<PAGE>
FORM 10-Q
---------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
________________________________________
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _____________
Commission File Number: 0-18280
DIGITAL SOUND CORPORATION
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(Exact name of Registrant as specified in its charter)
California 95-3222624
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6307 Carpinteria Avenue, Carpinteria, California 93013
- ----------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (805) 566-2000
-------------------------
Not Applicable
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares outstanding of Registrant's common stock as of
April 28, 1997 was 20,228,915.
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DIGITAL SOUND CORPORATION
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 31, 1997
and December 31, 1996 3
Statements of Operations for the
Three Months ended March 31, 1997
and March 31, 1996 4
Statements of Cash Flows for the
Three Months ended March 31, 1997
and March 31, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Exhibits and Reports on Form 8-K 9
</TABLE>
2
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PART I - FINANCIAL INFORMATION
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DIGITAL SOUND CORPORATION
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CONSOLIDATED BALANCE SHEETS
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(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and equivalents $ 12,472 $ 18,187
Accounts receivable, less allowance for
doubtful accounts of $581 and $600 at March
31, 1997 and December 31, 1996, respectively. 6,238 5,695
Inventories 3,383 3,470
Other current assets 327 299
-------- --------
Total current assets 22,420 27,651
Property and equipment, at cost:
Computers and other equipment 12,472 11,077
Furniture and fixtures 984 982
Leasehold improvements 1,124 1,130
-------- --------
14,580 13,189
Less accumulated depreciation and amortization (10,742) (10,733)
-------- --------
3,838 2,456
Other assets
Investment securities 1,000 -
Other assets 3,033 3,226
-------- --------
Total other assets 4,033 3,226
-------- --------
$ 30,291 $ 33,333
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 4,439 $ 3,639
Accrued payroll and related 2,213 1,986
Other accrued liabilities 2,233 1,681
-------- --------
Total current liabilities 8,885 7,306
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 15,000,000 shares
authorized, 2,631,579 issued and outstanding at
March 31, 1997 and December 31, 1996 respectively 5,000 5,000
Common stock, no par value, 50,000,000 shares
authorized; 20,228,915 and 20,224,540 shares issued
and outstanding at March 31, 1997 and
December 31, 1996 respectively 68,982 68,975
Accumulated deficit (52,576) (47,948)
-------- --------
Total shareholders' equity 21,406 26,027
-------- --------
$ 30,291 $ 33,333
======== ========
</TABLE>
See accompanying notes
3
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DIGITAL SOUND CORPORATION
--------------------------
STATEMENT OF OPERATIONS
-----------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Net sales $ 3,359 $ 4,769
Cost of sales 1,915 1,890
-------- --------
Gross margin 1,444 2,879
Selling, general and administrative 3,899 3,049
Engineering and development 2,323 2,070
-------- --------
6,222 5,119
-------- --------
Income (loss) from operations (4,778) (2,240)
Interest and other income 150 344
-------- --------
Income (loss) before provision for income taxes (4,628) (1,896)
Provision for income taxes: - -
Net income (loss) $ (4,628) $ (1,896)
======== ========
Net income (loss) per common and common
equivalent share $ (.23) $ (.09)
======== ========
Weighted average common and common
equivalent shares outstanding 20,227 20,008
======== ========
</TABLE>
See accompanying notes
4
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DIGITAL SOUND CORPORATION
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31, March 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ (4,628) $ (1,896)
Adjustments to reconcile net income to
net cash provided (used) by operations:
Depreciation and amortization 171 199
Changes in operating assets and liabilities:
Accounts receivable (543) (682)
Inventories 88 (221)
Other current assets (28) 102
Investment securities (1,000) 0
Other assets 30 1,700
Accounts payable 800 (648)
Accrued payroll and related 227 4
Other accrued liabilities 552 196
--------- ---------
Net cash provided (used) by
operations (4,331) (1,246)
--------- ---------
Cash flows from investing activities:
(Additions to) disposition of
property and equipment (1,391) (52)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 7 12
--------- ---------
Net increase (decrease) in cash and equivalents (5,715) (1,286)
Cash and equivalents at beginning of period 18,187 23,503
--------- ---------
Cash and equivalents at end of period $ 12,472 $ 22,217
========= =========
</TABLE>
See accompanying notes
5
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DIGITAL SOUND CORPORATION
-------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
March 31, 1997
--------------
(Unaudited)
NOTE 1. General
- -----------------
All interim financial data is unaudited, but, in the opinion of the
Company, such unaudited statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Nevertheless, the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading.
