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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): DECEMBER 19, 1997
DIGITAL SOUND CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-18280 95-3222624
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) 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 or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
On December 19, 1997 (the "Closing Date"), Digital Sound Corporation (the
"Company") consummated a private placement of the Company's convertible
securities with certain investors (collectively, the "Investors") for an
aggregate of approximately $20 million pursuant to a Preferred Stock Purchase
Agreement (the "Purchase Agreement") which is attached hereto as Exhibit 10.1.
Pursuant to the Purchase Agreement, the Company (i) sold for cash (A) 1,785,000
shares of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred") and (B) $6,612,502.50 aggregate principal amount of the Company's
Convertible Promissory Notes (the "Notes" and together with the Series B
Preferred, the "Securities") and (ii) exchanged the 2,631,579 shares of Series A
Convertible Preferred Stock (the "Series A Preferred") held by affiliates of
Oak Investment Partners ("Oak") for 666,667 shares of the Series B Preferred.
The Company sold the securities at a price of $0.75 per share of Common Stock on
an as-converted basis. One of the Investors is Microsoft Corporation, which
purchased an aggregate of $5 million of the Securities. Affiliates of Oak also
purchased an aggregate of $5 million of the Securities.
The terms of the Securities, the Purchase Agreement and the transactions
contemplated thereby were approved by a Special Committee of the Board of
Directors of the Company at a meeting on December 5, 1997 and by the Board of
Directors of the Company at a meeting on December 12, 1997. Houlihan Lokey
Howard & Zukin delivered an opinion dated December 5, 1997 to the Board of
Directors to the effect that the transactions contemplated by the Purchase
Agreement as set forth in clauses (i) and (ii) of the foregoing paragraph are
fair to the public shareholders of the Company's Common Stock from a financial
point of view.
The Securities and the Common Stock issuable upon exercise of the Series B
Preferred have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and are therefore subject to certain restrictions on
transfer. Concurrently with the execution of the Purchase Agreement, the
Company and the Investors entered into a Registration Rights Agreement (the
"Registration Rights Agreement") granting the Investors certain registration
rights with respect to the Common Stock issuable upon exercise of the Series B
Preferred. A summary of the terms of the Registration Rights Agreement is set
forth below.
The Notes automatically convert into the Series B Preferred at a
conversion price of $7.50 per share (the "Note Conversion Price") if the
Company's shareholders approve an amendment to the Company's Ninth Amended and
Restated Article of Incorporation (the "Articles of Incorporation") authorizing
a sufficient increase in the number of shares of the underlying Common Stock at
the next annual shareholders meeting ("Shareholder Approval"). Pursuant to the
Purchase Agreement, the Company is required to hold an annual shareholders
meeting as expeditiously as reasonably practicable and in no event, subject to
certain conditions, later than April 15, 1998. Each share of Series B Preferred
is convertible into 10 shares of Common Stock, subject to certain antidilution
adjustments.
The Company was granted an exception by the National Association of
Securities Dealers, Inc. (the "NASD") to issue the Securities without prior
shareholder approval pursuant to NASD Rule 4460(i)(2). Upon consummation of this
offering, the Company has 58,198,262 shares of Common Stock outstanding or
subject to issuance upon exercise or conversion of outstanding options, warrants
or convertible securities.
SERIES B CONVERTIBLE PREFERRED STOCK
The rights, preferences, privileges and restrictions of the Series B
Preferred are set forth in the Certificate of Determination (the "Series B
Certificate") filed by the Company with the Secretary of State of the State of
California on December 16. 1977. The Series B Certificate is filed herewith as
Exhibit 3.1 and the following descriptions of certain of the rights,
preferences, privileges and restrictions of the Series B Preferred are qualified
in their entirety by reference to such Exhibit.
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Series. The Series B Certificate creates 3,373,334 shares of Series B
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Preferred.
Dividends. The holders of the Series B Preferred are entitled to
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dividends at the applicable dividend rate for each share of the underlying
Common Stock into which the Series B Preferred is convertible. Dividends on the
Series B Preferred are not mandatory or cumulative and no rights accrue to the
holders of Series B Preferred if the company fails to declare dividends on the
Series B Preferred.
Liquidation Preference. The Series B Preferred ranks pari passu with the
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Series A Preferred of which, as of the closing of the transactions contemplated
by the Purchase Agreement, there is none outstanding. Upon liquidation, the
holders of the Series B Preferred are entitled, to the extent funds are
available therefor, to $7.50 per share plus all accrued and unpaid dividends
thereon.
Voting. The Series B Preferred is entitled to a number of votes equal to
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the number of shares of Common Stock into which such shares of Series B
Preferred could be converted. Except as otherwise required by law, the Series B
Preferred and the Common Stock vote together and not as separate classes.
Conversion. The Series B Preferred is convertible at any time at the
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option of the holder into Common Stock, initially at a conversion price (the
"Series B Preferred Conversion Price") of $0.75 per share of Common Stock. In
addition to customary antidilution provisions, the Series B Preferred Conversion
Price is subject to adjustment for certain issuances of the Company's Common
Stock if the consideration per share of such issuance is less than the Series B
Preferred Conversion Price. Upon such an issuance, the Series B Preferred
Conversion Price would be reduced, subject to certain conditions, to such
consideration per share which is less than the Series B Preferred Conversion
Price. The Series B Preferred is also subject to automatic conversion upon the
earliest to occur of an event that would cause the Series B Preferred to be
required to be registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended, or upon the filing with the Secretary of the Company of
the written approval of the holders of more than 50% of the outstanding shares
of the Series B Preferred.
CONVERTIBLE PROMISSORY NOTE
A form of Note is filed as Exhibit 10.2 hereto and the following
description of the terms and conditions of the Notes are qualified in their
entirety by reference to such Exhibit.
The Notes automatically convert upon Shareholder Approval. A holder of a
Note may declare the principal and all accrued interest, at a rate of 7%, to
become immediately due and payable upon certain events of default, including,
without limitation, (i) the Company's shareholders vote at a meeting of such
shareholders at which a quorum is present on a resolution that would constitute
Shareholder Approval if duly approved by such shareholders, and such resolution
is not duly approved by such shareholders at such meeting, (ii) the Company
shall be in breach of any of the terms and conditions of, or be in default
under, the Purchase Agreement or (iii) the annual shareholders meeting shall not
be held within the time limitations in the Purchase Agreement as set forth
above. If at any time prior to Shareholder Approval, the Company pays or makes
any dividend or distribution on the Series B Preferred, that dividend or
distribution must also be paid or made to the holders of the Notes as if the
Notes had been converted into such Series B Preferred. The Note Conversion Price
is subject to customary antidilution protection.
REGISTRATION RIGHTS AGREEMENT
A form of the Registration Rights Agreement is filed as Exhibit 10.3
hereto and the following description of the terms and conditions of the
Registration Rights Agreement are qualified in their entirety by reference to
such Exhibit.
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The Registration Rights Agreement provides specified registration rights
with respect to the Common Stock issued or issuable (i) upon conversion of the
Series B Preferred or (ii) pursuant to a stock dividend, stock split or other
distribution with respect to such Common Stock ("Restricted Stock"). Prior to
the seventh anniversary of the Closing Date, the holders of no fewer than 35% of
the shares of such Restricted Stock have the right to require the Company on two
occasions to register shares of Restricted Stock that are otherwise not eligible
for sale under Rule 144 of the Securities Act within a three-month period and
have an anticipated aggregate offering price of at least $2.5 million. In
addition, holders of Restricted Stock are granted the right to participate in
any other registration of Common Stock which the Company undertakes (other than
a registration of shares in connection with an employee or similar benefit plan
or a corporate reorganization on Forms S-4 or S-8), but subject to certain
underwriter cutbacks and hold-back agreements. All expenses of registration
(including one counsel for the registering holders), excluding underwriters' and
brokers' discounts and commissions, will be paid by the Company. The Company
and the holders of Restricted Stock are subject to customary indemnification
rights and procedures. Holders may not transfer the registration rights without
the prior written consent of the Company except in connection with the
simultaneous transfer to the same transferee of no less than the lesser of
200,000 shares of Restricted Stock or all of the shares of Restricted Stock then
held by such holder, unless such transfer is to an Investor or to an affiliate
of an Investor.
The terms and conditions of the Securities, the Purchase Agreement, the
Registration Rights Agreement and the related transactions are set forth in the
transaction documents filed herewith.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
3.1 Certificate of Determination of Rights, Preferences, Privileges
and Restrictions of Series B Convertible Preferred Stock of
Digital Sound Corporation.
10.1 Preferred Stock Purchase Agreement by and among Digital Sound
Corporation and the Investors named in Annex A thereto.
10.2 Form of Convertible Promissory Note.
10.3 Registration Rights Agreement by and among Digital Sound
Corporation and the Investors whose names are listed in Annex A
to the Preferred Stock Purchase Agreement.
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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 thereto duly authorized.
Digital Sound Corporation
By: /s/ Mark C. Ozur
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Mark C. Ozur
President and Chief
Executive Officer
Dated: December 23, 1997 By: /s/ B Robert Suh
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B. Robert Suh
Vice President, Finance
and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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3.1 Certificate of Determination of Rights, Preferences, Privileges
and Restrictions of Series B Convertible Preferred Stock of
Digital Sound Corporation.
10.1 Preferred Stock Purchase Agreement by and among Digital Sound
Corporation and the Investors named in Annex A thereto.
10.2 Form of Convertible Promissory Note.
10.3 Registration Rights Agreement by and among Digital Sound
Corporation and the Investors whose names are listed in Annex A
to the Preferred Stock Purchase Agreement.
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EXHIBIT 3.1
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CERTIFICATE OF DETERMINATION OF
RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
DIGITAL SOUND CORPORATION
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RESOLVED, that the Board of Directors does hereby provide, pursuant to Article
III, Section 2 of the Ninth Amended and Restated Articles of Incorporation of
the Company and Section 401 of the General Corporation Law of the State of
California, for the authorization and issuance of a series of Convertible
Preferred Stock of the Company to be known as the Series B Convertible Preferred
Stock of the Company, which series shall consist of 3,373,334 shares and shall
have the rights, preferences, privileges and restrictions as follows:
Section 1. Definitions. For purposes of this Certificate of
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Determination, the following definitions shall apply:
a. "Additional Stock" shall mean any shares of Common Stock issued
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(or deemed to have been issued pursuant to Section 5 (h)(v)) by the Company at
any time or from time to time after the filing of this Certificate of
Determination, other than shares of Common Stock issued or issuable: (i) upon
conversion of shares of the Series B Convertible Preferred Stock; (ii) to
employees, consultants, officers or directors of this corporation pursuant to a
stock option plan, restricted stock option plan or other stock or employee
incentive plan approved by the Board; (iii) as a dividend or distribution on the
Series B Convertible Preferred Stock; or (iv) pursuant to a merger,
consolidation, recapitalization, reorganization or similar transaction, which is
not intended to raise capital and which is approved by the Board.
b. "Affiliate" of a person shall have the meaning specified in Rule
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405 promulgated under the Securities Act of 1933, as amended.
c. "Board" shall mean the Board of Directors of the Company.
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d. "Company" shall mean this corporation.
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e. "Common Stock" shall mean the Common Stock of the Company.
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f. "Common Stock's Fair Market Value" shall mean for any day the
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last reported sale price regular way of the shares of Common Stock or, in case
no such reported sale price takes place on such day, the average of the closing
bid and asked quotations for such day, in either case on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading, or if they are not listed or admitted to trading on any
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national securities exchange, on the National Market System ("NMS") of the
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National Association of Securities Dealers, Inc. ("NASD") or, if they are not
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authorized for quotation on the NMS, on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") or, if the shares of Common Stock
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are not authorized for quotation on Nasdaq, the closing bid and asked prices as
furnished by two members of the NASD selected from time to time by the Company
for that purpose, or if no such prices are available, the fair market value of
such shares, as determined in good faith by the Board as of the applicable date.
g. "Dividend Rate" shall mean the rate at which cash dividends are
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declared by the Board from time to time with respect to each share of Common
Stock.
h. "Original Issue Price" shall mean $7.50 per share.
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i. "Series B Convertible Preferred Stock" shall mean the Series B
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Convertible Preferred Stock.
j. "Subsidiary" shall mean any corporation at least fifty percent
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(50%) of the outstanding voting stock of which is at the time owned directly or
indirectly by the Company or by one or more of such subsidiary corporations.
Section 2. Dividends. The holders of the then outstanding Series B
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Convertible Preferred Stock shall be entitled to receive in cash, when, if and
as declared by the Board, out of any funds legally available therefor, dividends
at the applicable Dividend Rate for each share of Common Stock into which the
Series B Convertible Preferred Stock is then convertible concurrently with the
payment of any cash dividends with respect to the Common Stock in any given
fiscal year of the Company. Dividends on the Series B Convertible Preferred
Stock shall not be mandatory or cumulative and no rights shall accrue to the
holders of Series B Convertible Preferred Stock in the event that the Company
shall fail to declare dividends on the Series B Convertible Preferred Stock in
respect of that or any previous fiscal year whether or not the earnings of the
Company in that or any previous fiscal year were sufficient to pay cash
dividends.
Section 3. Liquidation Rights of Series B Convertible Preferred
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Stock.
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a. Preference. In the event of any liquidation, dissolution or
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winding up of the Company, whether voluntary or involuntary, the holders of the
Series B Convertible Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
shareholders, whether such assets are capital, surplus, or earnings, before any
payment or declaration and setting apart for payment of any amount shall be made
in respect of the Common Stock, an amount equal to $7.50 per share plus an
amount equal to all accrued and unpaid dividends thereon (the "Preferential
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Amount"). If the assets to be distributed are insufficient to pay in full such
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Preferential Amount and all amounts payable in respect of any other shares of
preferred stock of the Company that rank pari passu with the Series B
Convertible Preferred Stock as to payment (the "Preferred Stock Preferential
----------------------------
Amount", the assets available for distribution shall be distributed to the
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holders of the Series B Convertible Preferred Stock and
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any such other preferred stock of the Company pro rata in proportion to the full
amounts to which they would otherwise be respectively entitled.
b. Remaining Assets. After the payment or distribution to the
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holders of the Series B Convertible Preferred Stock and any such other preferred
stock of the Company of the full Preferred Stock Preferential Amount aforesaid,
the holders of the Common Stock then outstanding shall be entitled to receive
ratably all remaining assets of the Company to be distributed.
c. Reorganization. A consolidation or merger of the Company with or
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into any other corporation or corporations in which the holders of the Company's
outstanding shares before the consolidation or merger do not retain a majority
of the voting power in the surviving corporation or a sale or other disposition
of all or substantially all of the assets of the Company shall be deemed a
liquidation, dissolution, or winding up of the Company as those terms are used
in this Section 3.
d. Consent to Certain Transactions. Each holder of shares of Series
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B Convertible Preferred Stock shall, by virtue of its acceptance of a stock
certificate evidencing Series B Convertible Preferred Stock, be treated as
having consented, for purposes of Sections 502, 503 and 506 of the California
Corporations Code, to distributions made by the Company for the repurchase of
shares of Common Stock from directors or employees of or consultants or advisers
to the Company or any Subsidiary upon the termination of employment by or
service to the Company or any Subsidiary or otherwise.
Section 4. Voting Rights.
