rate ("Prime Rate") which shall
vary concurrently with any change in such Prime Rate. Interest shall be
computed at the above rate on the basis of the actual number of days during
which the principal balance of the loan account is outstanding divided by
360, which shall for interest computation purposes be considered one year.
Bank at its option may demand payment of any or all of the amount due under
the Loan Account including accrued but unpaid interest at any time. Such
notice may be given verbally or in writing and should be effective upon
receipt by Borrower. The amount of interest payable each month by Borrower
shall not be less than a minimum monthly charge of $250.00. Bank is hereby
authorized to charge Borrower's deposit account(s) with Bank for all sums
due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
B. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
C. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
120 days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts if
the account debtor or any other person liable in connection therewith
is insolvent, subject to bankruptcy or receivership proceedings or has
made an assignment for the benefit of creditors or whose credit
standing is unacceptable to Bank and Bank has so notified Borrower.
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall determine are eligible from time to time.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security
therefor, and hereby grants to Bank a continuing security interest in all
moneys in the
<PAGE>
Collateral Account referred to in Section 6 hereof, as security for any and
all obligations of Borrower to Bank, whether now owing or hereafter
incurred and whether direct, indirect, absolute or contingent. So long as
Borrower is indebted to Bank or Bank is committed to extend credit to
Borrower, Borrower will execute and deliver to Bank such assignments,
including Bank's standard forms of Specific or General Assignment covering
individual Accounts, notices, financing statements, and other documents and
papers as Bank may require in order to affirm, effectuate or further assure
the assignment to Bank of the Collateral or to give any third party,
including the account debtors obligated on the Accounts, notice of Bank's
interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower will collect with diligence all Borrower's Accounts,
provided that no legal action shall be maintained thereon or in connection
therewith without Bank's prior written consent. Any collection of Accounts
by Borrower, whether in the form of cash, checks, notes, or other
instruments for the payment of money (properly endorsed or assigned where
required to enable Bank to collect same), shall be in trust for Bank, and
Borrower shall keep all such collections separate and apart from all other
funds and property so as to be capable of identification as the property of
Bank and deliver said collections daily to Bank in the identical form
received. The proceeds of such collections when received by Bank may be
applied by Bank directly to the payment of Borrower's Loan Account or any
other obligation secured hereby. Any credit given by Bank upon receipt of
said proceeds shall be conditional credit subject to collection. Returned
items at Bank's option may be charged to Borrower's general account. All
collections of the Accounts shall be set forth on an itemized schedule,
showing the name of the account debtor, the amount of each payment and such
other information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower may continue its present policies with respect to
returned merchandise and adjustments. However, Borrower shall immediately
notify Bank of all cases involving returns, repossessions, and loss or
damage of or to merchandise represented by the Accounts and of any credits,
adjustments or disputes arising in connection with the goods or services
represented by the Accounts and, in any of such events, Borrower will
immediately pay to Bank from its own funds (and not from the proceeds of
Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes Subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held Subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon; (iii) Permit representatives of Bank to inspect the
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location and of each office of Borrower
at which records of Borrower relating to the Accounts are kept; (vii)
Provide, maintain and deliver to Bank policies
<PAGE>
insuring the Collateral against loss or damage by such risks and in such
amounts, forms and companies as Bank may require and with loss payable
solely to Bank, and, in the event Bank takes possession of the Collateral,
the insurance policy or policies and any unearned or returned premium
thereon shall at the option of Bank become the sole property of Bank, such
policies and the proceeds of any other insurance covering or in any way
relating to the Collateral, whether now in existence or hereafter obtained,
being hereby assigned to Bank; (viii) in the event the unpaid balance of
Borrower's Loan Account shall exceed the maximum amount of outstanding
loans to which Borrower is entitled under Section 1 hereof, Borrower shall
immediately pay to Bank, from its own funds and not from the proceeds of
Collateral, for credit to Borrower's Loan Account the amount of such
excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors,
and Borrower does hereby make, constitute and appoint Bank its irrevocable,
true and lawful attorney with power to receive, open and dispose of all
mail addressed to Borrower, to endorse the name of Borrower upon any checks
or other evidences of payment that may come into the possession of Bank
upon the Accounts to endorse the name of the undersigned upon any document
or instrument relating to the Collateral; in its name or otherwise, to
demand, sue for, collect and give acquittances for any and all moneys due
or to become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commenced by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at its option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section I hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
<PAGE>
*16. Additional Provisions: See Addendum and Reference Provision attached.
Executed this 28th day of July, 1997
Digital Sound Corporation
/s/ B. Robert Suh
B. Robert Suh, Vice President, CFO & Corporate Secretary
Imperial Bank
/s/ Clinton E. Anderson
Clinton E. Anderson, Commercial Loan Officer
<PAGE>
EXHIBIT 10.51
First Amendment and Waiver to Digital Sound Corporation
Credit Terms and Conditions
This First Amendment and Waiver ("Amendment") amends that certain Credit Terms
and Conditions dated July 28, 1997 ("Agreement"), executed by Digital Sound
Corporation in favor of Imperial Bank ("Bank") as follows:
The Bank hereby waives those covenant violations detailed in that letter from
the Bank to the Borrower dated October 24, 1997.
Section B.5 is amended in its entirety to read as follows:
5) Financial Covenants.
The covenants contained in a.,b.,c.,e. and f. below are to be measured
beginning with the quarter ending December 31, 1997, and the covenant contained
in d. below is to be measured on a monthly basis.
a. Maintain on a quarterly basis a minimum tangible net worth (meaning
the excess of all assets, excluding any value for goodwill, trademarks, patents,
copyrights, proprietary rights, leaseholds, organization expense and other
similar intangible items, over its liabilities less subordinated debt) of not
less than $18,000,000;
b. maintain on a quarterly basis a ratio of total liabilities to tangible
net worth of not greater than 1.50 to one;
c. maintain on a quarterly basis net current assets (i.e., working
capital) of not less than $10 ,000,000;
d. maintain on a monthly basis liquidity of $5,000,000, defined as
unencumbered demand deposit balances with Bank and investment grade securities
beginning the earlier of Borrower's receipt of direct equity investments
totaling $15,000,000 or December 31, 1997;
e. maintain on a quarterly basis a quick ratio (defined as the ratio of
cash plus cash equivalents plus accounts receivable to current liabilities) of
not less than 1.50 to one; and
f. not sustain a loss, as measured in accordance with generally accepted
accounting principles, of more than $4,000,000 in any one fiscal quarter.