The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year.
Principles of consolidation The consolidated financial statements include
the accounts of Digital Sound Corporation (the Company) and its wholly owned
subsidiary Digital Sound International. All significant intercompany
transactions and balances have been eliminated.
Short term investments The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the
provisions of SFAS 115 for investments held as of December 31, 1995. The
adoption had no effect on the financial statements. Short term investments
(principally commercial paper and discount notes with maturity dates generally
within 90 days and considered cash equivalents) are classified as "held to
maturity" based on the Company's positive intent and ability to hold the
securities until maturity. The securities are presented at amortized cost which
approximates fair value. Amortization and interest on securities classified as
"held to maturity" is included in investment income.
Cash, cash equivalents and pledged cash The Company considers as cash
equivalents only those investments that are short-term, highly liquid, readily
convertible to cash, and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. The Company
classifies as cash equivalents only those investments with maturities of three
months or less. The Company pledged $1.0 million to facilitate a construction
loan for the landlord to build new office space in its existing building. The
Company anticipates these pledged funds to become available for general use in
the second quarter of 1997.
Operating Lease Agreements. Effective January 1997, the Company entered
into master lease agreements with BancBoston Leasing Inc and Mellon US Leasing.
The purpose of the lease agreements is to provide sale/lease-back financing
for capital acquisitions for 1997. The lease agreements are for up to a combined
$4.0 million in equipment purchases and the term of the lease is for 4 years.
The lease agreements requires a cash collateral equal to the limit of the credit
line which will be pledged in a certificate of deposit account in $1.0 million
increments as required.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Form 10-K for the
fiscal year ended December 31, 1996, as filed with the Securities and Exchange
Commission.
6
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NOTE 2. Inventories
- --------------------
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method) or market:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
Raw materials and purchased parts $ 1,614 $ 1,528
Work in process 1,645 1,815
Finished goods 124 127
--------- ---------
$ 3,383 $ 3,470
--------- ---------
</TABLE>
NOTE 3. Per Share Information
- ------------------------------
Earnings (loss) per common and common equivalent share is computed based
upon the weighted average number of outstanding shares of common stock and
common stock equivalents. Antidilutive common stock equivalents were excluded
from this calculation for the periods in which a loss was incurred
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
- -------------------------------------------------------------------------------
Net sales decreased 29.6% from $4.8 million in 1996 to $3.4 million in
1997. Compared to the first quarter of 1996, sales into the VIS market
decreased by $1.1 million and sales into the CPE market decreased by $0.3
million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and
VoiceServer 3110 decreased from those of the prior period by $0.3 million while
sales of system upgrades and enhancements and services decreased $1.1 million.
Gross margin as a percentage of net sales decreased to 42.9% in the 1997
period as compared to 60.4% for the same period in 1996. System margins were
down from 65.3% in the 1996 period to 41.6% in the first quarter of 1997 and
system upgrades, enhancements and service margins were down from 58.5% in the
first quarter of 1996 to 43.3% in the comparable period in 1997. Margins were
affected by additional costs incurred due to a large international system
installation and lower than planned manufacturing volume. System upgrades and
enhancements and services were 78.0% of total sales in the first quarter of 1996
and 77.0% in the comparable period in 1997.
Selling, general and administrative expenses increased from $3.0 million in
1996 to $3.9 million in 1997 as the Company invested in upgrading its personnel
and capabilities primarily in Sales and Marketing. As a result of the increased
investment and the lower volume in net sales, selling, general and
administrative expenses were higher as a percentage of sales (116.0%) in 1997 as
compared to 1996 (64.0%).