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a. Series B Convertible Preferred Stock. Each holder of shares of
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Series B Convertible Preferred Stock shall be entitled to vote on all matters to
come before the shareholders and shall be entitled to a number of votes equal to
the number of shares of Common Stock into which such shares of Series B
Convertible Preferred Stock could be converted pursuant to the provisions of
Section 5 hereof at the record date for the determination of the shareholders
entitled to vote on such matters, or if no such record date is established, at
the date such vote is taken.
b. Common Stock. Each holder of shares of Common Stock shall be
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entitled to one vote for each share thereof held. Except as otherwise expressly
provided herein or as required by law, the holders of Series B Convertible
Preferred Stock and the holders of Common Stock shall vote together and not as
separate classes.
Section 5. Conversion.
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a. Right to Convert. Each share of Series B Convertible Preferred
----------------
Stock shall be convertible, at any time or from time to time at the option of
the holder thereof, into fully
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paid and nonassessable shares of Common Stock without payment of any additional
consideration.
b. Conversion Price. Each share of Series B Convertible Preferred
----------------
Stock shall be convertible into the number of shares of Common Stock which
results from dividing the conversion price of the Series B Convertible Preferred
Stock that is in effect at the time of conversion (the "Conversion Price") into
the Original Issue Price for such Series B Convertible Preferred Stock. As of
the filing of this Certificate of Determination, the initial Conversion Price
for the Series B Convertible Preferred Stock shall be equal to one-tenth
(1/10th) of the Original Issue Price. The Conversion Price shall be subject to
adjustment from time to time as provided below.
c. Mechanics of Conversion. Each holder of Series B Convertible
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Preferred Stock who desires to convert the same into shares of Common Stock
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Company or any transfer agent for the Series B Convertible
Preferred Stock or Common Stock, and shall give written notice to the Company at
such office that such holder elects to convert the same and shall state therein
the number of shares of Series B Convertible Preferred Stock being converted.
Thereupon the Company shall promptly, but in no event more than two (2) days
after receipt of such notice, issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to which
such holder is entitled and shall promptly pay in cash any declared and unpaid
dividends on the shares of Series B Convertible Preferred Stock being converted.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate representing the
shares of Series B Convertible Preferred Stock to be converted, and the person
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of Common
Stock on such date. If a surrender for conversion occurs after the record date
fixed by the Company for the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock, but prior to the issuance of such additional shares, the
Conversion Price shall, subject to such issue, be recomputed in accordance with
subsection (e) of this Section 5.
d. Adjustment for Stock Splits and Combinations. If the Company at
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any time or from time to time after the filing of this Certificate of
Determination effects a subdivision of the outstanding Common Stock, the
Conversion Price for the Series B Convertible Preferred Stock in effect
immediately before that subdivision shall be proportionately decreased, and
conversely, if the Company at any time or from time to time after the filing of
this Certificate of Determination combines the outstanding shares of Common
Stock into a smaller number of shares, the Conversion Price for the Series B
Convertible Preferred Stock in effect immediately before the combination shall
be proportionately increased. Any adjustment under this subsection (d) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
e. Adjustment for Common Stock Dividends. If the Company at any time
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or from time to time after the filing of this Certificate of Determination
makes, or fixes a record
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date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock, in
each such event the applicable Conversion Price for the Series B Convertible
Preferred Stock that is then in effect shall be decreased as of the time of such
issuance or, in the event such record date is fixed, as of the close of business
on such record date, by multiplying the applicable Conversion Price then in
effect for the Series B Convertible Preferred Stock by a fraction (1) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (2) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the applicable Conversion Price for the Series B Convertible
Preferred Stock shall be recomputed accordingly as of the close of business on
such record date and thereafter the applicable Conversion Price for the Series B
Convertible Preferred Stock shall be adjusted pursuant to this subsection (e) to
reflect the actual payment of such dividend or distribution.
f. Adjustment for Other Dividends and Distributions. If the Company
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at any time or from time to time after the filing of this Certificate of
Determination makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Company other than shares of Common Stock, in each such event
provision shall be made so that the holders of the Series B Convertible
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Company which they would have received had their Series B Convertible Preferred
Stock been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such securities receivable by them as aforesaid during
such period, subject to all other adjustments called for during such period
under this Section 5 with respect to the rights of the holders of the Series B
Convertible Preferred Stock or with respect to such other securities by their
terms.
g. Adjustment for Reclassification, Exchange and Substitution. If at
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any time or from time to time after the filing of this Certificate of
Determination the Common Stock issuable upon the conversion of the Series B
Convertible Preferred Stock is changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger, consolidation or sale of assets,
provided for elsewhere in this Section 5) in any such event each holder of the
Series B Convertible Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of the
Series B Convertible Preferred Stock could have been converted immediately prior
to such recapitalization, reclassification or change, all subject to further
adjustment as provided herein or with respect to such other securities or
property by the terms thereof.
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h. Conversion Price Adjustments of Series B Convertible Preferred
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Stock. The Conversion Price of the Series B Convertible Preferred Stock shall
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be subject to adjustment from time to time as follows:
(i) If the Company at any time or from time to time after the filing
of this Certificate of Determination issues or sells, or is deemed by the
express provisions of this subsection (h) to have issued or sold, any Additional
Stock for consideration per share which is less than the Conversion Price for
the Series B Convertible Preferred Stock in effect immediately prior to such
issuance, the then existing Conversion Price for the Series B Convertible
Preferred Stock shall be forthwith reduced to the per share price received or
deemed received by the Company upon such issuance or sale, or deemed issuance or
sale, of such Additional Stock; provided, however, that no adjustment shall be
made pursuant to this subsection (h) and this subsection (h) shall not apply, if
an adjustment would otherwise be called for pursuant to any of subsections (d),
(e), (f), (g) or (i). Any adjustment to the Conversion Price for the Series B
Convertible Preferred Stock pursuant to the preceding sentence shall be
effective as of the opening of business on the date of the issuance or sale, or
deemed issuance or sale, of such Additional Stock by the Company. Whenever the
Company issues or sells, or is deemed to issue or sell, any Additional Stock,
the per share fair market value of the Additional Stock as of the date of such
issuance or sale, or deemed issuance or sale, shall be determined in good faith
by the Company's Board.
(ii) No adjustment of the Conversion Price for the Series B
Convertible Preferred Stock pursuant to this subsection (h) shall be made in an
amount less than one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be taken into account in any subsequent adjustment. Except to the limited
extent provided for in subsections (h)(v)(C) and (D), no adjustment of such
Conversion Price pursuant to this subsection (h) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(iii) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any underwriters' or brokers' discounts, or commissions allowed, paid
or incurred by this corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(iv) In the case of the issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair value thereof as reasonably determined in good faith by
the Board.
(v) Solely for the purpose of calculating the amount of any
adjustment which is required, in the case of the issuance of options to purchase
or rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities (which are not
excluded from the definition of Additional Stock), the following provisions
shall apply for all purposes of this subsection (h):
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A. The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in subsections
(h)(iii) and (iv)), if any, received by the Company upon the issuance
of such options or rights plus the minimum exercise price provided in
such options or rights for the Common Stock covered thereby.
B. The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities or upon the exercise of options to purchase
or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration,
if any, received by the Company for any such securities and related
options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in subsections (h)(iii) and (iv)).
C. In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the
Company upon exercise of such options or rights or upon conversion or
in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the
antidilution provisions thereof, the applicable Conversion Price of
the Series B Convertible Preferred Stock to the extent in any way
affected by or computed using such options, rights or securities,
shall be recomputed to reflect such change, but no further adjustment
shall be made for the actual issuance of Common Stock or any payment
of such consideration upon the exercise of any such options or rights
or the conversion or exchange of such securities.
D. Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or
exchangeable securities, the applicable Conversion Price of the Series
B Convertible Preferred Stock to the extent in any way affected by or
computed using such options, rights or securities or options or rights
related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible
or exchangeable securities which remain in effect) actually issued
upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or
rights related to such securities.
7
<PAGE>
E. The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to subsections
(h)(v)(A) and (B) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either
subsections (h)(v)(C) or (D).
i. Reorganizations, Mergers, Consolidations or Sales of Assets. If
-----------------------------------------------------------
at any time or from time to time after the filing of this Certificate of
Determination there is a capital reorganization of the Common Stock (other than
a recapitalization, subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section 5) or a merger or consolidation of
the Company into or with another corporation, or the sale of all or
substantially all the Company's properties and assets to any other person, as a
part of such reorganization, merger, consolidation or sale, provision shall be
made so that the holders of the Series B Convertible Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series B Convertible
Preferred Stock the number of shares of stock or other securities or property of
the Company, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of the number of shares of Common Stock
deliverable upon conversion would have been entitled on such capital
reorganization, merger, consolidation or sale, subject to adjustment in respect
of such stock or securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 5
with respect to the rights of the holders of Series B Convertible Preferred
Stock after the reorganization, merger, consolidation or sale to the end that
the provisions of this Section 5 (including adjustment of the Conversion Price
then in effect for the Series B Convertible Preferred Stock and the number of
shares purchasable upon conversion of the Series B Convertible Preferred Stock)
shall be applicable after that event and be as nearly equivalent as practicable.
j. Accountants' Certificate of Adjustment. In each case of an
--------------------------------------
adjustment or readjustment of the Conversion Price and the number of shares of
Common Stock or other securities issuable upon conversion of the Series B
Convertible Preferred Stock, the Company, at its expense, shall cause
independent public accountants of recognized standing selected by the Company
(who may be the independent public accountants then auditing the books of the
Company) to compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid, to each registered holder of the Series B Convertible Preferred Stock
at the holder's address as shown in the Company's books. The certificate shall
set forth such adjustment or readjustment, showing in detail the facts upon
which such adjustment or readjustment is based, including a statement of (1) the
Conversion Price at the time in effect, (2) the number of additional shares of
Common Stock and (3) the type and amount, if any, of other property which at the
time would be received upon conversion of the Series B Convertible Preferred
Stock.
k. Notices of Record Date. Upon (i) any taking by the Company of a
----------------------
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or (ii) any capital reorganization of the Company, any
8
<PAGE>
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person or any voluntary or involuntary dissolution, liquidation or winding up of
the Company, the Company shall mail to each holder of Series B Convertible
Preferred Stock at least twenty (20) days prior to the record date specified
therein a notice specifying (1) the date on which any such record is to be taken
for the purpose of such dividend or distribution and a description of such
dividend or distribution, (2) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, and (3) the date, if any, that is to
be fixed as to when the holders of record of Common Stock or Series B
Convertible Preferred Stock (or other securities) shall be entitled to exchange
their shares of Common Stock or Series B Convertible Preferred Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
l. Automatic Conversion.
--------------------
(1) Each share of Series B Convertible Preferred Stock shall
automatically be converted into shares of Common Stock based on the then-
effective Conversion Price for such share of Series B Convertible Preferred
Stock immediately upon any event that would cause the Series B Convertible
Preferred Stock to be required to be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended, or any successor provision thereto.
(2) Each share of the Series B Convertible Preferred Stock shall
automatically be converted into shares of Common Stock based on the then-
effective Conversion Price upon the filing with the Secretary of the Company of
the written approval of the holders of more than fifty percent of the
outstanding shares of the Series B Convertible Preferred Stock.
(3) Upon the occurrence of the events specified in paragraphs (1) or
(2) above, the outstanding shares of Series B Convertible Preferred Stock shall
be converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
such shares of Series B Convertible Preferred Stock are either delivered to the
Company or its transfer agent as provided below, or the holder notifies the
Company or its transfer agent that such certificates have been lost, stolen or
destroyed and executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with such
certificates. Upon the occurrence of such automatic conversion of the Series B
Convertible Preferred Stock, the holders of Series B Convertible Preferred Stock
shall surrender the certificates representing such shares at the office of the
Company or any transfer agent for the Series B Convertible Preferred Stock or
Common Stock. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of Series B Convertible Preferred Stock
surrendered were convertible on
9
<PAGE>
the date on which such automatic conversion occurred, and the Company shall
promptly pay in cash or, at the option of the Company, Common Stock (taken at
the Common Stock's Fair Market Value as of the date of such conversion), or, at
the option of the Company, a combination, all declared and unpaid dividends on
the shares of Series B Convertible Preferred Stock being converted to and
including the date of such conversion.
m. Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of Series B Convertible Preferred Stock. In lieu of any
fractional share to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the Common
Stock's Fair Market Value on the date of conversion.
n. Reservation of Stock Issuable Upon Conversion. The Company shall
---------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Convertible Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Convertible Preferred
Stock; and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series B Convertible Preferred Stock, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
o. Notices. Any notice required by the provisions of this Section 5
-------
to be given to holders of shares of the Series B Convertible Preferred Stock
shall be deemed given upon the earlier of actual receipt or seventy-two (72)
hours after the same has been deposited in the United States mail, by certified
or registered mail, return receipt requested, postage prepaid, and addressed to
each holder of record at the address of such holder appearing on the books of
the Company.
p. Payment of Taxes. The Company will pay all taxes (other than
----------------
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series B Convertible Preferred Stock, including without limitation any
tax or other charge imposed in connection with any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that in which
the shares of Series B Convertible Preferred Stock so converted were registered.
q. No Dilution or Impairment. The Company shall not amend its Ninth
-------------------------
Amended and Restated Articles of Incorporation or participate in any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, for the purpose of avoiding or
seeking to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but shall at all times in good
faith assist in carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of the holders of the
Series B Convertible Preferred Stock against dilution or other impairment.
10
<PAGE>
r. Cancellation of Series B Convertible Preferred Stock on
-------------------------------------------------------
Conversion. All certificates of the Series B Convertible Preferred Stock
surrendered for conversion or otherwise retired shall be appropriately cancelled
on the books of the Company, and the shares so converted or otherwise retired
represented by such certificates shall not be reissuable as shares of the Series
B Convertible Preferred Stock so converted, but shall instead be restored to the
status of authorized but unissued Preferred Stock of the Company, undesignated
as to the series and subject to designation by the Board of Directors of the
Company pursuant to Article III, Section 2 of the Ninth Amended and Restated
Articles of Incorporation.
11
<PAGE>
EXHIBIT 10.1
================================================================================
DIGITAL SOUND CORPORATION
_____________________
PREFERRED STOCK PURCHASE AGREEMENT
_____________________
2,451,667 SHARES OF
SERIES B CONVERTIBLE PREFERRED STOCK
$6,612,502.50 AGGREGATE
PRINCIPAL AMOUNT OF CONVERTIBLE PROMISSORY NOTES
Dated as of December 19, 1997
===============================================================================
<PAGE>
DIGITAL SOUND CORPORATION
6307 Carpinteria Avenue
Carpinteria, California 93013
December 19, 1997
To Each of the Persons Named
in Annex A to this Agreement
Gentlemen and Ladies:
The undersigned, Digital Sound Corporation, a California corporation
(the "Company"), hereby agrees with you (sometimes referred to herein
individually as the "Investor" and sometimes collectively as the "Investors") as
follows:
1. Authorization of Securities. The Company has authorized the issue and
---------------------------
sale or exchange of 2,451,667 shares of its Series B Convertible Preferred Stock
(the "Preferred Stock"), having the rights, preferences, privileges and
restrictions set forth in the Company's Certificate of Determination (the
"Certificate") attached hereto as Annex B and $6,612,502.50 aggregate principal
amount of its Convertible Promissory Notes in the form attached hereto as Annex
C (the "Convertible Promissory Notes"). The Preferred Stock is convertible into
the Company's common stock (the "Common Stock"); the Common Stock into which the
Preferred Stock is convertible is sometimes referred to herein as the
"Conversion Stock"; and the Preferred Stock, the Convertible Promissory Notes
and the Conversion Stock are sometimes referred to herein collectively as the
"Securities". The Convertible Promissory Notes are convertible into Preferred
Stock.