3. The following new Section B.6(g) and new Section B.6(h) are hereby added to
Section 6 of the Agreement:
"(g). As soon as available, and in any event within 15 days after the close of
each month, a liquidity schedule and supporting month-end statements for all
demand deposit accounts and investments as required under this Agreement."
"(h). As soon as available, and in any event within 45 days after the end of
each quarter of each fiscal year of Borrower, consolidating balance sheet,
profit and loss statement and reconciliation of Borrower's capital accounts, and
a completed Compliance Certificate in the form of Schedule B.6.h attached
hereto, including the calculations of the financial covenants, signed by the
Chief Financial Officer of Borrower, stating that Borrower has performed and
observed each and every covenant contained in this Agreement to be performed
hereunder and that no event has occurred and no condition then exists which
constitutes an Event of Default hereunder or would constitute such an Event of
Default upon the lapse of time or upon the giving of notice and the lapse of
time specified herein; or, if any such event has occurred or any such condition
exists, specifying the nature thereof."
4. Section C.7 is amended by deleting the period from the end of the sentence
and adding the following phrase thereto:
"and except for lease obligations incurred in conjunction with Borrower's
Service Bureau Agreement with GTE Card Service Incorporated dated February 24,
1997, for which Borrower may incur lease obligations with annual rent payments
of up to $400,000 per year."
5. Except as provided above, the Agreement remains unchanged.
<PAGE>
6. This Agreement may be executed in one or more counterparts, and by
different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute one and the same Agreement.
7. This Amendment is effective as of October 30, 1997, and the parties hereby
confirm that the Agreement as amended is in full force and effect.
Digital Sound Corporation "Borrower"
BY: /s/ B. Robert Suh
TITLE: Vice President and CFO
Imperial Bank "Bank"
BY: /s/ Clinton E. Anderson
Clinton E. Anderson, Assistant Vice President
<PAGE>
EXHIBIT 10.52
FIRST AMENDMENT TO
SECURITY AND LOAN AGREEMENT, DOMESTIC CREDIT
AND ADDENDUM THERETO
This First Amendment ("Amendment") amends that certain Security and Loan
Agreement, Domestic Credit, dated July 28, 1997, by and between IMPERIAL BANK
("Bank") and DIGITAL SOUND CORPORATION ("Borrower") and the Addendum, "Exhibit
A," (the Addendum") thereto, of even date, (collectively herein the Security and
Loan Agreement and the Addendum are referred to as the "Agreement") as follows:
1. Section 1 of the Security and Loan Agreement, Domestic Credit, is amended by
deleting the figure "50%" therefrom and substituting the figure "65%" therefore,
and by deleting the figure "$2,000,000" therefrom and substituting the figure
"$5,000,000 " therefore.
2. The Addendum is replaced in its entirety with the following:
ADDENDUM TO SECURITY AND LOAN AGREEMENT DOMESTIC CREDIT ("SECURITY AND LOAN
AGREEMENT, DOMESTIC CREDIT") BETWEEN DIGITAL SOUND CORPORATION AND IMPERIAL
BANK.
DATED: OCTOBER 30, 1997
This Addendum is made and entered into October 30, 1997 between DIGITAL SOUND
CORPORATION ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and
supplements the Security and Loan Agreement, Domestic Credit, and replaces the
Addendum dated July 28, 1997. In the event of any inconsistency between the
terms herein and the terms of the Security and Loan Agreement, Domestic Credit,
the terms herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set forth in the
Security and Loan Agreement.
A. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, Domestic Credit, to make advances against Eligible Accounts shall
expire on June 30, 1998 ("Maturity"), subject to Bank's right to renew said
commitment at its sole discretion. Any renewal of the commitment shall not be
binding upon the Bank unless it is in writing and signed by an officer of the
Bank.
B. Conditions Precedent. Bank's obligation to make any advances to Borrower
shall be subject to the following Conditions Precedent:
1. Borrower shall cause any material copyright registerable works including
software to be promptly registered in the U.S. Copyright Office and
execute and deliver a mortgage of copyrights and amendments appropriate
and acceptable to Bank to perfect Bank's security interest in all
proceeds of such works; and
2. Borrower shall execute a Warrant Agreement based on Bank's standard
documentation and with terms acceptable to Bank for a warrant to
purchase 300,000 shares of Borrower's stock at $1.00 per share, with all
of Bank's associated costs to be borne by Borrower.
C. Credit Limit. Pursuant to the provisions in the Security and Loan
Agreement, Domestic Credit, Bank will advance up to the following amounts (the
"Credit Limit"):
1. up to $1,000,000 in aggregate upon execution of this Agreement;
2. up to $3,000,000 in aggregate upon Bank's receipt and satisfactory
review of a definitive sales agreement between Borrower and GTE or its
subsidiaries in form and substance as generally represented to Bank by
Borrower (the "GTE Agreement"), as determined by Bank; and
3. up to $5,000,000 in aggregate upon receipt by Borrower of an investment
in form and substance to Bank's satisfaction of at least $15,000,000, or
evidence to Bank's satisfaction that such an investment is imminent (the
"Private Placement").
The applicable Credit Limit refers to all advances made by Bank to Borrower,
including advances under this and any other credit facility and including all
outstandings under the SBLC Sublimit (as defined in Section D herein).
<PAGE>
D. Standby Letter of Credit Sublimit. The Credit Limit shall include the sum of
all outstanding standby letters of credit issued for the account of Borrower, to
a maximum of $500,000 as a sublimit of borrowings hereunder (the "SBLC
Sublimit"), provided that the maturity of any standby letters of credit issued
hereunder shall not exceed the Maturity. Bank may, in its sole discretion,
advance as loans, any amounts that are or may become due or owing to Bank in
connection with any standby letters of credit. Borrower shall execute all
standard form applications and agreements of Bank in connection with the
issuance of standby letters of credit, and, without limiting any of the terms of
such applications and agreements, Borrower will pay all standard fees and
charges of Bank in connection with the issuance of and amendments to the standby
letters of credit.