Engineering and development expenses increased from $2.1 million in 1996
to $2.3 million in 1997. For 1997, engineering and development expenses reflect
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1997 and the lower volume in net sales, engineering and
development expenses were higher as a percentage of sales in 1997 (69.0%) as
compared to 1996 (43.4%).
There was no provision for income taxes in the first quarter of 1997 due to
the loss from operations. There was no provision for income taxes in the first
quarter of 1996 due to the loss from operations.
7
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As a result of the above, the Company's net loss for the three months ended
March 31, 1997 was $4.6 million as compared to a net loss of $1.9 million for
the comparable period last year.
Factors That May Affect Future Results
- --------------------------------------
Digital Sound operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. These risks are
discussed in the Company's 1996 Annual Report To Shareholders and incorporated
by reference in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31,1996.
Liquidity and Capital Resources
- -------------------------------
For the three months ended March 31, 1997, net working capital was $13.5
million compared to $20.3 million at December 31, 1996. The level of net working
capital resulted principally from a reduction in cash of $4.7 million, a
reclassification of $1.0 million from current assets to investment securities
pledged in connection with the lease agreement with BancBoston Leasing, an
increase in accounts receivable of $0.5 million, an increase in accounts payable
of $0.8 million and an increase in accrued payroll and other accrued liabilities
of $0.8 million. The decrease in cash reflects the level of the Company's sales
combined with the Company's continued commitment to investment in certain
strategic long-term initiatives focusing on the development of new products, the
enhancement of existing products and the strengthening of the Company' marketing
and sales capabilities. The Company's goal is for these initiatives to begin
showing concrete results by no later than the end of 1997. The level of sales
achieved by the Company during the first quarter of 1997 and before has been
insufficient to provide the Company with net cash from operations, and the
Company does not expect to generate net cash from operations in 1997.
At March 31, 1997, the Company had cash and investments of $13.5 million
and no long term debt. During 1997, net cash used by operations was $4.3
million, which was offset by $0.2 million of interest earned on cash balances.
Through March 31, 1997 capital expenditures were $1.4 million. Most of the
capital expenditures are identified as qualifying for the sale/lease-back
agreements described earlier in Note 1 to the financial statements under the
heading "Operating Lease Agreements." The Company has never paid any cash
dividends on its stock and anticipates that, for the foreseeable future, it will
continue to retain any earnings for use in the operation of its business.
8
<PAGE>
PART II - OTHER INFORMATION
----------------------------
DIGITAL SOUND CORPORATION
-------------------------
Item 1. Legal Proceedings
-----------------
As reported in Note 10 to the Company's financial statements included in
the Company's 1996 Annual Report to Shareholders and incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, the Company is involved in patent litigation with Theis Research, Inc.
There were no material developments in this litigation during the quarter ended
March 31, 1997.
Item 2. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
10.45 - Lease Agreement by and between the Registrant and BancBoston
Leasing, Inc. dated January 8, 1997.
b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
9
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 9, 1997.
DIGITAL SOUND CORPORATION
By /s/ Mark C. Ozur
---------------------------------------
Mark C. Ozur
President, Chief Executive Officer
By /s/ B. Robert Suh
---------------------------------------
B. Robert Suh
Vice President, Chief Financial Officer
10
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Exhibit 10.45
- -------------
MASTER LEASE AGREEMENT
This MASTER LEASE AGREEMENT, dated as of the 8th day of January, 1997 ("Lease
Agreement") is made at Boston, Massachusetts by and between BancBoston Leasing
Inc. ("Lessor"), a Massachusetts corporation with its principal place of
business at 100 Federal Street, Boston, Massachusetts 02110 and Digital Sound
Corporation ("Lessee"), a California corporation with its principal place of
business at 6307 Carpinteria Avenue, Carpinteria, CA 93013
IN CONSIDERATION OF the mutual promises and covenants contained herein, Lessor
and Lessee hereby agree as follows:
1. Property Leased. At the request of Lessee and subject to the terms and
conditions of this Lease Agreement, Lessor shall lease to Lessee and Lessee
shall lease from Lessor such personal property ("Equipment") as may be mutually
agreed upon by Lessor and Lessee. The Equipment shall be selected by or ordered
at the request of Lessee, identified in one or more equipment schedules
substantially in the form of Exhibit A attached hereto ("Equipment Schedule")
and accepted by Lessee in one or more certificates of acceptance ("Certificate
of Acceptance") in the form of Exhibit B attached hereto. Each Equipment
Schedule executed by Lessor and Lessee and each Certificate of Acceptance
executed by Lessee shall constitute a part of this Lease Agreement.