2. Sale and Purchase of Preferred Stock. Upon the terms and subject to
------------------------------------
the conditions herein contained, the Company agrees to sell to each Investor,
and each Investor severally agrees to purchase from the Company, at the Closing
(as hereinafter defined) on the Closing Date (as hereinafter defined), the
number of shares of Preferred Stock and the principal amount of Convertible
Promissory Notes at the purchase price or for the other consideration set forth
opposite its name on Annex A hereto.
3. Closing. The closing of the sale to and purchase by the Investors of
-------
the Preferred Stock (the "Closing") shall occur by exchange of documents by mail
or other courier to the respective parties to be held in escrow for delivery
upon oral instruction of the parties by telephone conference call on the date
hereof (the "Closing Date"). At the Closing, the Company shall deliver to each
Investor a certificate evidencing the shares of Preferred Stock being purchased
by it, which shall be registered in such Investor's name as stated on Annex A
hereto, and a certificate evidencing the Convertible Promissory Notes being
purchased by it, which shall be registered in such Investor's name as stated on
Annex A hereto, against, as applicable (i) delivery to the Company of payment by
1
<PAGE>
wire transfer in an amount equal to the purchase price of the shares of
Preferred Stock and the Convertible Promissory Notes being purchased by it or
(ii) surrender for cancellation of certificates evidencing the number of shares
of Series A Convertible Preferred Stock of the Company (the "Series A Preferred
Stock") set forth opposite its name on Annex A hereto.
4. Transfer Restrictions.
---------------------
4.1. Restrictions.
------------
(a) Each Investor understands and agrees that the Securities it will
be acquiring have not been registered under the Securities Act, and that
accordingly they will not be transferable except as permitted under various
exemptions contained in the Securities Act, or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act. Each
Investor acknowledges that it must bear the economic risk of its investment in
the Securities for an indefinite period of time since they have not been
registered under the Securities Act and therefore cannot be sold unless they are
subsequently registered or an exemption from registration is available.
(b) Each Investor represents and warrants to the Company that it is
acquiring the Securities it has agreed to purchase for investment purposes only,
for its own account, and not as nominee or agent for any other Person, and not
with a view to, or for resale in connection with, any distribution thereof
within the meaning of the Securities Act.
(c) Each Investor agrees with the Company as follows:
i) The certificates evidencing the Securities it has agreed to
purchase, and each certificate issued in transfer thereof, will bear the
following legend:
"The securities evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended, or any state
securities laws and may not be sold or transferred unless there is an
effective registration statement under such Act and any applicable state
securities laws covering such securities or the Corporation receives an
opinion of counsel (which counsel and opinion are reasonably satisfactory
to the Corporation) stating that such sale or transfer is exempt from the
registration and prospectus delivery requirements of such Act."
ii) The certificates representing such Securities, and each
certificate issued in transfer thereof, will also bear any legend required
under any applicable state securities law.
iii) Absent a registration statement under the Securities Act
covering the disposition of the Securities which such Investor acquires,
such Investor will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of
2
<PAGE>
any or all of the Securities without first providing the Company with an
opinion of counsel (which counsel and opinion are reasonably satisfactory
to the Company) stating that such disposition is exempt from the
registration and prospectus delivery requirements of the Securities Act and
has been registered or qualified under (or is exempt from the registration
and qualification requirements of) any applicable state securities laws.
iv) Such Investor consents to the Company's making a notation on
its records or giving instructions to any transfer agent of the Common
Stock, Preferred Stock or Convertible Promissory Notes in order to
implement the restrictions on transfer of the Securities set forth in this
paragraph (c).
4.2. Removal of Restrictions. Any legend endorsed on a certificate
-----------------------
evidencing a Security and any stop transfer instructions or notations on the
Company's records with respect to such Security pursuant to Section 4.1(c)(i)
hereof shall be removed or lifted and the Company shall issue a certificate
without such legend to the holder of such Security upon request (a) if the
transfer of such Security has been registered under the Securities Act, (b) if
such Security may be sold under Rule 144(k) promulgated under the Securities Act
or (c) if such holder provides the Company with an opinion of counsel (which
counsel and opinion are reasonably satisfactory to the Company) stating that a
public sale or transfer of such Security may be made without registration under
the Securities Act.
5. Representations and Warranties by the Company. Except as set forth in
---------------------------------------------
the disclosure schedule that has been prepared, executed and delivered by the
Company to the Investors on the date of this Agreement (the "Company Disclosure
Schedule"), the Company covenants with, and represents and warrants to, each
Investor as follows:
5.1. Due Organization; Subsidiaries; Etc.
------------------------------------
(a) The Company owns no shares of capital stock of, or equity
interest of any nature in, any Entity, other than Digital Sound International
Corporation and DGSD Malaysia Corporation. (The Company and each of its
Subsidiaries are sometimes referred to collectively in this Agreement as the
"Company").
(b) Each of the Company and each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all necessary power and authority: (i) to
conduct its business in the manner in which its business is currently being
conducted; and (ii) to own and use its assets in the manner in which its assets
are currently owned and used.
(c) Except as set forth in the Company Disclosure Schedule, each of
the Company and each Subsidiary is qualified to do business as a foreign
corporation, and is in good standing, under the laws of all jurisdictions where
the nature of its business requires such qualification and where the failure to
so qualify would have a Material Adverse Effect. The Company shall become
qualified or in good standing as soon as
3
<PAGE>
reasonably practicable after the Closing under the laws of all jurisdictions
where the nature of its business requires such qualification.
5.2. Certificate of Incorporation and Bylaws. The Company has made
---------------------------------------
available to the Investors accurate and complete copies of the articles of
incorporation and bylaws of the Company and each Subsidiary, including all
amendments thereto.
5.3. Capitalization, Etc.
--------------------
(a) As of December 15, 1997, the authorized capital stock of the
Company consists of: (i) 50,000,000 shares of Common Stock, of which 20,561,593
shares have been issued and are outstanding as of the date of this Agreement;
and (ii) 15,000,000 shares of preferred stock, no par value, of which 2,631,579
shares have been designated Series A Preferred Stock, all of which have been
issued and are outstanding, and of which 3,386,667 shares have been designated
Series B Preferred Stock, of which no shares are outstanding as of the date of
this Agreement. All of the outstanding shares of Common Stock and Series A
Preferred Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. Except as set forth in the Company Disclosure Schedule: (i)
none of the outstanding shares of Common Stock or Series A Preferred Stock is
entitled or subject to any preemptive or similar right; (ii) none of the
outstanding shares of Common Stock or Series A Preferred Stock is subject to any
right of first refusal in favor of the Company; and (iii) there is no contract
to which the Company is a party, or of which the Company is aware, relating to
the voting or registration of, or restricting any person from purchasing,
selling, pledging or otherwise disposing of (or granting any option or similar
right with respect to), any shares of outstanding Common Stock or Series A
Preferred Stock. The Company is under no obligation to repurchase, redeem or
otherwise acquire any outstanding shares of Common Stock or Series A Preferred
Stock.
(b) Except as set forth in the Company Disclosure Schedule and as of
December 15, 1997, there is no: (i) outstanding subscription, option, call,
warrant or right (whether or not currently exercisable) to acquire any shares of
the capital stock or other securities of the Company; (ii) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of the Company; or (iii)
stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which the Company is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities.
5.4. SEC Filings; Financial Statements.
---------------------------------
(a) The Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act in addition to one or more
registration statements and amendments thereto heretofore filed by the Company
with the SEC (all of the foregoing including filings incorporated by reference
therein being referred to herein as the
4
<PAGE>
"Company SEC Documents"). As of the time it was filed with the SEC (or, if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing): (i) each of the Company SEC Documents complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. No event or circumstance has occurred or exists with respect to the
Company or its business, properties, prospects, operations or financial
condition, which, under any applicable Legal Requirements, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(b) The financial statements (including any related notes) contained
in the Company SEC Documents: (i) complied as to form in all material respects
with the published rules and regulations of the SEC applicable thereto; (ii)
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered (except as may be
indicated in the notes to such financial statements or, in the case of unaudited
statements, as permitted by Form 10-Q under the Exchange Act, and except that
the unaudited financial statements may not contain footnotes and are subject to
normal and recurring year-end adjustments which will not, individually or in the
aggregate, be material in amount), and (iii) fairly present the consolidated
financial position of the Company and its Subsidiaries as of the respective
dates thereof and the consolidated results of operations of the Company and its
Subsidiaries for the periods covered thereby.
5.5. Absence of Changes. Except as set forth in the Company Disclosure
------------------
Schedule, since September 30, 1997, there has not been any material adverse
change in the business, condition, assets, liabilities, operations, financial
performance or prospects of the Company, and no event has occurred that could
reasonably be expected to have a Material Adverse Effect on the Company.
5.6. Proprietary Assets.
------------------
(a) The Company has taken reasonable measures and precautions to
protect and maintain the confidentiality, secrecy and value of its Proprietary
Assets.
(b) Except as set forth in the Company SEC Documents and to the best
knowledge of the Company: (i) all patents, trademarks, service marks and
copyrights held by the Company are valid, enforceable and subsisting; (ii) no
Company Proprietary Assets and no Proprietary Asset that is currently being
developed by the Company (either by itself or with any other person) infringes,
misappropriates or conflicts with any Proprietary Asset owned or used by any
other Person; (iii) none of the products that are or have been designed,
created, developed, assembled, manufactured or sold by the Company is
infringing, misappropriating or making any lawful or unauthorized use of
5
<PAGE>
any Proprietary Asset owned or used by any other Person, and none of such
products has at any time infringed, misappropriated or made any unlawful or
unauthorized use of, and the Company has not received any notice or other
communication (in writing or otherwise) of any actual, alleged, possible or
potential infringement, misappropriation or unlawful or unauthorized use of any
Proprietary Asset owned or used by any other Person; (iv) no other Person is
infringing, misappropriating or making any unlawful or unauthorized use of, and
no Proprietary Asset owned or used by any other Person infringes or conflicts
with, any Company Proprietary Assets.
(c) The Company's Proprietary Assets constitute all the Proprietary
Assets necessary to enable the Company to conduct its business in the manner in
which such business has been and is being conducted. The Company has not (i)
licensed any of the Company Proprietary Assets to any person on an exclusive
basis, or (ii) entered into any covenant not to compete or Contract limiting its
ability to exploit fully any of its Proprietary Assets or to transact business
in any market or geographical area or with any person.
5.7. Contracts.
---------
(a) For purposes of this Agreement, any Contract that is or would be
material to the Company, to the business, condition, capitalization or
operations of the Company or to any of the transactions contemplated by this
Agreement shall be deemed to constitute a "Material Contract."
(b) Except as set forth in the Company Disclosure Schedule, each
Material Contract is valid and in full force and effect, and is enforceable by
the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
(c) Except as set forth in the Company Disclosure Schedule, the
Company has not violated or breached, or committed any default under, any
Material Contract, and, to the best knowledge of the Company, no other person
has violated or breached, or committed any default under, any Material Contract;
(ii) no event has occurred, and no circumstance or condition exists, that (with
or without notice or lapse of time) will, or could reasonably be expected to,
(A) result in a violation or breach of any of the provisions of any Material
Contract, (B) give any person the right to declare a default or exercise any
remedy under any Material Contract, (C) give any person the right to accelerate
the maturity or performance of any Material Contract, or (D) give any person the
right to cancel, terminate or modify any Material Contract; and (iii) the
Company has not received any notice or other communication regarding any actual
or possible violation or breach of, or default under, any Material Contract.
5.8. Liabilities. Except as set forth in the Company Disclosure Schedule,
-----------
the Company does not have any accrued, contingent or other liabilities of any
nature, either matured or unmatured (whether or not required to be reflected in
financial statements in
6
<PAGE>
accordance with generally accepted accounting principles, and whether due or to
become due), except for: (a) liabilities identified as such in the "liabilities"
column of the unaudited balance sheet contained in the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997; and (b) normal and
recurring liabilities that have been incurred by the Company since September 30,
1997 in the ordinary course of business and consistent with past practices.
5.9. Compliance with Legal Requirements. The Company is in compliance
----------------------------------
with all applicable Legal Requirements, except where the failure to comply with
such Legal Requirements has not had and will not have a Material Adverse Effect
on the Company. The Company has not received any notice or other communication
from any Governmental Body regarding any actual or possible violation of, or
failure to comply with, any Legal Requirement.
5.10. Transactions with Affiliates. Except as set forth in the Company
----------------------------
SEC Documents or except as contemplated by this Agreement, since the date of the
Company's last proxy statement filed with the SEC, no event has occurred that
would be required to be reported by the Company pursuant to Item 404 of
Regulation S-K promulgated by the SEC.
5.11. Legal Proceedings; Orders. Except as set forth in the Company
-------------------------
Disclosure Schedule or the Company SEC Documents, there is no pending Legal
Proceeding, and, to the best knowledge of the Company, no Person has threatened
to commence any Legal Proceeding: (i) that involves the Company or any of the
assets owned or used by the Company; or (ii) that challenges, or that may have
the effect of preventing, delaying, making illegal or otherwise interfering with
any of the transactions contemplated by this Agreement. To the best knowledge
of the Company, no event has occurred, and no claim, dispute or other condition
or circumstance exists, that will, or that could reasonably be expected to, give
rise to or serve as a basis for the commencement of any such Legal Proceeding.
There is no order, writ, injunction, judgment or decree to which the Company, or
any of the assets owned or used by the Company, is subject.
5.12. Authority; Binding Nature of Agreement. The Company has the
--------------------------------------
absolute and unrestricted right, power and authority to enter into and to
perform its obligations under this Agreement, the Registration Rights Agreement
referred to in Section 9.1(e), and the Convertible Promissory Notes. The Board
of Directors of the Company (at a meeting duly called and held) has (a)
determined that this Agreement, the Registration Rights Agreement referred to in
Section 9.1(e), the Convertible Promissory Notes and the Certificate and the
transactions contemplated hereby and thereby are fair and in the best interests
of the Company and its shareholders, (b) approved the execution, delivery and
performance of this Agreement, the Registration Rights Agreement referred to in
Section 9.1(e), the Convertible Promissory Notes and the Certificate by the
Company and has approved the transactions contemplated hereby and thereby and no
further consent or authorization of the Company or the Board of Directors or
shareholders is required except as contemplated by this Agreement, including,
without limitation, by Section 8 hereof.
7
<PAGE>
This Agreement, the Registration Rights Agreement referred to in Section 9.1(e),
and the Convertible Promissory Notes constitute the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
their terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
5.13. Vote Required. Except as contemplated by this Agreement (including,
-------------
without limitation, Section 8 hereof), no vote of the holders of any class or
series of the Company's capital stock is necessary to adopt and approve this
Agreement, the Certificate or the transactions contemplated by this Agreement.
5.14. Issuance of Shares; Offering Valid. The issuance of the Preferred
----------------------------------
Stock has been duly authorized and, when issued in accordance with the terms
hereof, the Preferred Stock shall be validly issued, fully paid and non-
assessable and not subject to any Encumbrances arising by virtue of actions or
omissions by the Company and entitled to the rights, preferences and privileges
set forth in the Certificate. The Conversion Stock has been or will be duly
authorized and reserved for issuance and, upon conversion in accordance with the
Certificate, will be duly issued, fully paid and non-assessable and not subject
to any Encumbrances. Assuming the accuracy of the representations and
warranties of the Investors contained in Section 6, the offer, issuance and sale
of the Securities are and will be exempt from the registration requirements of
the Securities Act and are exempt from registration and qualification under the
registration, permit or qualification requirements of all applicable state
securities laws.