E. Bank will advance up to 65% of Eligible Accounts up to maximum of
$5,000,000, provided that total borrowings shall not collectively exceed the
Credit Limit as defined herein. Eligible Accounts shall only include such
accounts as Bank in its sole discretion shall determine are eligible from time
to time. "Eligible Accounts" shall also NOT include any of the following:
1. Accounts over 120 days past invoice date;
2. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower;
3. All Accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists;
4. Accounts with respect to which 25% or more of the account debtor's total
accounts or obligations outstanding to Borrower are more than 120
calendar days from invoice date;
5. For Accounts representing more than 15% of total accounts receivable,
the balance in excess of the 15% is not eligible; except Accounts owed
by all entities affiliated with GTE, which Account balances shall
collectively be included as eligible up to 45% of total accounts
receivable, and Accounts owed by all entities affiliated with Pacific
Bell, which Account balances shall collectively be included as eligible
up to 30% of total accounts receivable;
6. C.O.D. Accounts;
7. Credit balances greater than 120 days from invoice date;
8. Consignment or guaranteed sales;
9. Bill and hold Accounts;
10. Equipment rental offsets;
11. Evaluation units;
12. Maintenance contract receivables;
13. Salesman's accounts for promotional purposes;
14. Collection Accounts;
15. Retentions;
16. Foreign Accounts, except those covered by credit insurance or evidenced
by letter of credit for goods that have been shipped;
17. U.S. Government receivables.
F. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
1. Within 10 working days from each month-end, deliver to Bank a detailed
accounts receivable aging reconciled to the general ledger of Borrower,
a detailed accounts payable aging reconciled to the Borrower's general
ledger and
<PAGE>
setting forth the amount of any book overdraft or the amount of checks
issued but not sent, and cash balance report with attached copies of
bank statements;
a. The preceding will be supported by the following Bank forms: AC-1
Accounts Receivable and Inventory Transaction Report, AC-11
Computation of Ineligible Accounts Receivable, and AC-12 Monthly
Accounts Receivable Reconciliation;
b. All advances will be supported by the following Bank forms submitted
to Bank on a daily basis, in addition to the preceding forms: AC-1
Accounts Receivable and Inventory Transaction Report, AC-2 Schedule
of Accounts Receivable Assigned, and AC-3 Schedule of Collections;
2. On a quarterly basis, provide Bank with an alphabetized list of
customers including addresses;
3. Comply with additional financial reporting requirements as discussed in
the Credit Terms and Conditions dated July 28, 1997 and all amendments
thereto.
G. Notwithstanding the provisions of the Security and Loan Agreement (Accounts
Receivable and/or Inventory), the following provision shall apply to all
obligations of the Borrower to the Bank: All of Borrower's receipts from its
account debtors shall be received at Borrower's lockbox with Bank pursuant to
the Remittance Banking Service Agreement dated August 14, 1997 between Bank and
Borrower. All sums received by Bank, whether from Borrower or from Borrower's
account debtors, shall be applied to the outstanding loan balance on the 2nd
(second) day following receipt thereof by the Bank. Interest shall continue to
accrue on all loans outstanding pursuant to the Loan and Security Agreement
until sums received are applied as herein provided.
H. The rate of interest applicable to the Loan Account shall be as follows:
1. 2.00% per year in excess Bank's Prime Rate until Bank's satisfactory
review of Borrower's GTE Agreement and Bank's satisfaction that the
Private Placement has been received by Borrower, and
2. 0.50% per year in excess of Bank's Prime Rate thereafter.
"Prime Rate" is defined as the rate of interest which Bank has announced as its
prime lending rate which shall vary concurrently with any change in such Prime
Rate. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance of the loan account is
outstanding divided by 360, which shall, for interest computation purposes, be
considered one year. Should Borrower be in default, Bank at its option may
demand payment of any or all of the amount due under the Loan Account including
accrued but unpaid interest, at any time. Notice of such demand may be given
verbally or in writing and should be effective upon receipt by Borrower. The
default rate of interest shall be five percent per year in excess of the rate
otherwise applicable.
I. A facility fee of $10,000 has been paid. A non-usage fee of 0.50% per annum
will be calculated and assessed on a quarterly basis, using Borrower's average
outstanding daily loan balance per quarter subtracted from $5,000,000, the
product of which will be multiplied by the pro-rata non-usage fee as calculated
on a 360 day basis. The first assessment of the non-usage fee will be based on
the period from August 14, 1997 to November 30, 1997, and quarterly assessments
thereafter will begin and be based on the quarter ending February 28, 1997.
J. Late Charges. If any installment payment, interest payment, principal
payment or principal balance due hereunder is delinquent ten or more days,
Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so
due and unpaid, in addition to the payment; but nothing in this paragraph is to
be construed as any obligation on the part of the Bank to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
All payments shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
K. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or
delay on the part of your Bank or any holder of Notes Issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof or of any other right,
power or privilege. All rights and remedies existing under this agreement or
any not issued in connection with a loan that your Bank may make hereunder, are
cumulative to, not exclusive of, any rights or remedies otherwise available.
<PAGE>
L. Notice of Default. Borrower shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
M. Governing Law; Judicial Reference.
1. Governing Law. This Agreement shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to principles
of conflicts of law.
2. Judicial Reference. The provisions of Section E5, Judicial Reference of
the Credit Terms and Conditions Agreement dated July 28, 1997, executed
by the Borrower in favor of the Bank, are incorporated herein by
reference.
N. This Addendum is executed by and on behalf of the parties as of the date
first above written.
3. This Agreement may be executed in one or more counterparts, and by
different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute one and the same Agreement.
4. This Amendment is effective as of October 30, 1997, and the parties hereby
confirm that the Agreement as amended is in full force and effect.
DIGITAL SOUND CORPORATION "BORROWER"
By: /S/ B. Robert Suh
------------------------------
Title: Vice President and CFO
------------------------------
IMPERIAL BANK "BANK"
By: /s/ Clinton E. Anderson
------------------------------
Clinton E. Anderson
Title: Assistant Vice President
EXHIBIT "A"
ADDENDUM TO SECURITY AND LOAN AGREEMENT DOMESTIC FACILITY ("SECURITY AND LOAN
AGREEMENT") BETWEEN DIGITAL SOUND CORPORATION AND IMPERIAL BANK.
DATED: JULY 28, 1997
This Addendum is made and entered into JULY 28, 1997 between DIGITAL SOUND
CORPORATION ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and
supplements the Security and Loan Agreement. In the event of any inconsistency
between the terms herein and the terms of the Security and Loan Agreement, the
terms herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set forth in the
Security and Loan Agreement.
Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on June 30,
1998, subject to Bank's right to renew said commitment at its sole discretion.
Any renewal of the commitment shall not be binding upon the Bank unless it is in
writing and signed by an officer of the Bank.
<PAGE>
As a condition precedent to Bank's obligation to make any advances to Borrower,
Borrower shall, among other things, cause any material copyright registerable
works including software to be promptly registered in the U.S. Copyright Office
and execute and deliver a mortgage of copyrights and amendments appropriate and
acceptable to Bank to perfect Bank's security interest in all proceeds of such
works.