5.15. Non-Contravention; Consents. Neither (1) the execution, delivery or
---------------------------
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the transactions contemplated by this
Agreement, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the articles of incorporation, bylaws or other charter or
organizational documents of the Company, or (ii) any resolution adopted by the
shareholders, the Board or any committee of the Board;
(b) contravene, conflict with or result in a violation of, or give
any Governmental Body or other Person the right to challenge the transactions
contemplated by this Agreement or to exercise any remedy or obtain any relief
under, any Legal Requirement or any order, writ, injunction, judgment or decree
to which the Company, or any of the assets owned or used by the Company are
subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Authorization
that is held by the Company or that otherwise relates to the business of the
Company or to any of the assets owned or used by the Company;
8
<PAGE>
(d) except as set forth in the Company Disclosure Schedule,
contravene, conflict with or result in a violation or breach of, or result in a
default under, any provision of any Contract that is or would constitute a
Material Contract, or give any Person the right to (i) declare a default or
exercise any remedy under any such Material Contract, (ii) accelerate the
maturity or performance of any such Material Contract, or (iii) cancel,
terminate or modify any term of such Material Contract; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by the Company (except for minor liens
that will not, in any case or in the aggregate, materially detract from the
value of the assets subject thereto or materially impair the operations of the
Company).
Except as set forth in the Company Disclosure Schedule, the Company
will not be required to make any filing (other than the filing of the
Certificate with the California Secretary of State or any SEC, NASD or state
security law filings which may be required to be made by the Company and any
registration statement which may be filed pursuant to the Registration Rights
Agreement referred to in Section 9.1(e)) with or give any notice to, or to
obtain any consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the transactions
contemplated by this Agreement.
5.16. Fairness Opinion. The Company's Board of Directors has received the
----------------
written opinion of Houlihan Lokey Howard & Zukin, dated November 21, 1997, to
the effect that the transactions contemplated by this Agreement are fair to the
existing holders of the Common Stock from a financial point of view.
5.17. Full Disclosure. This Agreement (including the Company Disclosure
---------------
Schedule) does not (i) contain any representation, warranty or information that
is false or misleading with respect to any material fact, or (ii) omit to state
any material fact necessary in order to make the representations, warranties and
information contained herein and therein (in the light of the circumstances
under which such representations, warranties and information were made or
provided) not false or misleading.
6. Representations and Warranties by the Investors. Each Investor
-----------------------------------------------
covenants with, and represents and warrants to, the Company as follows:
6.1. Sophistication, etc. The Investor has experience as an investor in
--------------------
securities of companies similar to the Company and has the knowledge,
sophistication and experience in business and financial matters necessary to
evaluate the merits and risks of an investment in the Securities and is able to
bear the risks of its investment in the Securities and to afford the complete
loss of such investment.
6.2. Accredited Investor. The Investor is an "accredited investor" as
-------------------
such term is defined in Rule 501(a) of Regulation D under the Securities Act.
9
<PAGE>
6.3. Access to Information. The Investor has been afforded access to
---------------------
information about the Company and the Company's financial condition, results of
operations, business, properties, technology, management and prospects. The
Investor has been afforded the opportunity to ask such questions as it has
deemed necessary of, and to receive answers from, representatives of the Company
concerning such matters as the Investor has deemed relevant to an evaluation of
the merits and risks of investing in the Securities.
6.4. Corporate Acts and Proceedings. All corporate (or, as appropriate,
------------------------------
partnership, limited liability company or other organizational) acts and
proceedings required for the authorization, execution and delivery of this
Agreement and the Registration Rights Agreement referred to in Section 9.1(e)
hereof and the performance of this Agreement have been lawfully and validly
taken or will have been so taken by the Investor prior to the Closing.
6.5. Binding Obligations. This Agreement and the Registration Rights
-------------------
Agreement referred to in Section 9.1(e) hereof constitute the legal, valid and
binding obligations of the Investor and are enforceable against the Investor in
accordance with their respective terms, except as such enforcement is limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditors' right generally or by equitable principles of general application
(whether considered in an action at law or in equity).
7. Additional Representation and Warranty by Certain Investors. Each of
-----------------------------------------------------------
Oak Investment Partners V, Limited Partnership and Oak V Affiliates Fund,
Limited Partnership covenants with, and represents and warrants to, the Company
that it has good and valid title to the number of shares of Series A Preferred
Stock set forth opposite its name on Annex A hereto to be surrendered for
cancellation hereunder, free and clear of all encumbrances, liens, pledges,
charges or adverse claims.
8. Shareholders' Meeting. (a) As expeditiously as reasonably practicable
---------------------
following the Closing, the Company shall file with the SEC its preliminary proxy
statement (the "Proxy") pursuant to Section 14 of the Exchange Act and in no
event shall such Proxy be filed later than February 27, 1998 and (b) as
expeditiously as reasonably practicable following the Closing, the Company shall
hold its regular annual meeting and in no event shall such meeting be held later
than April 15, 1998 (as extended, the "Meeting Date"); provided, however, if the
period of time by which the Proxy is subject to SEC review exceeds 30 days, the
Meeting Date shall be extended by such number of days that exceeds 30 days;
provided that the Company is using its best efforts to cause the Proxy to be
approved by the SEC within such 30 day period. Such meeting shall include for
submission for shareholder approval an amendment to the Company's articles of
incorporation increasing the Company's authorized Common Stock in an amount
sufficient to cause the automatic conversion of the Convertible Promissory
Notes.
10
<PAGE>
9. Conditions of Parties' Obligations.
----------------------------------
9.1. Conditions of Investors' Obligations. The obligation of each
------------------------------------
Investor to purchase and pay for the Preferred Stock and the Convertible
Promissory Notes which it has agreed to purchase on the Closing Date is subject
to the fulfillment prior to or on the Closing Date of the following conditions,
any of which may be waived in whole or in part by an Investor with respect to
such investor:
(a) No Misrepresentation. The representations and warranties of the
--------------------
Company under this Agreement shall be deemed to have been made at and as of the
Closing Date and shall, without regard to any Material Adverse Effect
qualification contained therein, be true and correct in all material respects.
(b) Compliance with Agreement. The Company shall have performed and
-------------------------
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by it on or before the Closing
Date.
(c) Certificate. The Certificate shall have been filed with the
-----------
Secretary of State of the State of California, and the Investors shall have
received confirmation reasonably satisfactory to them that such filing has
occurred.
(d) Supporting Documents. Each Investor shall have received the
--------------------
following:
i) A copy of the Certificate and copies of resolutions of the
Board and each committee of the Board authorizing and approving the
Certificate and the execution, delivery and performance of this Agreement
and the Registration Rights Agreement referred to in Section 9.1(e) hereof
and the transactions contemplated hereby and thereby, each certified by the
secretary of the Company;
ii) A certificate of incumbency executed by the Secretary of the
Company certifying the names, titles and signatures of the officer(s)
executing the documents referred to in subparagraph (i).
(e) Registration Rights Agreement. The Company and the Investors
-----------------------------
shall have entered into a Registration Rights Agreement in the form attached
hereto as Annex D.
(f) The Company shall have received a letter from the Nasdaq Stock
Market, Inc., granting an exception from the shareholder approval requirement
under Marketplace Rules, 4460(i)(1)(B) and (D)(ii), 4460(i)(2) and 4460(j) with
respect to the transactions contemplated by this Agreement.
(g) The Investors shall purchase (including the exchange of 2,631,579
shares of the Series A Preferred Stock) at least $25,000,000 of Preferred Stock
and
11
<PAGE>
Convertible Promissory Notes at the Closing. Microsoft Corporation shall
purchase at least $5,000,000 of Preferred Stock and Convertible Promissory
Notes.
(h) The Investors shall have received from Latham & Watkins, counsel
for the Company, an opinion, dated the Closing Date, in the form attached hereto
as Annex E.
(i) The Board of Directors of the Company shall have received an
opinion from Houlihan Lokey Howard & Zukin to the effect that the transactions
contemplated by this Agreement are fair to the public shareholders of the
Company from a financial point of view.
9.2. Condition of Company's Obligations. The Company's obligation to
----------------------------------
issue and sell the Preferred Stock to the Investors on the Closing Date is
subject to the fulfillment prior to or on the Closing Date of the following
conditions, any of which may be waived in whole or in part by the Company.
(a) No Misrepresentation. The representations and warranties of each
--------------------
of the Investors under this Agreement shall be deemed to have been made at and
as of the Closing Date and shall be true and correct in all material respects.
(b) Compliance with Agreement. Each of the Investors shall have
-------------------------
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it on
or before the Closing Date.
(c) Certificate. The Certificate shall have been filed with the
-----------
Secretary of State of the State of California, and the Company shall have
received confirmation reasonably satisfactory to it that such filing has
occurred.
(d) The Company shall not be required to sell and exchange less than
2,451,667 shares of the Preferred Stock to the Investors as a whole.
10. Definitions. Unless the context otherwise requires, the terms defined
-----------
in this Section 9 shall have the meanings specified for all purposes of this
Agreement.
"Affiliate" shall mean any Person that directly or indirectly
---------
controls, is controlled by, or is under common control with, the indicated
Person.
"Agreement" shall mean this Agreement.
---------
"Board" shall mean the Board of Directors of the Company.
-----
"Certificate" shall have the meaning assigned to it in Section 1
-----------
hereof.
"Common Stock" shall have the meaning assigned to it in Section 1
------------
hereof.
12
<PAGE>
"Company Proprietary Asset" shall mean any Proprietary Asset owned by
-------------------------
or licensed to the Company or otherwise used by the Company.
"Consent" shall mean any approval, consent, ratification, permission,
-------
waiver or authorization (including any Governmental Authorization).
"Contract" shall have mean any written, oral or other agreement,
--------
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature: (a) to which the Company is a
party; (b) by which the Company or any asset of the Company is or may become
bound or under which the Company has, or may become subject to, any obligation;
or (c) under which the Company has or may acquire any right or interest.
"Conversion Stock" shall mean the unissued Common Stock into which the
----------------
Preferred Stock is convertible and the Common Stock issued upon such conversion.
"Encumbrance" shall mean any lien, pledge, hypothecation, charge,
-----------
mortgage, security interest, encumbrance, claim, infringement, interference,
option, right of first refusal, preemptive right, community property interest or
restriction of any nature (including any restriction on the voting of any
security, any restriction on the transfer of any security or other asset, any
restriction on the receipt of any income derived from any asset, any restriction
on the use of any asset and any restriction on the possession, exercise or
transfer of any other attribute of ownership of any asset).
"Entity" shall mean any corporation (including any non-profit
------
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Governmental Authorization" shall mean any: (a) permit, license,
--------------------------
certificate, franchise, permission, clearance, registration, qualification or
authorization issued, granted, given or otherwise made available by or under the
authority of any Governmental Body or pursuant to any Legal Requirement; or (b)
right under any Contract with any Governmental Body.
"Governmental Body" shall mean any (a) nation, state, commonwealth,
-----------------
province, territory, county, municipality, district or other jurisdiction of any
nature; (b) federal, state, local, municipal, foreign or other government; or
(c) governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, instrumentality,
official, organization, unit, body or Entity and any court or other tribunal).
"Holder" of any Security shall mean the record or beneficial owner of
------
such Security. A Holder of Preferred Stock shall be deemed to be also the
Holder of the Conversion Stock underlying the Preferred Stock.
13
<PAGE>
"Holders of Majority of the Conversion Stock" shall mean the Holders
-------------------------------------------
of more than 50% of the then-outstanding shares of the Conversion Stock issued
or issuable upon conversion of the Preferred Stock.
"Investor" shall have the meaning assigned to it in the introductory
--------
paragraph of this Agreement.
"Legal Proceeding" shall mean any action, suit, litigation,
----------------
arbitration, proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving, any court or other Governmental Body or any arbitrator or arbitration
panel that could reasonably be expected to have a Material Adverse Effect on the
Company.
"Legal Requirement" shall mean any federal, state, local, municipal,
-----------------
foreign or other law, statute, constitution, principle of common law,
resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Body.
"Material Adverse Effect" shall mean an event, violation, inaccuracy,
-----------------------
circumstance or other matter if such event, violation, inaccuracy, circumstance
or other matter would have a material adverse effect on the business, condition,
assets, liabilities, operations or financial performance of the Company and its
subsidiaries taken as a whole.
"Person" shall include all natural persons, corporations, business
------
trusts, associations, companies, partnerships, joint ventures and other Entities
and Government Bodies.
"Preferred Stock" shall have the meaning assigned to it in Section 1
---------------
hereof.
"Proprietary Asset" shall mean any (a) patent, patent application,
-----------------
trademark (whether registered or unregistered), trademark application, trade
name, fictitious business name, service mark (whether registered or
unregistered), service mark application, copyright (whether registered or
unregistered), copyright application, maskwork, maskwork application, trade
secret, know-how, customer list, franchise, system, computer software, computer
program, source code, algorithm, invention, design, blueprint, engineering
drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset; or (b) right to use or exploit
any of the foregoing.
"Representatives" shall mean officers, directors, employees, agents,
---------------
attorneys, accountants, advisors and representatives.
"SEC" shall mean the Securities and Exchange Commission.
---
"Securities" shall have the meaning assigned to it in Section 1
----------
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
14
<PAGE>
"Subsidiary" shall mean any corporation, association or other business
----------
entity at least 50% of the outstanding voting stock of which is at the time
owned or controlled directly or indirectly by the Company or by one or more of
such subsidiary entities or both.
11. Fees and Costs. In the event a Holder of any Security brings an
--------------
action against the Company or the Company brings an action against a Holder
arising under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement or the Certificate, including without limitation such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
12. Miscellaneous.
-------------
12.1. Waivers and Amendments. With the written consent of the Holders of
----------------------
a Majority of the Conversion Stock (a) the obligations of the Company and the
rights of the Holders of the 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
(b) the Company 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 or of any supplemental agreement or modifying in
any manner the rights and obligations hereunder of the Holders of the Securities
and the Company.
The foregoing notwithstanding, no such waiver or supplemental
agreement shall affect any of the rights of any Holder of a Security created by
the Certificate or by the California Corporations Code without compliance with
all applicable provisions of the California Corporations Code.
Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally or by course of dealing, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12.2. Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery or registered
first-class mail, facsimile, or air courier guaranteeing overnight delivery:
(a) If to a Holder of any of the Securities, addressed to such
Holder at its address shown on the signature pages hereof, or at such other
address as such Holder may specify by written notice to the Company, or
15
<PAGE>
(b) If to the Company initially at the following address:
Digital Sound Corporation
6307 Carpinteria Avenue
Carpinteria, California 93013
Attention: B. Robert Suh
Facsimile: (805) 566-2004
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is electronically acknowledged, if by facsimile; and on the next business day,
if timely delivered to an air courier guaranteeing overnight delivery.
12.3. Severability. Should any one or more of the provisions of this
------------
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
12.4. Successors, Assignees and Transferees. All the terms and provisions
-------------------------------------
of this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and, in particular, shall be binding upon and inure
to the benefit of any immediate or remote transferee of any Investor that is a
Holder at the time of any of the Securities; provided, however, that a
-------- --------
transferee who acquires Securities in a public offering registered under the
Securities Act or in a transaction that qualifies for exemption pursuant to Rule
144 under the Securities Act shall take such Securities free of the benefits and
burdens of this Agreement. This Agreement shall not run to the benefit of or be
enforceable by any Person other than a party to this Agreement and such
successors, assigns and transferees.
12.5. Headings. The headings of the Sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
12.6. Choice of Law. It is the intention of the parties that the internal
-------------
laws, and not the laws of conflicts, of California should govern the
enforceability and validity of this Agreement, the construction of its terms and
the interpretation of the rights and duties of the parties.
12.7. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties hereto with respect to the transactions contemplated by this
Agreement and supersedes all prior arrangements or understandings with respect
thereto.
16
<PAGE>
12.8. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
12.9. Expenses. Except as specifically provided herein, all reasonable
--------
legal costs and expenses of Cooley Godward LLP incurred in connection with this
Agreement and the transactions contemplated hereby on behalf of the Investors
shall be paid by the Company.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
undersigned, whereupon this letter shall become a binding contract between you
and the undersigned.
(Signature pages follow)
17
<PAGE>
[Preferred Stock Purchase Agreement]
DIGITAL SOUND CORPORATION
By /s/ Mark C. Ozur
------------------------
Mark C. Ozur, President
and /s/ B. Robert Suh
------------------------
B. Robert Suh, Secretary
S-1
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
SCOT B. JARVIS, AN INDIVIDUAL
By: /s/ Scott B. Jarvis
-----------------------------
Scot B. Jarvis, an Individual
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Scot B. Jarvis
--------------
Address for notices:
Cedar Grove Partners, LLC
4153 Issaquah Pine Lake Road S.E.
Issaquah, WA 98029
Attention: Scot B. Jarvis
Telephone: (888) 222-7268
Facsimile: (425) 392-9944
Investor is organized under the laws
of the State of N/A
---
S-2
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
MICHAEL J. WILLNER, AN INDIVIDUAL
By: /s/ Michael J. Willner
---------------------------------
Michael J. Willner, an Individual
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Michael J. Willner
------------------
Address for notices:
c/o Willner Properties
150 Allendale Road
King of Prussia, PA 19406
Attention: Michael J. Willner
Telephone: (610) 265-8121
Facsimile: (610) 265-8325
Investor is organized under the laws
of the State of N/A
---
S-3
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
SPRING POINT PARTNERS, L.P.
By: /s/ John D. Botti
-------------------------------
John D. Botti, Managing Partner
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Spring Point Partners, L.P.
---------------------------
Address for notices:
655 Montgomery Street, Suite 600
San Francisco, CA 94111
Attention: John D. Botti
Telephone: (415) 263-1890
Facsimile: (415) 399-9828
Investor is organized under the laws
of the State of California
----------
S-4
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
NEWBERG FAMILY TRUST UTA DTD 12/18/90
By: /s/ Bruce Newberg
----------------------
Bruce Newberg, Trustee
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Newberg Family Trust UTA DTD 12/18/90
-------------------------------------
Address for notices:
11601 Wilshire Blvd., Suite 1940
Los Angeles, CA 90025
Attention: Bruce Newberg
Telephone: (310) 914-9293
Facsimile: (310) 914-9242
Investor is organized under the laws
of the State of California
----------
S-5
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
FREDERICK J. AND ROBIN GRACE WARREN, AS JOINT TENANTS
By: /s/ Frederick J. Warren By: /s/ Robin Grace Warren
---------------------------- ---------------------------
Frederick J. Warren Robin Grace Warren
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Frederick J. Warren and Robin Grace Warren, as
----------------------------------------------
Joint Tenants
- -------------
Address for notices:
11150 Santa Monica Blvd., Suite 1200
Los Angeles, CA 90025
Attention: Frederick J. Warren and Robin Grace Warren
Telephone: (310) 477-6611
Facsimile: (310) 477-1011
Investor is organized under the laws
of the State of N/A
---
S-6
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
STROME SUSSKIND HEDGECAP FUND, L.P.
By: Strome Susskind Investment Management, L.P.
a Delaware limited partnership
Its: General Partner
By: SSCO, Inc.
a Delaware corporation
Its: General Partner
By: /s/ Jeffrey Susskind
---------------------------------------------
Jeffrey Susskind, Director and Vice President
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Strome-Susskind Hedgecap Fund, L.P.
-----------------------------------
Address for notices:
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401
Attention: Jeffrey Susskind
Telephone: (310) 917-6600
Facsimile: (310) 917-6613
Investor is organized under the laws
of the State of Delaware
--------
S-7
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
STROME HEDGECAP LIMITED
By: Strome Susskind Investment Management, L.P.
a Delaware limited partnership
Its: General Partner
By: SSCO, Inc.
a Delaware corporation
Its: General Partner
By: /s/ Jeffrey Susskind
---------------------------------------------
Jeffrey Susskind, Director and Vice President
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Strome Hedgecap Limited
-----------------------
Address for notices:
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401
Attention: Jeffrey Susskind
Telephone: (310) 917-6600
Facsimile: (310) 917-6613
Investor is organized under the laws
of the State of Delaware
--------
S-8
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
STROME OFFSHORE, LIMITED
By: Strome Susskind Investment Management, L.P.
a Delaware limited partnership
Its: Investment Advisor
By: SSCO, Inc.
a Delaware corporation
Its: General Partner
By: /s/ Jeffrey Susskind
---------------------------------------------
Jeffrey Susskind, Director and Vice President
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Strome Offshore, Limited
------------------------
Address for notices:
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401
Attention: Jeffrey Susskind
Telephone: (310) 917-6600
Facsimile: (310) 917-6613
Investor is organized under the laws
of the Cayman Islands
--------------
S-9
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
STROME PARTNERS, L.P.
By: Strome Susskind Investment Management, L.P.
a Delaware limited partnership
Its: General Partner
By: SSCO, Inc.
a Delaware corporation
Its: General Partner
By: /s/ Jeffrey Susskind
---------------------------------------------
Jeffrey Susskind, Director and Vice President
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Strome Partners, L.P.
---------------------
Address for notices:
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401
Attention: Jeffrey Susskind
Telephone: (310) 917-6600
Facsimile: (310) 917-6613
Investor is organized under the laws
of the State of Delaware
--------
S-10
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Sarvas Savvinidis
-----------------------------------------
Sarvas Savvinidis, Director of Operations
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Moore Global Investments, Ltd.
------------------------------
Address for notices:
c/o Moore Capital Management, Inc.
1251 Avenue of the Americas
New York, New York 10020
Attention: Michael Heffernan
Telephone: (212) 782-7033
Facsimile: (212) 575-6832
Investor is organized under the laws
of the British Virgin Islands
----------------------
S-11
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
REMINGTON INVESTMENT STRATEGIES, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Sarvas Savvinidis
-----------------------------------------
Sarvas Savvinidis, Director of Operations
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Remington Investment Strategies, L.P.
-------------------------------------
Address for notices:
Moore Capital Advisors, L.L.C.
1251 Avenue of the Americas
New York, New York 10020
Attention: Michael Heffernan
Telephone: (212) 782-7033
Facsimile: (212) 575-6832
Investor is organized under the laws
of the State of Delaware
--------
S-12
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
CITIVENTURE 96 PARTNERSHIP FUND, L.P.
By: Chancellor LGT Asset Management, Inc.
Its: Investment Advisor
By: /s/ Allesandro Piol
----------------------------------
Allesandro Piol, Managing Director
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Citiventure 96 Partnership Fund, L.P.
-------------------------------------
Address for notices:
c/o Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10038
Attention: Mark Radovanovich
Telephone: (212) 278-9683
Facsimile: (212) 278-9883
Investor is organized under the laws
of the Cayman Islands
--------------
S-13
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS II, L.P.
By: CPCO Associates, L.P.
Its: Investment General Partner
By: Chancellor LGT Venture Partners, Inc.,
Its: General Partner
By: /s/ Allesandro Piol
----------------------------------
Allesandro Piol, Managing Director
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Chancellor LGT Private Capital Offshore Partners
------------------------------------------------
II, L.P.
- --------
Address for notices:
c/o Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10036
Attention: Mark Radovanovich
Telephone: (212) 278-9683
Facsimile: (212) 278-9883
Investor is organized under the laws
of the Cayman Islands
--------------
S-14
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS I, C.V.
By: Chancellor LGT KME IV Partner, L.P.
Its: Investment General Partner
By: Chancellor LGT Venture Partners, Inc.
Its: General Partner
By: /s/ Allesandro Piol
----------------------------------
Allesandro Piol, Managing Director
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Chancellor LGT Private Capital Offshore Partners
------------------------------------------------
I, C.V.
- -------
Address for notices:
c/o Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10036
Attention: Mark Radovanovich
Telephone: (212) 278-9683
Facsimile: (212) 278-9883
Investor is organized under the laws
of the Netherlands Antilles
--------------------
S-15
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS III, L.P.
By: CPCP Associates, L.P.
Its: General Partner
By: Chancellor LGT Venture Partners, Inc.
Its: General Partner
By: /s/ Allesandro Piol
----------------------------------
Allesandro Piol, Managing Director
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Chancellor LGT Private Capital Offshore Partners
------------------------------------------------
III, L.P.
- ---------
Address for notices:
c/o Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10036
Attention: Mark Radovanovich
Telephone: (212) 278-9683
Facsimile: (212) 278-9883
Investor is organized under the laws
of the Delaware
--------
S-16
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP
By: Oak Associates VII, L.L.C.
Its: General Partner
By: /s/ Bandel Carano
----------------------------------------------------
Bandel Carano, Managing Member
Exact name of Investor or nominee
as it should appear on stock
certificate: Oak Investment Partners VII, Limited Partnership
------------------------------------------------
Address for notices:
525 University Avenue
Suite 1300
Palo Alto, CA 94301
Attention: Bandel Carano
Telephone: (650) 614-3700
Facsimile: (650) 328-6345
Investor is organized under the laws
of the State of Delaware
--------
S-17
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
OAK VII AFFILIATES FUND, LIMITED PARTNERSHIP
By: Oak VII Affiates, L.L.C.
Its: General Partner
By: /s/ Bandel Carano
------------------------------
Bandel Carano, Managing Member
Exact name of Investor or nominee
as it should appear on stock
certificate: Oak VII Affiliates Fund, Limited Partnership
--------------------------------------------
Address for notices:
525 University Avenue
Suite 1300
Palo Alto, CA 94301
Attention: Bandel Carano
Telephone: (650) 614-3700
Facsimile: (650) 328-6345
Investor is organized under the laws
of the State of Delaware
--------
S-18
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
OAK INVESTMENT PARTNERS V, LIMITED PARTNERSHIP
By: Oak Associates V, L.L.C.
Its: General Partner
By: /s/ Bandel Carano
-------------------------------
Bandel Carano, Managing Member
Exact name of Investor or nominee
as it should appear on stock
certificate: Oak Investment Partners V, Limited Partnership
----------------------------------------------
Address for notices:
525 University Avenue
Suite 1300
Palo Alto, CA 94301
Attention: Bandel Carano
Telephone: (650) 614-3700
Facsimile: (650) 328-6345
Investor is organized under the laws
of the State of Delaware
--------
S-19
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
OAK V AFFILIATES FUND, LIMITED PARTNERSHIP
By: Oak V Affiliates
a Connecticut partnership
Its: General Partner
By: /s/ Bandel Carano
------------------------------
Bandel Carano, General Partner
Exact name of Investor or nominee
as it should appear on stock
certificate: Oak V Affiliates Fund, Limited Partnership
------------------------------------------
Address for notices:
525 University Avenue
Suite 1300
Palo Alto, CA 94301
Attention: Bandel Carano
Telephone: (650) 614-3700
Facsimile: (650) 328-6345
Investor is organized under the laws
of the State of Delaware
--------
S-20
<PAGE>
[Preferred Stock Purchase Agreement]
The foregoing Agreement is
hereby accepted as of the
date first above written.
MICROSOFT CORPORATION
By: /s/ Gregory B. Maffei
-----------------------------
Title: Chief Financial Officer
---------------------------
Exact name of Investor or nominee
as it should appear on stock and convertible
promissory note certificates: Microsoft Corporation
---------------------
Address for notices:
One Microsoft Way
9N/1266
Redmond, WA 98052-6399
Attention: Robert A. Eshelman
Telephone: (425) 882-8080
Facsimile: (425) 936-7329
Investor is organized under the laws
of the State of Washington
----------
S-21
<PAGE>
SCHEDULES TO PREFERRED STOCK PURCHASE AGREEMENT
Section 5.1 Due Organization; Subsidiaries; etc.
Section 5.3 Capitalization rights of certain persons to purchase the
Company's capital stock or require the registration of such
capital stock under the Securities Act.
Section 5.5 Absence of Changes: A list of certain changes or events since
September 30, 1997.
Section 5.7 Contracts: A list of the material contracts of the Company
whereby the Company is, or may deemed to be, in default.
Section 5.8 Certain Liabilities of the Company.
Section 5.11 Legal Proceedings: A list of material litigation of the Company
and its Subsidiaries.
Section 5.15 Non-Contravention; Consents: A list of agreements, obligations,
encumbrances, and plans of the Company that the execution and
performance of the Preferred Stock Purchase Agreement would cause
a breach or default thereof.
S-1
<PAGE>
ANNEX A
-------
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Principal Amount
Number of Shares of Convertible Purchase Price
of Preferred Stock Promissory Notes or Other
Name/Nominee Being Purchased Being Purchased Consideration
- ------------ --------------- --------------- -------------
<S> <C> <C> <C>
Scot B. Jarvis 4,463 $16,522.50 $49,995.00
Michael J. Willner 13,387 $49,597.50 $150,000.00
Spring Point Partners, 22,312 $82,657.50 $249,997.50
L.P.
Newberg Family Trust UTA 26,775 $99,187.50 $300,000.00
DTD 12/18/90
Frederick J. Warren and 44,625 $165,315.00 $500,002.50
Robin Grace Warren
Strome Susskind, 75,863 $281,032.50 $850,005.00
Hedgecap Fund, L.P.
Strome Hedgecap Limited 13,387 $49,597.50 $150,000.00
Strome Offshore, Limited 49,087 $181,845.00 $549,997.50
Strome Partners, L.P. 40,163 $148,777.50 $450,000.00
Moore Global 164,667 $609,997.50 $1,845,000.00
Investments, Ltd.
Remington Investment 36,146 $133,905.00 $405,000.00
Strategies, L.P.
Citiventure 96 232,586 $861,607.50 $2,606,002.50
Partnership Fund, L.P.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Chancellor LGT Private 103,441 $383,190.00 $1,158,997.50
Capital Offshore
Partners II, L.P.
Chancellor LGT Private 8,121 $30,090.00 $90,997.50
Capital Offshore
Partners I, C.V.