A. Should there be a default under the Security and Loan Agreement, the Credit
Terms and Conditions, the General Security Agreement, the Security Agreement for
the Export-Import Bank of the United States ("Eximbank") facility executed by
Borrower or under any note executed by Borrower in favor of Bank, all
obligations, loans and liabilities of Borrower to Bank, due or to become due,
whether now existing or hereafter arising, shall at the option of the Bank,
become immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and remedies.
B. Pursuant to the provisions in the Security and Loan Agreement and this
Addendum, Bank will advance up to $2,000,000 in the aggregate outstanding at any
one time within the following limitations:
1. $500,000 ON A REVOLVING BASIS, OR
2. $2,000,000 ON A CASH-SECURED BASIS, OR
3. $2,000,000 ON A STREAMLINE BASIS.
Borrower may have advances outstanding at the same time under 1 and 2 above,
provided the aggregate amount outstanding thereunder may not exceed $2,000,000.
Borrower may not have advances outstanding at the same time under 1 and 3 or 2
and 3.
Advances made on a Revolving basis shall be made at Borrower's request so long
as no event of default has occurred hereunder. Advances made on a Cash-secured
basis shall be made at Borrower's request so long as no event of default has
occurred hereunder Such advances shall require Borrower to open with and
pledge to Bank in form and substance satisfactory to Bank, a certificate of
deposit for the amount of the advance and with a minimum maturity of 30 days.
Advances made on a STREAMLINE BASIS WILL BE ADVANCED UP TO 50% OF ELIGIBLE
ACCOUNTS UP TO MAXIMUM OF $2,000,000. Eligible Accounts shall only include such
accounts as Bank in its sole discretion shall determine are eligible from time
to time. "Eligible Accounts" shall also NOT include any of the following:
1. Accounts over 120 days past invoice date;
2. Accounts with respect to which the account debtor is an officer, director,
shareholder, employee, subsidiary or affiliate of Borrower;
3. All accounts sold to and purchased from a company of common name/ownership,
whereby a potential offset exists;
4. Accounts with respect to which 25% or more of the account debtor's total
accounts or obligations outstanding to Borrower are more than 120 calendar
days from invoice date;
5. For Accounts representing more than 15% of total accounts receivable, the
balance in excess of the 15% is not eligible; except GTE and Pacific Bell
which will each have a 30% limit;
6. C.O.D. Accounts;
7. Credit balances greater than 120 days from invoice date;
8. Consignment or guaranteed sales;
9. Bill and hold Accounts;
10. Equipment rental offsets;
11. Evaluation units;
<PAGE>
12. Maintenance contract receivables;
13. Salesman's accounts for promotional purposes;
14. Collection Accounts;
15. Retentions;
16. Foreign Accounts;
17. U.S. Government receivables.
C. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
1. Within 10 working days from each month-end, deliver to Bank a detailed
accounts receivable aging reconciled to the general ledger of Borrower,
a detailed accounts payable aging reconciled to the Borrower's general
ledger and setting forth the amount of any book overdraft or the amount
of checks issued but not sent, and cash balance report with attached
copies of bank statements;
a. The preceding will be supported by the following Bank forms: AC-1
Accounts Receivable And Inventory Transaction Report, AC-11
Computation Of Ineligible Accounts Receivable, and AC-12 Monthly
Accounts Receivable Reconciliation;
b. Any advances made on a Streamline basis will be supported by the
following Bank forms submitted to Bank on a daily basis, in addition
to the preceding forms: AC-1 Accounts Receivable And Inventory
Transaction Report, AC-2 Schedule Of Accounts Receivable Assigned,
and AC-3 Schedule Of Collections;
2. On a quarterly basis, provide Bank with an alphabetized list of
customers including addresses;
3. Comply with additional financial reporting requirements as discussed in
the Credit Terms and Conditions dated July 28, 1997.
D. NOTWITHSTANDING THE PROVISIONS OF THE SECURITY AND LOAN AGREEMENT (ACCOUNTS
RECEIVABLE AND/OR INVENTORY), THE FOLLOWING PROVISION SHALL APPLY TO ALL
STREAMLINE OBLIGATIONS OF THE BORROWER TO THE BANK: ALL OF BORROWER'S RECEIPTS
FROM ITS ACCOUNT DEBTORS SHALL BE RECEIVED AT BORROWER'S LOCKBOX WITH BANK
PURSUANT TO THE REMITTANCE BANKING SERVICE AGREEMENT DATED , 1997 BETWEEN
BANK AND BORROWER. ALL SUMS RECEIVED BY BANK, WHETHER FROM BORROWER OR FROM
BORROWER'S ACCOUNT DEBTORS, SHALL BE APPLIED TO THE OUTSTANDING LOAN BALANCE ON
THE 2ND (SECOND) DAY FOLLOWING RECEIPT THEREOF BY THE BANK. INTEREST SHALL
CONTINUE TO ACCRUE ON ALL LOANS OUTSTANDING PURSUANT TO THE LOAN AND SECURITY
AGREEMENT UNTIL SUMS RECEIVED ARE APPLIED AS HEREIN PROVIDED.
E. The rate of interest applicable to the Loan Account shall be 0.50% per year
in excess of the rate of interest which Bank has announced as its prime lending
rate ("Prime Rate") which shall vary concurrently with any change in such Prime
Rate. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance of the loan account is
outstanding divided by 360, which shall, for interest computation purposes, be
considered one year. Should Borrower be in default, Bank at its option may
demand payment of any or all of the amount due under the Loan Account including
accrued but unpaid interest, at any time. Notice of such demand may be given
verbally or in writing and should be effective upon receipt by Borrower. The
default rate of interest shall be five percent per year in excess of the rate
otherwise applicable.
F. A fee of $10,000, less any remaining balances from Borrower's $10,000 good
faith deposit, is due upon execution hereof. A non-usage fee of 0.50% per
annum will be calculated and assessed on a quarterly basis using Borrower's
average outstanding daily loan balance per quarter.
G. Late Charges. If any installment payment, interest payment, principal
payment or principal balance due hereunder is delinquent ten or more days,
Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so
due and
<PAGE>
unpaid, in addition to the payment; but nothing in this paragraph is to be
construed as any obligation on the part of the Bank to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
All payments shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
H. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or
delay on the part of your Bank or any holder of Notes Issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof or of any other right,
power or privilege. All rights and remedies existing under this agreement or
any not issued in connection with a loan that your Bank may make hereunder, are
cumulative to, not exclusive of, any rights or remedies otherwise available.