Chancellor LGT Private 57,477 $212,925.00 $644,002.50
Capital Partners III,
Limited Partnership
Oak Investment Partners 435,317 $1,612,627.50 $4,877,505.00
VII, Limited Partnership
Oak VII Affiliates Fund, 10,933 $40,500.00 $122,497.50
Limited Partnership
Oak Investment Partners 652,000 Surrender for
V, Limited Partnership cancellation
Certificate No. 1
evidencing 2,573,684
shares of Series A
Preferred Stock
Oak V Affiliates Fund, 14,667 Surrender for
Limited Partnership cancellation
Certificate No. 2
evidencing 57,895
shares of Series A
Preferred Stock
Microsoft Corporation 446,250 $1,653,127.50 $5,000,002.50
</TABLE>
<PAGE>
ANNEX B
[Certificate of Determination - see Exhibit 3.1 to Form 8-K]
<PAGE>
ANNEX C
[Convertible Promissory Note - See Exhibit 10.2 to Form 8-K]
<PAGE>
ANNEX D
[Registration Rights Agreement - See Exhibit 10.3 to Form 8K]
<PAGE>
ANNEX E
1. The Corporation has been duly incorporated and is validly existing and
in good standing under the laws of the State of California with full corporate
power and authority to own or lease its properties and conduct its business as
presently being conducted.
2. The Corporation has corporate power and authority to enter into and
perform its obligations under the Documents.
3. Each of the Documents has been duly authorized, executed and delivered
by the Corporation and is the legally valid and binding obligation of the
Corporation enforceable against the Corporation in accordance with its terms.
4. The execution and delivery by the Corporation of the Documents (A)
does not conflict with or violate any provision of (i) the Governing Documents
or (ii) any presently existing law, rule or regulation or, to the best of our
knowledge, any order, writ, injunction or decree applicable to the Corporation
and (B) does not require the consent or approval of, or registration,
declaration or filing with, any California or federal court, or California or
federal governmental agency or body except for such consent, approval,
registration, declaration or filing, as have been made or secured on or prior to
the date hereof.
5. Based solely, as to factual matters, upon the representations and
warranties of the Investors contained in Sections 4.1 and 6 of the Purchase
Agreement and on a certificate from an officer of the Corporation, and without
any independent investigation of the accuracy of such representations, it is not
necessary to register the initial issuance and sale of the shares of Preferred
Stock to you and the Convertible Promissory Notes by the Corporation under the
circumstances contemplated by the Purchase Agreement, under the Securities Act
of 1933, as amended (the "Securities Act").
6. Except as set forth in the Company Disclosure Schedule, the execution,
delivery and performance by the Corporation of each of the Documents does not
conflict with or constitute a breach of or default under (with due notice or
passage of time or otherwise) any Material Agreement of the Corporation, which
conflict, breach, or default could reasonably be expected to have a material
adverse effect on the Company and its subsidiaries taken as a whole, or on the
ability of the Corporation to perform its material obligations under the
Documents.
7. To the best of our knowledge and except as set forth in the Company
Disclosure Schedule or the Company SEC Documents, there is no material action,
suit, proceeding or investigation pending or threatened against or affecting the
Corporation or any of its properties or assets that seeks to restrain, enjoin,
prevent the consummation of or otherwise challenge any of the Documents or the
issuance, sale and delivery of the shares of Preferred Stock and the Convertible
Promissory Notes pursuant thereto, or that seeks material damages in
1
<PAGE>
connection therewith. We expressly advise you that with respect to this
paragraph 7, we have not undertaken any search of court dockets or other
public records in any jurisdiction with respect to the claims or other
matters referred to herein.
2
<PAGE>
EXHIBIT 10.2
------------
CONVERTIBLE PROMISSORY NOTE
---------------------------
NONE OF THIS NOTE OR THE SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
ISSUABLE UPON CONVERSION HEREOF, OR THE SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION OF SUCH PREFERRED STOCK (COLLECTIVELY, THE "SECURITIES"),
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE
SECURITIES LAWS OF ANY STATE. AS SET FORTH HEREIN, THIS NOTE IS NOT
NEGOTIABLE. THE SECURITIES MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND UNDER ANY APPLICABLE STATE
SECURITIES LAWS OR (II) DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED. ANY ATTEMPT TO TRANSFER, SELL, PLEDGE OR HYPOTHECATE IN
VIOLATION OF THESE RESTRICTIONS SHALL BE VOID.
U.S. $_______________ Dated: December 19, 1997
1. Principal. FOR VALUE RECEIVED, the undersigned, DIGITAL SOUND
---------
CORPORATION, a California corporation ("Maker"), HEREBY PROMISES TO PAY to
_________________ (the "Holder"), the aggregate sum of _________________________
U.S. dollars (U.S. $_________________) (the "Principal"), plus interest thereon
from the date hereof on the unpaid principal amount at the rate of seven percent
(7.0%) per annum (on the basis of a 365-day year and the actual number of days
elapsed).
2. Payment of Principal. Unless converted pursuant to Section 4 or
--------------------
accelerated pursuant to Sections 5 or 6 of this Note, all unpaid principal and
accrued and unpaid interest under this Note shall be due and payable in full on
the first anniversary of the date of this Note set forth above (the "Maturity
Date").
3. Manner of Payment. Payment of all unpaid principal and accrued and
-----------------
unpaid interest in accordance with Section 2 above shall be payable to Holder by
certified check in lawful currency of the United States of America delivered to
the following address:
[address]
<PAGE>
or to such address as Holder shall notify Maker in writing; provided that such
change of address notice is made in accordance with Section 6 hereof and is
received by Maker not less than five (5) business days prior to the Maturity
Date. As used herein, "business day" means a day other than a Saturday, Sunday
or a day on which banks are authorized to close in Los Angeles, California.
5. Conversion.
----------
(a) Upon the occurrence of Shareholder Approval (as defined below),
the outstanding Principal represented by this Note shall automatically be
converted into the number of shares of the Maker's Series B Convertible
Preferred Stock determined by dividing the Principal amount by $7.50 (the
"Number of Conversion Shares"). "Shareholder Approval" means approval by the
shareholders of the Maker of an amendment to the Maker's Ninth Amended and
Restated Articles of Incorporation authorizing a sufficient number of shares of
the Maker's Common Stock ("Common Stock") to permit the conversion of this Note
and all Notes of like tenor and the securities issuable on conversion thereof
into Common Stock, after taking into consideration all outstanding shares of
Common Stock and all shares of Common Stock reserved for issuance upon
conversion of all outstanding convertible securities of Maker and reserved for
issuance upon exercise of all outstanding options, warrants, rights, or similar
securities of Maker that may be exercised or exchanged by the holder thereof for
shares of Common Stock. The foregoing notwithstanding, any change in the
Conversion Price (as defined in the Maker's Certificate of Determination of
Rights, Preferences, Privileges and Restrictions of Series B Convertible
Preferred Stock) that occurs prior to such automatic conversion shall apply
equally to the Series B Convertible Preferred Stock issuable upon conversion as
if such shares had been outstanding at the time of such adjustment.
Upon the automatic conversion specified in the paragraph above, the outstanding
Principal represented by this Note shall be converted automatically without any
further action by the Holder and whether or not this Note is surrendered to the
Maker for cancellation. Upon the occurrence of such automatic conversion of
this Note, the Holder shall surrender this Note to the Maker for cancellation
or, if not surrendered, such notation shall be made in the books and records of
the Maker and be binding on the Holder and any transferee thereof. Thereupon,
there shall be issued and delivered to the Holder promptly at such office and in
its name as shown on this Note, a certificate or certificates for the number of
shares of Series B Convertible Preferred Stock into which this Note was
converted on the date on which such automatic conversion occurred. Upon
conversion in full, this Note and all obligations pursuant to this Note shall be
deemed paid and satisfied in full and this Note shall be cancelled. No
interest, accrued or unpaid, shall be due or payable upon conversion as set
forth herein.
(b) If the Company at any time or from time to time after the date
hereof effects a subdivision of the outstanding Series B Convertible Preferred
Stock, the Number of Conversion Shares in effect immediately before that
subdivision shall be proportionately decreased, and conversely, if the Company
at any time or from time to time after the date hereof combines the outstanding
shares of Series B Convertible
2
<PAGE>
Preferred Stock into a smaller number of shares, the Number of Conversion Shares
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this subsection (b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(c) If the Company at any time or from time to time after the date
hereof makes, or fixes a record date for the determination of holders of Series
B Convertible Preferred Stock entitled to receive, a dividend or other
distribution payable in securities of the Company other than shares of Series B
Convertible Preferred Stock, in each such event provision shall be made so that
the Holder shall receive upon conversion hereof, in addition to the number of
shares of Series B Convertible Preferred Stock receivable thereupon, the amount
of securities of the Company which they would have received had such Note been
converted into Series B Convertible Preferred Stock on the date of such event
and had they thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 4 with respect to the rights of the Holder or
with respect to such other securities by their terms.
(d) If at any time and from time to time after the date hereof the
Series B Convertible Preferred Stock issuable upon the conversion of this Note
is changed into the same or a different number of shares of any class or classes
of stock, whether by recapitalization, reclassification or otherwise (other than
a subdivision or combination of shares or stock dividend provided for elsewhere
in this Section 4) in any such event the Holder shall have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other change
by holders of the number of shares of Series B Convertible Preferred Stock into
which such shares of this Note could have been converted immediately prior to
such recapitalization, reclassification or change, all subject to further
adjustment as provided herein or with respect to such other securities or
property by the terms thereof.
[The following Section (e) is to be added in the Note of Microsoft
Corporation only:]
[(e) Notwithstanding any other provision to the contrary, to the
extent that conversion of all or any portion of this Note for any reason would
result in Holder's acquiring beneficial ownership of an aggregate of twenty
percent (20%) or more of the outstanding voting securities of Maker and such
event would or might reasonably be expected to result in the termination of any
Material Contract (as defined in the Preferred Stock Purchase Agreement (as
defined below)), then Maker shall be entitled to pre-pay at any time such
portion of the Note rather than convert such portion of the Note into voting
securities of the Maker.]
3
<PAGE>
Nothing contained in this Note shall be construed as conferring upon
the Holder or any other holder hereof any rights as a shareholder of the Maker
prior to the automatic conversion of this Note pursuant to this Section 4.
The Maker will not be required to issue fractional shares upon
conversion of this Note pursuant to this Section 4. If any fraction of a share
would be issuable upon conversion of this Note, the Holder shall receive the
next highest integral number of shares of Series B Convertible Preferred Stock.
6. Default.
-------
(a) An "Event of Default" occurs if, prior to the Maturity Date and
while this Note is outstanding: (i) the Company fails to pay to the Holder on
the Maturity Date the Principal and all accrued interest thereon; (ii) the
Company, pursuant to or within the meaning of any Bankruptcy Law: (A) commences
a voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a Custodian for it or
for all or substantially all of its property, or (D) makes a general assignment
for the benefit of its creditors; (iii) a court of competent jurisdiction enters
an order or decree under any Bankruptcy Law that remains unstayed and in effect
for 60 days and that: (A) is for relief against the Company in an involuntary
case, (B) appoints a Custodian for the Company or for all or substantially all
of its property, (C) orders the liquidation of the Company, or (D) requires all
or substantially all of the Company's property to be sold or otherwise
transferred; (iv) all or substantially all of the Company's property shall be
sold or otherwise transferred in any foreclosure action; (v) the Company's
shareholder vote at a duly held meeting of such shareholders at which a quorum
is present on a resolution that would constitute Shareholder Approval if duly
approved by such shareholders, and such resolution is not duly approved by such
shareholders at such meeting (including any adjournments thereof); (vi) the
Company shall breach or be in default of any representation, warranty, covenant
or agreement made by it in the Preferred Stock Purchase Agreement (as defined
below) that results in a Material Adverse Effect (as defined in the Preferred
Stock Purchase Agreement) on the Company or (vii) the Company shall breach or be
in default of Section 8(b) of the Preferred Stock Purchase Agreement.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar federal
or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidation or similar official under any
Bankruptcy Law. Nothing in this Section 5 shall limit the effect of Section 6.
(b) If an Event of Default occurs and is continuing, the Holder of
this Note may declare the Principal and all accrued interest to be due and
payable by sending notice to the Company. Upon such declaration, the Principal
and all accrued interest thereon shall be due and payable immediately.
7. Liquidation, Etc.
-----------------
4
<PAGE>
(a) In the event of (i) any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, (ii) a merger or consolidation of
the Company with another corporation (other than a wholly owned subsidiary of
the Company) in which the Company shall not be the survivor, (iii) the sale,
transfer or lease (other than a transfer or lease to a bona fide lender to
secure an obligation of the Company) of all or substantially all of the assets
of the Company, or (iv) a sale by the Company (other than pursuant to the
Preferred Stock Purchase Agreement or pursuant to the conversion of any or all
Convertible Promissory Note or Notes) of more than 51% of the outstanding voting
stock of the Company, there shall be deemed to be a liquidation of the Company
for purposes of this Note; provided that, if the stockholders of the Company
immediately prior to any transaction described in clauses (i) through (iv) above
are the holders of at least 51% of the outstanding voting securities of the
surviving or acquiring corporation or entity immediately after the completion of
the transaction (for purposes of this calculation, securities that any
stockholder of the Company owned prior to the transaction as a securities holder
of another party to the transaction shall be disregarded), then such merger,
consolidation, sale, transfer, or lease shall not be deemed to be a liquidation
of the Company.
(b) If there is a liquidation or deemed liquidation of the Company
pursuant to Section 6(a), then, without demand or notice, the Principal and all
accrued interest thereon shall be due and payable immediately.
8. Holder Representations. In issuing this Note, Maker is relying on the
----------------------
representations as set forth in Section 6 of the Preferred Stock Purchase
Agreement, dated as of the date hereof by and among Maker, Holder and each of
the Persons named in Annex A thereto (the "Preferred Stock Purchase Agreement").
9. Notices. Notices sent by the Maker or Holder hereunder shall be made
-------
in writing in accordance with Section 11.2 of the Preferred Stock Purchase
Agreement or as the Maker and Holder may otherwise agree in writing.
10. Headings. Headings used in this Note have been inserted for
--------
convenience of reference only and do not constitute a part hereof.
11. Choice of Law. It is the intention of the parties that the internal
-------------
laws, and not the laws of conflicts, of California should govern the
enforceability and validity of this Note, the construction of its terms and the
interpretation of the rights and duties of the parties.
12. Successors, Assignees and Transferees. This Note shall be binding
-------------------------------------
upon and shall inure to the benefit of Holder and Maker and their respective
heirs, successors and permitted assigns.
(Signature page follows)
5
<PAGE>
[Convertible Promissory Notes]
DIGITAL SOUND CORPORATION,
a California corporation
By: /s/ Mark C. Ozur
---------------------------
Mark C. Ozur, President
<PAGE>
EXHIBIT 10.3
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIGITAL SOUND CORPORATION
----------------
REGISTRATION RIGHTS AGREEMENT
Dated as of December 19, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DIGITAL SOUND CORPORATION
6307 Carpinteria Avenue
Carpinteria, California 93013
This Registration Rights Agreement ("Agreement") is made and entered
into as of December 19, 1997, by and among Digital Sound Corporation, a
California corporation (the "Company"), and the investors (herein referred to
collectively as the "Investors" and individually as an "Investor") whose names
are listed in Annex A to the Preferred Stock Purchase Agreement dated the date
hereof among the Company and the Investors (the "Purchase Agreement"). In order
to induce the Investors to enter into the Purchase Agreement, the Company has
agreed to provide the registration rights set forth in this Agreement. The
execution of this Agreement is a condition to the closing under the Purchase
Agreement.
The parties hereby agree as follows:
1. Definitions.
-----------
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Board: The Board of Directors of the Company.
-----
Claim: Any loss, claim, damages, liability (joint or several) or
-----
expense (including the reasonable costs of investigation and legal fees and
expenses).
Common Stock: The common stock of the Company.
------------
Convertible Promissory Notes: The convertible promissory notes in the
----------------------------
aggregate principal amount of $6,612,502.50 being issued and sold to the
Investors pursuant to the Purchase Agreement.
Equity Security: Any capital stock of the Company or any security
---------------
convertible, with or without consideration, into any such stock, or any
security carrying any warrant or right to subscribe to or purchase any such
stock, or any such warrant or right.
Exchange Act: The Securities Exchange Act of 1934, as from time to
------------
time amended.
Holder: The beneficial owner of a security. For all purposes of this
------
Agreement, the Company shall be entitled to treat the record owner of a
security as the beneficial owner of such security unless the Company has
been given written notice of the existence and identity of a different
beneficial owner. Securities held by a Holder shall be deemed to include
any securities held by affiliates of such Holder. A Holder of Preferred
Stock shall be deemed to be the Holder of the Common Stock into which such
Preferred Stock could be converted.
2
<PAGE>
Indemnified Holder: Any Holder of Restricted Stock, any partner,
------------------
officer, director, employee or agent of any such Holder and any Person who
controls any such Holder within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act.
Misstatement: An untrue statement of a material fact or an omission
------------
to state a material fact required to be stated in a Registration Statement
or Prospectus or necessary to make the statements in a Registration
Statement, Prospectus or preliminary prospectus not misleading.
Person: A natural person, partnership, corporation, business trust,
------
association, joint venture or other entity or a government or agency or
political subdivision thereof.
Preferred Stock: The Series B Convertible Preferred Stock being
---------------
issued and sold pursuant to the Purchase Agreement and the Series B
Convertible Preferred Stock issuable upon conversion of the Convertible
Promissory Notes being sold pursuant to the Purchase Agreement.
Prospectus: The prospectus included in any Registration Statement, as
----------
supplemented by any and all prospectus supplements and as amended by any
and all pre-effective and post-effective amendments and including all
material incorporated by reference in such prospectus.
Registration: A registration pursuant to Section 2 or 3 hereof.
------------
Registration Expenses: The out-of-pocket expenses of a Registration,
---------------------
including:
(1) all registration and filing fees (including fees with
respect to filings required to be made with the National Association of
Securities Dealers);
(2) fees and expenses of compliance with state securities or
blue sky laws (including fees and disbursements of counsel for the underwriters
or selling holders in connection with blue sky qualifications of the Restricted
Stock and determinations of their eligibility for investment under the laws of
such jurisdictions as the managing underwriters or holders of a majority of the
Restricted Stock being sold may designate);
(3) printing, messenger, telephone and delivery expenses;
(4) fees and disbursements of counsel for the Company, counsel
for the underwriters and reasonable fees and expenses of counsel (one firm only)
for the sellers of the Restricted Stock;
(5) fees and disbursements of all independent certified public
accountants of the Company incurred in connection with such Registration
(including the expenses of any special audit and "cold comfort" letters incident
to such registration); and
3
<PAGE>
(6) fees and disbursements of underwriters.
Registration Statement: Any registration statement which covers
----------------------
Restricted Stock pursuant to the provisions of this Agreement, including
the Prospectus included in such registration statement, amendments
(including post-effective amendments) and supplements to such registration
statement, and all exhibits to and all material incorporated by reference
in such registration statement.
Restricted Stock: The shares of Common Stock issued or issuable (i)
----------------
upon conversion of the Preferred Stock or (ii) pursuant to a stock
dividend, stock split or other distribution with respect to Common Stock
issued upon conversion of the Preferred Stock.
Securities Act: The Securities Act of 1933, as from time to time
--------------
amended.
SEC: The Securities and Exchange Commission.
---
Series B Convertible Preferred Stock: The Series B Convertible
------------------------------------
Preferred Stock of the Company.
Transfer Restricted Security: Restricted Stock that has not been sold
----------------------------
to or through a broker, dealer or underwriter in a public distribution or
other public securities transaction or sold in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act
under Rule 144 promulgated thereunder (or any successor rule) and which,
together with all other shares of Restricted Stock held by a given Holder,
is not eligible for sale under such Rule 144 within a three-month period.
underwritten registration or underwritten offering: A registration in
------------------------- ---------------------
which securities of the Company are sold to an underwriter for distribution
to the public.
2. Demand Registration
-------------------
a. Timing of Demand Registration
-----------------------------
The Holders of no fewer than 35% of the shares (as adjusted for any
stock split, reverse stock split, stock dividend or similar transaction) of
Restricted Stock may request in writing that the Company file a registration
statement under the Securities Act covering shares of Restricted Stock having an
anticipated aggregate offering price of at least $2,500,000 that are then
Transfer Restricted Securities at any time before the seventh anniversary of the
date of this Agreement.
If the Company is requested to effect a Registration and the Company
furnishes to the Holders of Restricted Stock requesting such Registration a copy
of a resolution of the Board certified by the Secretary of the Company stating
that in the good faith judgment of the Board it would be seriously detrimental
to the Company or its shareholders for such Registration Statement to be filed
on or before the date such filing would otherwise be required hereunder, the
4
<PAGE>
Company shall have the right to defer such filing for a period of not more than
135 days after receipt of the request for such Registration from the Holder or
Holders of Restricted Stock requesting such Registration; provided that during
such time the Company may not file a registration statement other than on Form
S-8 for securities to be issued and sold for its own account or that of anyone
other than the Holder or Holders of Restricted Stock requesting such
Registration; provided, further, that the Company may not exercise such right
more than once in any twelve-month period. Notwithstanding the foregoing, if
the reasons for deferring such filing should expire within such 135-day period,
the Company shall promptly notify the requesting Holders of such fact and shall
file such Registration Statement as expeditiously as possible, but in no event
later than 135 days after the receipt of request for such Registration.
b. Maximum Number of Demand Registrations
--------------------------------------
The Company shall be obligated to prepare, file and cause to become
effective no more than two registrations pursuant to this Section 2.
c. Participation
-------------
The Company shall promptly give written notice to all Holders of
Restricted Stock upon receipt of a request for a Registration pursuant to
Section 2(a) above. The Company shall include in such Registration such shares
of Restricted Stock for which it has received written requests to register such
shares within 10 days after such written notice has been given.
d. Underwriter's Cutback
---------------------
If the public offering of Restricted Stock is to be underwritten and,
in the good faith judgment of the managing underwriter, the inclusion of all the
Restricted Stock requested to be registered hereunder would interfere with the
successful marketing of a smaller number of such shares of Restricted Stock, at
a price per share that is acceptable to a majority in interest of the Holders
requesting such Registration, the number of shares of Restricted Stock to be
included shall be reduced to such smaller number with the participation in such
offering to be pro rata among the Holders of Restricted Stock requesting such
Registration, based upon the number of shares of Restricted Stock owned by such
Holders.
The Company and other Holders of securities of the Company may include
such securities in such Registration if, but only if, the managing underwriter
concludes that such inclusion will not interfere with the successful marketing
of all the Restricted Stock requested to be included in such Registration at a
price per share that is acceptable to a majority in interest of the Holders
requesting such Registration.
e. Managing Underwriter
--------------------
The managing underwriter or underwriters of any underwritten public
offering covered by a Registration shall be selected by the Board, subject to
the approval of the Holders of a majority of the shares of Restricted Stock that
initiate such Registration, which shall not be unreasonably withheld.
5
<PAGE>
f. Registration Expenses
---------------------
All Registration Expenses (excluding underwriters' and brokers'
discounts and commissions) incurred in connection with a registration pursuant
to this Section 2 will be borne by the Company.
3. Piggyback Registrations
-----------------------
a. Timing of Piggyback Registration and Participation
--------------------------------------------------
The Company shall notify all Holders of Transfer Restricted Securities
in writing at least fifteen (15) days prior to filing any registration statement
under the Securities Act for purposes of effecting a public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to any registration under Section 2
- ---------
of this Agreement or to any employee or similar benefit plan or a corporate
reorganization on Forms S-4 or S-8 or any successor forms thereto) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Transfer Restricted Securities then held by such Holder.
Each Holder desiring to include in any such registration statement all or any
part of the Transfer Restricted Securities held by such Holder shall, within ten
(10) days after receipt of the above-described notice from the Company, so
notify the Company in writing, and in such notice shall inform the Company of
the number of Transfer Restricted Securities such Holder wishes to include in
such registration statement.
b. Unlimited Number of Piggyback Registrations
-------------------------------------------
Each Holder of Transfer Restricted Securities is entitled to an
unlimited number of piggyback registrations pursuant to this Section 3. If a
Holder decides not to include all of its Transfer Restricted Securities in any
registration statement filed by the Company with respect to which it has
piggyback registration rights, such Holder shall nevertheless continue to have
the right to include any Transfer Restricted Securities in any subsequent
registration statement or registration statements, as the case may be, filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
c. Underwriter's Cutback
---------------------
If the public offering of Restricted Stock is to be underwritten and,
in the good faith judgment of the managing underwriter, the inclusion of all the
Transfer Restricted Securities requested to be registered hereunder would
interfere with the successful marketing of a smaller number of such shares in
the offering at a price per share that is acceptable to the Company, in the case
of a Company-initiated registration, or, in the case of a registration by the
holders of securities other than the Holders of Transfer Restricted Securities,
to such holders, the number of shares that may be included in the registration
shall be allocated, first, in the case of a Company-initiated registration, to
-----
the Company or, in the case of a registration by the holders of securities other
than the Holders of Transfer Restricted Securities, to such other holders, and
second, to each of the Holders requesting inclusion pursuant to this Section 3
- ------
of their Transfer
6
<PAGE>
Restricted Securities in such registration and any other Holders of "piggyback"
registration rights on a pro rata basis among such Holders, based upon the
number of shares of registrable securities owned by such Holders.
The Company and other Holders of securities of the Company may include
such securities in such Registration if, but only if, the managing underwriter
concludes that such inclusion will not interfere with the successful marketing
of all the Transfer Restricted Securities requested to be included in such
Registration at a price per share that is acceptable to the Company, in the case
of a Company-initiated registration, or, in the case of a registration by the
holders of securities other than the Holders of Transfer Restricted Securities,
to such holders.
d. Managing Underwriter
--------------------
The managing underwriter or underwriters of any underwritten public
offering covered by a registration pursuant to this Section 3 shall be selected
by the Board.
e. Registration Expenses
---------------------
All Registration Expenses incurred in connection with a registration
pursuant to this Section 3 (excluding underwriters' and brokers' discounts and
commissions) will be borne by the Company.
4. Hold-Back Agreements
--------------------
a. By Holders of Restricted Stock
------------------------------
Upon the written request of the managing underwriter of an
underwritten offering to the Holders of the Company's securities pursuant to
Section 2 or 3 above, a Holder of Restricted Stock shall not sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any Restricted Stock (other than those included in such Registration) without
the prior written consent of such managing underwriter for a period (not to
exceed 90 days after the effective date of such Registration) that such managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering; provided that no Holder of Restricted Stock shall
be bound by this Section 4(a) unless such Holder is permitted to include any of
such Holders' Restricted Stock then held by such Holder in such Registration
equal to the number of shares of Restricted Stock that such Holder could sell
during such 90-day period under Rule 144 of the Securities Act.
b. By the Company
--------------
The Company agrees not to effect any public or private sale or
distribution of its Equity Securities during the 60-day period prior to, and
during the 135-day period after, the effective date of each underwritten
offering made pursuant to a registration under Section 2 above, if so requested
in writing by the managing underwriter (except as part of such underwritten
offering or pursuant to registrations on Forms S-4 or S-8).
7
<PAGE>
5. Rule 144.
--------
The Company covenants that it will timely file the reports required to
be filed by it under the Exchange Act and the rules and regulations adopted by
the SEC thereunder, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without Registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or (b) any
similar successor rule or regulation hereafter adopted by the SEC.
6. Registration Procedures
-----------------------
If and whenever the Company is required to register Restricted Stock
in a Registration, the Company will use its best efforts to effect such
Registration to permit the sale of such Restricted Stock in accordance with the
intended plan of distribution thereof, and pursuant thereto the Company will as
expeditiously as possible:
a. prepare and file with the SEC a Registration Statement within 30 days
of such request with respect to such Restricted Stock and use its best efforts
to cause such Registration Statement to become effective within 90 days of such
request and remain effective until the Restricted Stock covered by such
Registration Statement has been sold; provided that the Company shall not be
required to maintain the effectiveness of any Registration Statement for more
than 90 days after such Registration Statement becomes effective;
b. prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be required by the rules, regulations or instructions
applicable to the registration form used by the Company or by the Securities Act
or rules and regulations thereunder to keep the Registration Statement effective
until all Restricted Stock covered by such Registration Statement is sold in
accordance with the intended plan of distribution set forth in such Registration
Statement or supplement to the Prospectus or for such shorter period of time
during which such Registration Statement must be kept effective by the terms of
this Agreement;
c. promptly notify the selling Holders of Restricted Stock and the
managing underwriter, if any, in writing,
(1) when the Prospectus or any supplement or pre- or post-effective
amendment has been fined, and, with respect to the Registration Statement
or any post-effective amendment, when the same has become effective.
(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information.
(3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose.
8
<PAGE>
(4) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the Restricted Stock for sale in any
jurisdiction or the initiation of any proceeding for such purpose, and
(5) of the existence of any fact which results in the Registration
Statement, the Prospectus or any document incorporated therein by reference
containing a Misstatement;
d. make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible time;
e. if requested by the managing underwriter of Restricted Stock being
sold in connection with an underwritten offering, immediately incorporate in a
supplement or post-effective amendment such information as the managing
underwriter requests to be included therein relating to the sale of the
Restricted Stock, including, without limitation, information with respect to the
number of shares of Restricted Stock being sold to underwriters, the purchase
price being paid therefor by such underwriters and with respect to any other
terms of the underwritten offering of the Restricted Stock to be sold in such
offering; and make all required filings of such supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
supplement or post-effective amendment;
f. promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) provide copies of such
document to counsel to the selling Holders of Restricted Stock and to the
managing underwriter, if any;
g. furnish to each selling Holder of Restricted Stock and the managing
underwriter, at least one signed copy of the Registration Statement and any
post-effective amendments thereto, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference) promptly after such documents become available
to the Company;
h. promptly deliver to each selling Holder of Restricted Stock and the
underwriters, if any, as many copies of each Prospectus (and each preliminary
prospectus) as such Persons may reasonably request (the Company hereby
consenting to the use of each such Prospectus (or preliminary prospectus) by
each of the selling Holders of Restricted Stock and the underwriters, if any, in
connection with the offering and sale of the Restricted Stock covered by such
Prospectus (or preliminary prospectus));
i. prior to any public offering of Restricted Stock, use all reasonable
efforts to register and qualify such Restricted Stock for offer and sale under
the securities or blue sky laws of such jurisdictions as such selling Holders or
underwriters may designate in writing to enable the disposition in such
jurisdictions of the Restricted Stock covered by the Registration Statement;
provided that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to general service of process in any such
jurisdiction where it is not then so subject;
9
<PAGE>
j. timely prepare and deliver certificates not bearing any restrictive
legends representing the Restricted Stock to be sold and cause such Restricted
Stock to be in such denominations and registered in such names as the managing
underwriter may request at least three business days prior to any sale of
Restricted Stock to the underwriters;
k. if the Registration Statement or the Prospectus contains a
Misstatement, promptly, but in no event more than five (5) days after the
Company becomes aware of such Misstatement, prepare a supplement or post-
effective amendment to the Registration Statement or the related Prospectus or
any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Restricted
Stock the Prospectus will not contain a Misstatement;
l. cause all Restricted Stock covered by the Registration Statement to be
listed on any national securities exchange or authorized for quotation on Nasdaq
or on the National Market System, if the Common Stock of the Company is so
listed or authorized at the time;
m. enter into an underwriting agreement if the registration is an
underwritten registration; and
(1) make such representations and warranties to the underwriters, in
form, substance and scope as are customarily made by issuers to underwriters in
underwritten offerings;
(2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriter), addressed to the underwriters,
covering the matters customarily covered in opinions delivered to underwriters
in underwritten offerings;
(3) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters by underwriters in connection
with underwritten offerings;
(4) cause such underwriting agreement to include such indemnification
and contribution provisions as such underwriters shall customarily require; and
(5) deliver such documents and certificates as may be requested by the
managing underwriter, to evidence compliance with clause (1) above and with any
customary conditions contained in the underwriting agreement or other agreement
entered into by the Company.