I. Notice of Default. Borrower shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
J. Governing Law; Judicial Reference.
1. Governing Law. This Agreement shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to principles
of conflicts of law.
2. Judicial Reference. The provisions of Section E5, Judicial Reference of
the Credit Terms and Conditions Agreement dated July 28, 1997, executed
by the Borrower in favor of the Bank, are incorporated herein by
reference.
This Addendum is executed by and on behalf of the parties as of the date first
above written.
DIGITAL SOUND CORPORATION "BORROWER"
By: /s/ B. Robert Suh
--------------------------------
Title: Vice President and CFO
--------------------------------
IMPERIAL BANK "BANK"
By: /s/ Clinton E. Anderson
--------------------------------
Title: Assistant Vice President
--------------------------------
<PAGE>
EXHIBIT 10.53
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Digital Sound Corporation, a California Corporation
Number of Shares: Three Hundred Thousand (300,000)
Class of Stock: Common Stock (subject to Section 1.7)
Initial Exercise Price: One Dollar ($1.00) per share
Issue Date: October 30, 1997
Expiration Date: October 30, 2002 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration and pursuant to that certain First
Amendment to Security and Loan Agreement, Domestic Credit and Addendum Thereto,
dated October 30, 1997, IMPERIAL BANK or registered assignee ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the trading day immediately before Holder delivers its
Notice of Exercise to the Company. If the Shares are not regularly traded in a
public market, the Board of Directors of the Company shall determine fair market
value in its reasonable good faith judgment. The foregoing notwithstanding, if
Holder advises the Board of Directors in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the valuation of such
investment banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking firm shall be
paid by the Company. In all other circumstances, such fees and expenses shall
be paid by Holder.
1.4 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.5 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
<PAGE>
1.6.1. "Acquisition". For the purpose of this Warrant, "Acquisition"
-----------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.6.2. Assumption of Warrant. If upon the closing of any Acquisition
---------------------
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.6.3. Nonassumption. If upon the closing of any Acquisition the
-------------
successor entity does not assume the obligations of this Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 as of the closing date of the Acquisition and thereafter Holder
shall participate in the Acquisition on the same terms as other holders of the
same class of securities of the Company.
1.6.4. Purchase Right. Notwithstanding the foregoing, at the
--------------
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
1.7 Adjustment From Issuance of Convertible Preferred Stock. If on or
--------------------------------------------------------
before April 30, 1998, the Company sells and issues to any investors,
convertible preferred stock with aggregate gross proceeds to the Company of at
least one million dollars ($1,000,000), this Warrant shall concurrent with the
issuance of such shares of convertible preferred stock automatically be adjusted
to instead be exercisable for shares of the same series and class and bearing
the same rights, preferences, and privileges, of such shares of stock, with the
Warrant Price (per share of Common Stock into which such convertible preferred
stock may be converted) hereunder adjusted to equal the lesser of the Exercise
Price then in effect or the per share (per share of Common Stock into which such
convertible preferred stock may be converted) purchase price of such stockand
the number of such shares subject to this Warrant adjusted to equal (i) Three
hundred thousand dollars ($300,000), divided by (ii) such modified per share
Warrant Price. The terms of the Imperial Bank Anti-Dilution Agreement attached
hereto as Ex. A shall not apply to such issuance of preferred stock.
1.8 Fractional Shares. The Company shall not be required to issue any
-----------------
fractional Warrant Share on the exercise of a Warrant. If any fraction of a
share would, except for the provisions of this Section 1 be issuable on the
exercise of a Warrant, the Company shall pay an amount in cash equal to the fair
value of one Share on the date immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, not otherwise provided for in Sections 2.1 and 2.3
hereof, Holder shall be entitled to receive, upon exercise or conversion of this
Warrant, the number and kind of securities and property that Holder would have
received for the Shares if this Warrant had been exercised immediately before
such reclassification, exchange, substitution, or other event. Such an event
shall include any automatic conversion of the outstanding or issuable securities
of the Company of the same class or series as the Shares to common stock
pursuant to the terms of the Company's Articles of Incorporation upon the
closing of a registered public offering of the Company's common stock. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be
<PAGE>
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
---------------------------------
combined or consolidated, by reverse stock split, reclassification or otherwise,
into a lesser number of shares, the Warrant Price shall be proportionately
increased and the number of shares proportionately decreased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on Exhibit B, if attached, in the
event of Diluting Issuances (as defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder that all Shares which may be issued upon the exercise of
the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances arising from obligations or actions of the Company except for
restrictions on transfer provided for herein or under applicable federal and
state securities laws or arising from obligations or actions of the Holder.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 10 business days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 10 business days prior written notice of the date
when the same will take place (and specifying the date on which the holders of
common stock will be entitled to exchange their common stock for securities or
other property deliverable upon the occurrence of such event); and (3) in the
case of the matter referred to in (e) above, the same notice as is given to the
holders of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant the
------------------
Company shall deliver to the Holder (a) promptly after mailing, copies of all
communiques to the shareholders of the Company, (b) within ninety (90) days
after the end of each fiscal year of the Company, the annual audited financial
statements of the Company certified by independent public accountants of
recognized standing and (c) within forty-five (45) days after the end of each of
the first three quarters of each fiscal year, the Company's quarterly, unaudited
financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
-----------------------------------------------------
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit B.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
--------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above. The Company shall give Holder written notice of Holder's right to
exercise this Warrant in the form attached as Appendix 2 not more than 90 days
and not less than 30 days before the Expiration Date. If the notice is not so
given, the Expiration Date shall automatically be extended until 30 days after
the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents to the Company in writing that it has complied with Rule 144(d) and
(e) in reasonable detail, the selling broker represents that it has complied
with Rule 144(f), and the Company is provided with a copy of Holder's notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company. Prior to any proposed transfer of a Warrant or the Warrant Shares,
if such transfer is not made pursuant to an effective Registration Statement
under the Securities Act of 1933, as amended (the "Act"), or an opinion of
counsel, reasonably satisfactory in form and substance to the Company, that the
Warrant or Warrant Shares may be sold publicly without registration under the
Act, the Warrant Holder will, if requested by Company, deliver to the Company:
(i) an investment representation reasonably satisfactory to the
Company signed by the proposed transferee;
(ii) an agreement by the proposed transferee to the impression of the
restrictive investment legend set forth in Section 4.2 on the Warrant
Certificate or the certificate representing the Warrant Shares;
(iii) an agreement by the proposed transferee that the Company may
place a notation in the stock books of the Company or a "stop transfer order"
with any transfer agent or registrar with respect to the Warrant Shares; and
(iv) an agreement by such transferee to be bound by the provisions of
this Section 4.4 relating to the transfer of the Warrant or Warrant Shares.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. 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.