The above shall be done at each closing under such underwriting or similar
agreement; and
n. otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC, and make generally available to its security holders
earnings statements satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of any
10
<PAGE>
12-month period (or 90 days, if such period is a fiscal year) commencing at the
end of any fiscal quarter in which Restricted Stock is sold to underwriters in
an underwritten offering.
7. Indemnification
---------------
a. Indemnification by Company
--------------------------
The Company agrees to indemnify and hold harmless each Indemnified Holder
from and against all Claims arising out of or based upon any Misstatement or
alleged Misstatement, except insofar as such Misstatement or alleged
Misstatement was made strictly in conformance with information furnished in
writing to the Company by such Indemnified Holder expressly for use in the
document containing such Misstatement or alleged Misstatement. This indemnity
shall not be exclusive and shall be in addition to any liability which the
Company may otherwise have.
The foregoing notwithstanding, the Company shall not be liable to the
extent that any such Claim arises out of or is based upon a Misstatement or
alleged Misstatement made in any preliminary prospectus if (i) having previously
been furnished by or on behalf of the Company with copies of the Prospectus,
such Indemnified Holder failed to send or deliver a copy of the Prospectus with
or prior to the delivery of written confirmation of the sale of Restricted Stock
giving rise to such Claim and (ii) the Prospectus would have corrected such
untrue statement or omission.
In addition, the Company shall not be liable to the extent that any
such Claim arises out of or is based upon a Misstatement or alleged Misstatement
in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected
in an amendment or supplement to such Prospectus and (y) having previously been
furnished by or on behalf of the Company with copies of the Prospectus as so
amended or supplemented, such Indemnified Holder thereafter fails to deliver
such Prospectus as so amended or supplemented prior to or concurrently with the
sale to the person who purchased Restricted Stock from such Indemnified Holder
and who is asserting such Claim.
The Company shall also indemnify underwriters participating in a
distribution covered by a Registration Statement, their officers and directors
and each Person who controls such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Indemnified Holders of
Restricted Stock.
b. Indemnification Procedures
--------------------------
If any action or proceeding (including any governmental investigation or
inquiry) shall be brought or asserted against an Indemnified Holder in respect
of which indemnity may be sought from the Company, such Indemnified Holder shall
promptly notify the Company in writing, and the Company shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to such
Indemnified Holder and the payment of all reasonable expenses (including
expenses of such counsel).
11
<PAGE>
Such Indemnified Holder shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such separate counsel shall be the expense of such
Indemnified Holder unless (i) the Company has agreed to pay such fees and
expenses, (ii) the Company shall have failed to diligently defend such action or
proceeding or has failed to employ counsel reasonably satisfactory to such
Indemnified Holder in any such action or proceeding or (iii) the named parties
to any such action or proceeding (including any impleaded parties) include both
such Indemnified Holder and the Company, and such Indemnified Holder shall have
been advised by counsel that there may be one or more legal defenses available
to such Indemnified Holder that are different from or additional to those
available to the Company.
If such Indemnified Holder notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company as permitted by
the provisions of the preceding paragraph, the Company shall not have the right
to assume the defense of such action or proceeding on behalf of such Indemnified
Holder. The foregoing notwithstanding, the Company shall not be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for such Indemnified Holder and any other Indemnified Holders (which firm
shall be designated in writing by such Indemnified Holders) in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances.
The Company shall not be liable for any settlement of any such action
or proceeding effected without its written consent, which shall not be
unreasonably withheld or delayed, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Company agrees to indemnify and hold harmless such Indemnified Holders from
and against any loss or liability by reason of such settlement or judgment.
c. Indemnification by Holder of Restricted Stock
---------------------------------------------
Each Holder of Restricted Stock agrees to indemnify and hold harmless the
Company, its directors, officers, employees and agents and each Person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act (a "Company Indemnitee") to the
same extent as the foregoing indemnity from the Company to such Holder, but only
with respect to Misstatements made strictly in conformance with information
relating to such Holder furnished in writing by such Holder expressly for use in
any Registration Statement, Prospectus or preliminary prospectus. In no event,
however, shall the liability hereunder of any selling Holder of Restricted Stock
be greater than the dollar amount of the proceeds (net of underwriters' and
brokers' discounts and commissions) received by such Holder upon the sale of the
Restricted Stock giving rise to such indemnification obligation.
In case any action or proceeding shall be brought against the Company
or a Company Indemnitee, in respect of which indemnity may be sought against a
Holder of Restricted Stock, such Holder shall have the rights and duties given
the Company and the
12
<PAGE>
Company or Company Indemnitee shall have the rights and duties given to each
Holder by Sections 6(a) and 6(b) above.
d. Contribution
------------
If the indemnification provided for this Section 6 is unavailable to an
indemnified party under Section 6(a) or Section 6(c) above (other than by reason
of exceptions provided in those Sections) in respect of any Claims referred to
in such Sections, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such Claims in such proportion
as is appropriate to reflect the relative fault of the Company or Company
Indemnitee on the one hand and of the Indemnified Holder on the other in
connection with the statements or omissions which resulted in such Claims as
well as any other relevant equitable considerations. The amount paid or payable
by a party as a result of the Claims referred to above shall be deemed to
include, subject to the limitations set forth in Section 7(b), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.
The relative fault of the Company or Company Indemnitee on the one
hand and of the Indemnified Holder on the other shall be determined by reference
to, among other things, whether the Misstatement or alleged Misstatement relates
to information supplied by the Company or Company Indemnitee or by the
Indemnified Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such Misstatement or alleged
Misstatement.
The Company and each Holder of Restricted Stock agree that it would
not be just and equitable if contribution pursuant to this Section 6(d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 6(d), an Indemnified
Holder shall not be required to contribute any amount in excess of the amount by
which (i) the net proceeds to the Indemnified Holder from the sale of the
securities that were sold by such Indemnified Holder and distributed to the
public exceeds (ii) the amount of any damages which such Indemnified Holder has
otherwise been required to pay by reason of such Misstatement.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
8. Requirements for Participation in Underwritten Offerings
--------------------------------------------------------
No Person may participate in any underwritten offering pursuant to a
Registration hereunder unless such Person (a) agrees to sell such Person's
securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all customary questionnaires, powers of attorney,
13
<PAGE>
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements.
9. Suspension of Sales
-------------------
Upon receipt of written notice from the Company that a Registration
Statement or Prospectus contains a Misstatement, each Holder of Restricted Stock
shall forthwith discontinue disposition of Restricted Stock until such Holder
has received copies of the supplemented or amended Prospectus required by
Section 4(k) hereof, or until such Holder is advised in writing by the Company
that the use of the Prospectus may be resumed, and, if so directed by the
Company, such Holder shall deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Restricted Stock current at the time of receipt of
such notice.
10. Miscellaneous
-------------
a. Amendments and Waivers
----------------------
The provisions of this Agreement, including the provisions of this
sentence, may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given unless the Company has
obtained the written consent of the Holders of at least a majority of the
outstanding shares of Restricted Stock. The foregoing notwithstanding, a waiver
or consent to departure from the provisions hereof that relates exclusively to
the rights of Holders of shares of Restricted Stock whose shares are being sold
pursuant to a Registration Statement and that does not directly or indirectly
affect the rights of other Holders of shares of Restricted Stock may be given by
the Holders of a majority of the shares of Restricted Stock being sold.
b. Notices
-------
All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, facsimile, or air courier guaranteeing overnight delivery:
i) if to a Holder of Restricted Stock, at the most current address
given by such Holder to the Company in accordance with the provisions
hereof, which address initially is, with respect to each Investor, the
address set forth on such Investor's signature page of the Purchase
Agreement; and
ii) if to the Company, initially at its address set forth in the
Purchase Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions hereof.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is electronically acknowledged, if by facsimile;
14
<PAGE>
and on the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
c. Successors and Assigns
----------------------
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties. The foregoing notwithstanding,
the registration rights granted the Holders of Restricted Stock under this
Agreement may not be transferred without the prior written consent of the
Company which shall not be unreasonably withheld or delayed; provided, that such
registration rights shall not be transferable except in connection with the
simultaneous transfer to the same transferee of no less than the lesser of
200,000 shares of Restricted Stock or all of the shares of Restricted Stock then
held by such Holder; provided, further, that such registration rights may be
transferred without such prior written consent upon written notice to the
Company in connection with the transfer of shares of Restricted Stock to an
Investor or to any affiliate of an investor.
d. Counterparts
------------
This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
e. Headings
--------
The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
f. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
g. Severability
------------
In the event that any one or more of the provisions contained herein,
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
h. Forms
-----
All references in this Agreement to particular forms of registration
statements are intended to include all successor forms which are intended to
replace, or to apply to similar transactions as, the forms herein referenced.
15
<PAGE>
i. Entire Agreement
----------------
This Agreement and the Purchase Agreement are intended by the parties
as the final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein with respect to the registration rights granted by the Company
with respect to the securities sold pursuant to the Purchase Agreement. This
Agreement and the Purchase Agreement supersede all prior agreements and
understandings between the parties with respect to such subject matter.
(Signature pages follow)
16
<PAGE>
[Registration Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
DIGITAL SOUND CORPORATION
By: /s/ MARK C. OZUR
-----------------------
Mark C. Ozur, President
S-1
<PAGE>
[Registration Rights Agreement]
SCOT B. JARVIS, an Individual
By: /s/ SCOT B. JARVIS
-----------------------------
Scot B. Jarvis, an Individual
S-2
<PAGE>
[Registration Rights Agreement]
MICHAEL J. WILLNER, an Individual
By: /s/ MICHAEL J. WILLNER
---------------------------------
Michael J. Willner, an Individual
S-3
<PAGE>
[Registration Rights Agreement]
SPRING POINT PARTNERS, L.P.
By: /s/ JOHN D. BOTTI
-------------------------------
John D. Botti, Managing Partner
S-4
<PAGE>
[Registration Rights Agreement]
NEWBERG FAMILY TRUST UTA DTD 12/18/90
By: /s/ BRUCE NEWBERG
----------------------
Bruce Newberg, Trustee
S-5
<PAGE>
[Registration Rights Agreement]
FREDERICK J. AND ROBIN GRACE WARREN,
as Joint Tenants
By: /s/ FREDERICK J. WARREN
-----------------------
Frederick J. Warren
By: /s/ ROBIN GRACE WARREN
----------------------
Robin Grace Warren
S-6
<PAGE>
[Registration Rights Agreement]
STROME SUSSKIND HEDGECAP FUND, L.P.
By: Strome Susskind Investment Management, L.P.
Its: General Partner
By: SSCO, Inc.
Its: General Partner
By: /s/ JEFFREY SUSSKIND
--------------------------
Jeffrey Susskind, Director
and Vice President
STROME HEDGECAP LIMITED
By: Strome Susskind Investment Management, L.P.
Its: General Partner
By: SSCO, Inc.
Its: General Partner
By: /s/ JEFFREY SUSSKIND
--------------------------
Jeffrey Susskind, Director
and Vice President
STROME OFFSHORE, LIMITED
By: Strome Susskind Investment Management, L.P.
Its: Investment Advisor
By: SSCO, Inc.
Its: General Partner
By: /s/ JEFFREY SUSSKIND
--------------------------
Jeffrey Susskind, Director
and Vice President
S-7
<PAGE>
[Registration Rights Agreement]
STROME PARTNERS, L.P.
By: Strome Susskind Investment Management, L.P.
Its: General Partner
By: SSCO, Inc.
Its: General Partner
By: /s/ JEFFREY SUSSKIND
--------------------------
Jeffrey Susskind, Director
and Vice President
S-8
<PAGE>
[Registration Rights Agreement]
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ SARVAS SAVVINIDIS
----------------------
Sarvas Savvinidis,
Director of Operations
REMINGTON INVESTMENT STRATEGIES,
L.P.
By: Moore Capital Advisors, L.L.C.
Its :General Partner
By: /s/ SARVAS SAVVINIDIS
----------------------
Sarvas Savvinidis,
Director of Operations
S-9
<PAGE>
[Registration Rights Agreement]
CITIVENTURE 96 PARTNERSHIP FUND, L.P.
By: Chancellor LGT Asset Management, Inc.,
Its: Investment Advisor
By: /s/ ALLESANDRO PIOL
-------------------------
Allesandro Piol, Managing
Director
CHANCELLOR LGT PRIVATE CAPITAL
OFFSHORE PARTNERS II, L.P.
By: CPCO Associates, L.P.
Its: Investment General Partner
By: Chancellor LGT Venture Partners, Inc.,
Its: General Partner
By: /s/ ALLESANDRO PIOL
-------------------------
Allesandro Piol, Managing
Director
CHANCELLOR LGT PRIVATE CAPITAL
OFFSHORE PARTNERS I, C.V.
By: Chancellor LGT KME IV Partners, L.P.
Its: Investment General Partner
By: Chancellor LGT Venture Partners, Inc.
Its: General Partner
By: /s/ ALLESANDRO PIOL
-------------------------
Allesandro Piol, Managing
Director
S-10
<PAGE>
[Registration Rights Agreement]
CHANCELLOR LGT PRIVATE CAPITAL
OFFSHORE PARTNERS III, L.P.
By: CPCP Associates, L.P.
Its: General Partner
By: Chancellor LGT Venture Partners, Inc.
Its: General Partner
By: /s/ ALLESANDRO PIOL
-------------------------
Allesandro Piol, Managing
Director
S-11
<PAGE>
[Registration Rights Agreement]
OAK INVESTMENT PARTNERS VII, LIMITED
PARTNERSHIP
By: Oak Associates VII, LLC
Its: General Partner
By: /s/ BANDEL CARANO
------------------------------
Bandel Carano, Managing Member
OAK VII AFFILIATES FUND,
LIMITEDPARTNERSHIP
By: Oak VII Affiates, L.L.C.
Its: General Partner
By: /s/ BANDEL CARANO
------------------------------
Bandel Carano, Managing Member
OAK INVESTMENT PARTNERS V,
LIMITED PARTNERSHIP
By: Oak Associates V, L.L.C.
Its: General Partner
By: /s/ BANDEL CARANO
-----------------
Bandel Carano,
Managing Member
OAK V AFFILIATES FUND, LIMITED
PARTNERSHIP
By: Oak V Affiliates,
a Connecticut partnership
Its: General Partner
By: /s/ BANDEL CARANO
-----------------
Bandel Carano,
General Partner
S-12
<PAGE>
[Registration Rights Agreement]
MICROSOFT CORPORATION
By: /s/ GREGORY B. MAFFEI
---------------------
Title: Chief Financial Officer
-----------------------
S-13