<PAGE>
4.7 Attorneys' Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
4.9 Counterparts. This Warrant Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
DIGITAL SOUND CORPORATION
By: /s/ B. Robert Suh
-----------------------------
Name: B. Robert Suh
-----------------------------
Title: Vice President and CFO
-----------------------------
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _____________ shares of the
Common Stock of Digital Sound Corp. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised
with respect to ________________ of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANK
- -----------------------------
(Signature)
- ---------------
(Date)
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
--------------------------------------
<PAGE>
___________________,
Chief Financial Officer
Controllers Department
Imperial Bank
P.O. Box 92991
Los Angeles, CA 90009
Dear Gentleperson:
This is to advise you that the Warrant issued to you described below will
expire on DATE.
Issuer: Digital Sound Corp.
Issue Date: DATE
Class of Security Issuable: CLASS
Exercise Price Per Share: PRICE
Number of Shares Issuable: NUMBER OF SHARES
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
DIGITAL SOUND CORPORATION
By:_____________________________
Its:____________________________
<PAGE>
EXHIBIT 10.54
EXHIBIT A
IMPERIAL BANK
-------------
ANTIDILUTION AGREEMENT
----------------------
This Antidilution Agreement is entered into as of October 30, 1997, by and
between Imperial Bank ("Purchaser") and Digital Sound Corporation ("the
Company").
RECITALS
--------
A. Concurrently with the execution of this Antidilution Agreement, the
Purchaser is purchasing from the Company a Warrant to Purchase Stock (the
"Warrant") pursuant to which Purchaser has the right to acquire from the Company
the Shares (as defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and the Company desire to
set forth the adjustment in the number of Shares issuable upon exercise of the
Warrant as a result of a Diluting Issuance.
C. Capitalized terms used herein shall have the same meaning as set forth
in the Warrant.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Definitions. As used in this Antidilution Agreement, the following
terms have the following respective meanings:
(a) "Option" means any right, option or warrant to subscribe for, purchase
or otherwise acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of indebtedness, shares of
stock or other securities directly or indirectly convertible into or
exchangeable for common stock.
(c) "Issue" means to grant, issue, sell, assume or fix a record date for
determining persons entitled to receive any security (including Options),
whichever of the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock (including reissued
shares) Issued (or deemed to be issued pursuant to Section 2) after the date of
the Warrant. Additional Common Shares does not include, however, any common
stock Issued in a transaction described in Sections 2.1, 2.2 and 2.3 of the
Warrant; any common stock Issued upon conversion of preferred stock outstanding
on the date of the Warrant; the Shares; or common stock Issued as incentive or
in a nonfinancing transaction to employees, officers, directors or consultants
to the Company.
(e) "Diluting Issuances" means any issuance of securities, debt, equity, or
otherwise, where the Company issues Additional Common Shares after the date of
the Warrant and the consideration per Additional Common Share (determined
pursuant to Section 9) is less than the Warrant Price in effect immediately
before such Issue other than resulting from or in connection with an issuance of
Preferred Stock provided for in Section 1.7 of the Warrant
2. Deemed Issuance of Additional Common Shares. The shares of common
-------------------------------------------
stock ultimately Issuable upon exercise of an Option (including the shares of
common stock ultimately Issuable upon conversion or exercise of a Convertible
Security Issuable pursuant to an Option) are deemed to be issued when the Option
is issued. The shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security (other than a Convertible Security Issued
pursuant to an Option) shall be deemed issued upon Issuance of the Convertible
Security. The maximum amount of common stock Issuable is determined without
regard to any future adjustments permitted under the instrument creating the
Options or Convertible Securities.
3. Adjustment of Warrant Price for Diluting Issuances.
--------------------------------------------------
<PAGE>
3.1 Adjustment of Exercise Price. If the Company issues a Diluting
----------------------------
Issuance, the Warrant Price shall be adjusted as provided herein. Within one
hundred and eighty (180) days of the Issue Date of the Warrant Agreement, the
Warrant Price shall be adjusted according to Section 3.1(a) below (Ratchet
Adjustment). After one hundred and eighty (180) days of the Issue Date in the
Warrant Agreement, the Warrant Price shall be adjusted according to Section
3.1(b) below (Weighted Average Adjustment). If Preferred Stock is issued as
provided in Section 1.7 of the Warrant, reference to Warrant Price and number of
shares issued or issuable and correlative terms shall be determined on a per
share basis with reference to the shares into which such stock may be converted.
(a) Ratchet Adjustment. If the Company issues Additional Common
------------------
Shares within 180 days after the Issue Date of the Warrant and the consideration
per Additional Common Share (determined pursuant to Section 9) is less than the
Warrant Price in effect immediately before such Issue, the Warrant Price shall
be reduced to the lesser of:
(i) the amount of such consideration per Additional Common Share;
or
(b) Weighted Average Adjustment. If the Company issues Additional
---------------------------
Common Shares later than 180 days after the Issue Date of the Warrant and the
consideration per Additional Common Share (determined pursuant to Section 9) is
less than the Warrant Price in effect immediately before such Issue, the Warrant
Price in effect immediately before such Issue shall be reduced, concurrently
with such Issue, to a price (calculated to the nearest hundredth of a cent)
determined by multiplying the Warrant Price by a fraction:
(i) the numerator of which is the number of shares of common
stock outstanding immediately before such Issue plus the number of shares of
common stock that the aggregate consideration received by Company for the
Additional Common Shares would purchase at the Warrant Price in effect
immediately before such Issue, and
(ii) the denominator of which is the number of shares of common
stock outstanding immediately before such Issue plus the number of such
Additional Common Shares.
3.2 Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price, the number of Shares Issuable upon exercise of the Warrant shall
be increased to equal the quotient obtained by dividing (a) the product
resulting from multiplying (i) the number of Shares Issuable upon exercise of
the Warrant and (ii) the Warrant Price, in each case as in effect immediately
before such adjustment, by (b) the adjusted Warrant Price.
3.3 Securities Deemed Outstanding. For the purpose of this Section 3,
-----------------------------
all securities Issuable upon exercise of any outstanding Convertible Securities
or Options, Warrants, or other rights to acquire securities of the Company shall
be deemed to be outstanding.
4. No Adjustment for Issuances Following Deemed Issuances. No adjustment
------------------------------------------------------
to the Warrant Price shall be made upon the exercise of Options or conversion of
Convertible Securities.
5. Adjustment Following Changes in Terms of Options or Convertible
---------------------------------------------------------------
Securities. If the consideration payable to, or the amount of common stock
- ----------
Issuable by, the Company increases or decreases, respectively, pursuant to the
terms of any outstanding Options or Convertible Securities, the Warrant Price
and number of shares issuable upon exercise of the Warrant shall be recomputed
to reflect such increase or decrease. The recomputation shall be made as of the
time of the Issuance of the Options or Convertible Securities. Any prior changes
pursuant to this Section 5 in the Warrant Price and number of shares issuable
upon exercise of the Warrant that occurred after such Issuance because other
Additional Common Shares were Issued or deemed Issued shall also be recomputed.
6. Recomputation Upon Expiration of Options or Convertible Securities. The
------------------------------------------------------------------
Warrant Price and number of shares issuable upon exercise of the Warrant
computed upon the original Issue of any Options or Convertible Securities, and
any subsequent adjustments based thereon, shall be recomputed when any Options
or rights of conversion under Convertible Securities expire without having been
exercised. In the case of Convertible Securities or Options for common stock,
the Warrant Price shall be recomputed as if the only Additional Common Shares
Issued were the shares of common stock actually Issued upon the exercise of such
securities, if any, and as if the only consideration received therefor was the
consideration actually received upon the Issue, exercise or conversion of the
Options or Convertible Securities. In the case of Options for Convertible
Securities, the Warrant Price shall be recomputed as if the only Convertible
Securities Issued were the Convertible Securities actually Issued upon the
exercise thereof, if any, and as if the only consideration received therefor was
<PAGE>
the consideration actually received by the Company (determined pursuant to
Section 9), if any, upon the Issue of the Options for the Convertible
Securities.
7. Limit on Readjustments. No readjustment of the Warrant Price and
----------------------
number of shares issuable upon exercise of the Warrant pursuant to Sections 5 or
6 shall increase the Warrant Price or correspondingly affect such number of
shares issuable more than the amount of any decrease made in respect of the
Issue of any Options or Convertible Securities.
8. 30 Day Options. In the case of any Options that expire by their terms
--------------
not more than 30 days after the date of Issue thereof, no adjustment of the
Warrant Price shall be made until the expiration or exercise of all such
Options.
9. Computation of Consideration. The consideration received by the Company
----------------------------
for the Issue of any Additional Common Shares shall be computed as follows:
(a) Cash shall be valued at the amount of cash received by the Corporation,
----
excluding amounts paid or payable for accrued interest or accrued dividends.
(b) Property. Property, other than cash, shall be computed at the fair
--------
market value thereof at the time of the Issue as determined in good faith by the
Board of Directors of the Company.
(c) Mixed Consideration. The consideration for Additional Common Shares
-------------------
Issued together with other property of the Company for consideration that covers
both shall be determined in good faith by the Board of Directors.
(d) Options and Convertible Securities. The consideration per Additional
----------------------------------
Common Share for Options and Convertible Securities shall be determined by
dividing:
(i) the total amount, if any, received or receivable by the Company
for the Issue of the Options or Convertible Securities, plus the minimum amount
of additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Company upon exercise of the Options or
conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) ultimately Issuable upon the
exercise of such Options or the conversion of such Convertible Securities,
assuming receipt by the Company of the minimum amount, if any, of additional
consideration referred to in Section 9(d)(i).
10. General.
-------
10.1 Governing Law. This Antidilution Agreement shall be governed in
-------------
all respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
10.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
10.3 Entire Agreement. Except as set forth below, this Antidilution
----------------
Agreement and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
10.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Purchaser at Purchaser's address as set forth below, or at
such other address as Purchaser shall have furnished to the Company in writing,
or (b) if to the Company, at the Company's address set forth below, or at such
other address as the Company shall have furnished to the Purchaser in writing.
10.5 Severability. In case any provision of this Antidilution
------------
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Antidilution Agreement shall
not in any way be affected or impaired thereby.
<PAGE>
10.6 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Antidilution Agreement.
10.7 Counterparts. This Antidilution Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
PURCHASER ISSUER
IMPERIAL BANK DIGITAL SOUND CORPORATION
By: /s/ B. Robert Suh By: /s/ Clinton E. Anderson
---------------------------- ------------------------------
Name: B. Robert Suh Name: Clinton E. Anderson
-------------------------- ----------------------------
Title: Vice President and CFO Title: Assistant Vice President
------------------------- ---------------------------
Address: Address:
----------------------- -------------------------
<PAGE>
EXHIBIT 10.55
IMPERIAL BANK
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is entered into as of October 30, 1997,
by and between Imperial Bank ("Purchaser") and the Company whose name appears on
the last page of this Agreement.
RECITALS
- --------
A. Concurrently with the execution of this Agreement, the Purchaser is
purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant
to which Purchaser has the right to acquire from the Company the Shares (as
defined in the Warrant).
B. By this Agreement, the Purchaser and the Company desire to set forth
the registration rights of the Shares all as provided herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
registration statement or document.
(b) The term "Registrable Securities" means (i) the Shares (if
Common Stock) or all shares of Common Stock of the Company issuable or issued
upon conversion of the Shares and (ii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, any shares referred to in (i),
provided, however, no such shares of common stock shall be a registrable
security after such time as the holder thereof is entitled to sell freely such
shares of common stock pursuant to Rule 144 (or any successor provision)
promulgated under the Securities Act.
(c) The terms "Holder" or "Holders" mean the Purchaser or
qualifying transferees under subsection 1.8 hereof who hold Registrable
Securities.
(d) The term "SEC" means the Securities and Exchange Commission.
1.2 Company Registration.
--------------------
(a) Registration. If at any time or from time to time the Company
------------
shall determine to register any of its securities, for its own account or the
account of any of its shareholders, other than a registration on Form S-1 or S-8
relating solely to employee or similar stock option or purchase plans, or a
registration on Form S-4, or a registration on any other form (other than Form
S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms,
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of Registrable
Securities, the Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable Blue Sky or other state
securities laws); and
(ii) include in such registration (and any qualifications), and
in any underwriting involved therein, all the Registrable Securities specified
in a written request or requests, made within 10 business days after receipt of
such written notice from the Company, by any Holder or Holders, except as set
forth in subsection 1.2(b) below. The foregoing not withstanding, the Company
shall have the right to terminate any such negotiation prior to effectiveness in
its own discretion.
<PAGE>
Note: important to PS financing: must have underwriters' cut-back pro-rata for
all piggy-back holders. Must be added here.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.2(a)(i). In such event, the right of any Holder to
registration pursuant to this subsection 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company. In any registration initiated by the Company,
shares to be sold by it shall receive priority over shares of Holders, which
shall be reduced prorata for any amount determined by the underwriters to be not
includable in such registration. In the event of a demand for registration
issued by a Holder with such rights, such Holder shall receive priority over
remaining Holders, with the shares to be included being subject to reduction
prorata as determined by the underwriters.
1.3 Expenses of Registration. All expenses incurred in connection
------------------------
with any registration, qualification or compliance pursuant to this Section 1
including, without limitation, all registration, filing and qualification fees,
printing expenses, fees and disbursements of counsel for the Company and
expenses of any special audits incidental to or required by such registration,
shall be borne by the Company, except the Company shall not be required to pay
underwriters' fees, discounts or commissions relating to Registrable Securities.
All expenses of any registered offering not otherwise borne by the Company shall
be borne pro rata among the Holders participating in the offering and the
Company.
1.4 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep each Holder participating
therein advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof Except as
otherwise provided in subsection 1.3, at its expense the Company will:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to 90 days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 Indemnification.
---------------
(a) The Company will indemnify each Holder of Registrable Securities
and each of its officers, directors and partners, and each person controlling
such Holder, with respect to which such registration, qualification or
compliance has
<PAGE>
been effected pursuant to this Rights Agreement, and each underwriter, if any,
and each person who controls any underwriter of the Registrable Securities held
by or issuable to such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereto) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading, or any violation or
alleged violation by the Company of the Securities Act, the Securities Exchange
Act of 1934, as amended, ("Exchange Act") or any state securities law applicable
to the Company or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any such state law and relating to action or inaction
required of the Company in connection with any such registration, qualification
of compliance, and will reimburse each such Holder, each of its officers,
directors and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, within a
reasonable amount of time after incurred for any reasonable legal and any other
expenses incurred in connection with investigating, defending or settling any
such claim, loss, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 1.5(a) shall not apply to
amounts paid in settlement of any such claim, loss, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld); and provided further, that the Company will
not be liable in any such case to the extent that any such claim, loss, damage
or liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by an instrument duly executed
by such Holder or underwriter specifically for use therein or on the failure of
such Holder or Underwriter to deliver the most recently available version of the
Prospectus required to be delivered pursuant to Section 5 of the Securities Act.
(b) Each Holder will, if Registrable Securities held by or issuable to
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company within the meaning of the Securities Act, and each other such
Holder, each of its officers, directors and partners and each person controlling
such Holder, against all claims, losses, expenses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, partners, persons or
underwriters for any reasonable legal or any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder
specifically for use therein; provided, however, that the indemnity agreement
contained in this subsection 1.5(b) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if such
settlement is effected without the consent of the Holder, (which consent shall
not be unreasonably withheld); and provided further, that the total amount for
which any Holder shall be liable under this subsection 1.5(b) shall not in any
event exceed the aggregate proceeds received by such Holder from the sale of
Registrable Securities held by such Holder in such registration.
(c) Each party entitled to indemnification under this subsection 1.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; and provided further, that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in prejudice to the
Indemnifying Party; and provided further, that an Indemnified Party (together
with all other Indemnified Parties which may be represented without conflict by
one counsel) shall have the right to retain one separate counsel, with the fees
and expenses to be paid by the Indemnifying Party, if representation of such
Indemnified Party by the counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
1.6 Information by Holder. Any Holder or Holders of Registrable
---------------------
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by
<PAGE>
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.7 Rule 144 Reporting. With a view to making available to Holders
------------------
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees at all times to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, after 90 days after the effective
date of the first registration filed by the Company for an offering of its
securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as the Holder may reasonably request in complying with any rule
or regulation of the SEC allowing the Holder to sell any such securities without
registration.
1.8 Transfer of Registration Rights. Holders' rights to cause the
-------------------------------
Company to register their securities and keep information available, granted to
them by the Company under subsections 1.2 and 1.7, may be assigned to a
transferee or assignee of a Holder's Registrable Securities not sold to the
public, provided that the Company is given written notice by such Holder at the
time of or within a reasonable time after said transfer, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. The Company may
prohibit the transfer of any Holders' rights under this subsection 1.8 to any
proposed transferee or assignee who the Company reasonably believes is a
competitor of the Company. The Company may prohibit the transfer of any Holders'
rights under this subsection 1.8 to any proposed transferee or assignee who is
not an affiliate of Holder, and will receive less than 25% of the Registrable
Securities.
2. General.
-------
2.1 Waivers and Amendments. With the written consent of the record or
----------------------
beneficial Holders of at least a majority of the Registrable Securities, the
obligations of the Company and the rights of the Holders of the Registrable
Securities under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities. Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record Holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof may be changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 2.1.
2.2 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
2.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.4 Entire Agreement. Except as set forth below, this Agreement and
----------------
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
<PAGE>
2.5 Notices. etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Holder, at such Holder's address as set forth below, or at
such other address as such Holder shall have furnished to the Company in
writing, or (b) if to the Company, at the Company's address set forth below, or
at such other address as the Company shall have furnished to the Holder in
writing.
2.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal, or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement or any provision of the other
Agreements shall not in any way be affected or impaired thereby.
2.7 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
2.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
PURCHASER COMPANY
IMPERIAL BANK DIGITAL SOUND CORPORATION
By: /s/ B. Robert Suh By: /s/ Clinton E. Anderson
--------------------------------- ---------------------------------
Name: B. Robert Suh Name: Clinton E. Anderson
------------------------------- -------------------------------
(Print) (Print)
Title: Vice President and CFO Title: Assistant Vice President
------------------------------ ------------------------------
Address: Address:
---------------------------- ----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,895
<SECURITIES> 0
<RECEIVABLES> 5,933
<ALLOWANCES> 394
<INVENTORY> 5,751
<CURRENT-ASSETS> 14,415
<PP&E> 14,148
<DEPRECIATION> 10,426
<TOTAL-ASSETS> 22,873
<CURRENT-LIABILITIES> 10,142
<BONDS> 0
0
5,000
<COMMON> 69,082
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,873
<SALES> 5,890
<TOTAL-REVENUES> 5,890
<CGS> 3,241
<TOTAL-COSTS> 7,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,089)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,089)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,089)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