2. Certain Definitions.
2.1 The "Acquisition Cost" shall mean the total cost of the Equipment paid by
Lessor as set forth in the applicable Equipment Schedule.
2.2 The "Commencement Date" shall mean the date on which the Equipment
identified in the applicable Equipment Schedule is accepted and placed in
service by Lessee under this Lease Agreement. Each Commencement Date shall be
evidenced by the Certificate of Acceptance applicable to such Equipment
Schedule.
2.3 The "Rent Start Date" shall mean either (i) the first day of the month
following the month in which the Commencement Date occurs or (ii) the
Commencement Date, if the Commencement Date occurs on the first day of the
month.
2.4 The "Monthly Rent" shall mean the amount set forth in the applicable
Equipment Schedule as Monthly Rent for the Equipment identified on such
Equipment Schedule.
2.5 The "Daily Rent" shall mean one-thirtieth (1/30) of the Monthly Rent.
2.6 The words "herein", "hereof", and "hereunder" shall refer to this Lease
Agreement as a whole and not to any particular section. All other capitalized
terms defined In this Lease Agreement shall have the meanings assigned thereto.
3. Initial Term of Lease; Payment of Rent.
3.1 The term of lease for the Equipment ("Initial Term") shall begin on the
Commencement Date set forth in the applicable Certificate of Acceptance and
shall continue during and until the expiration of the number of full calendar
months set forth in the applicable Equipment Schedule, measured from the Rent
Start Date. The Initial Term may not be canceled or terminated except as set
forth in Section 10.2 below.
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3.2 At the expiration of the Initial Term, Lessor and Lessee may extend the
lease of the Equipment for any period as they may agree upon in writing
("Extended Term") at the then fair market rental value of the Equipment, as
determined in good faith by Lessor.
3.3 Aggregate Daily Rent shall be due and payable by Lessee on the Rent Start
Date in an amount equal to the Daily Rent multiplied by the actual number of
days elapsed from, and including, the Commencement Date to, but excluding, the
Rent Start Date. The Monthly Rent shall be due and payable on the Rent Start
Date and, thereafter on the first day of each month of the Initial Term or any
Extended Term. All Daily Rents and Monthly Rents shall be paid to Lessor at its
office in Boston, Massachusetts.
4. Acceptance of Equipment; Exclusion of Warranties.
4.1 Lessee shall signify its acceptance of the Equipment identified in the
applicable Equipment Schedule by promptly executing and delivering to Lessor a
Certificate of Acceptance. Lessee acknowledges that its execution and delivery
of the Certificate of Acceptance shall conclusively establish, as between Lessor
and Lessee, that the Equipment has been inspected by Lessee, is in good repair
and working order, is of the design, manufacture and capacity selected by
Lessee, and is accepted by Lessee under this Lease Agreement.
4.2 In the event the Equipment is ordered by Lessor from a manufacturer or
supplier at the request of Lessee, Lessor shall not be required to pay the
Acquisition Cost for such Equipment unless and until the applicable Certificate
of Acceptance has been received by Lessor. Lessee hereby agrees to indemnify,
defend and hold Lessor harmless from any liability to any manufacturer or
supplier arising from the failure of Lessee to lease any Equipment which is
ordered by Lessor at the request of Lessee or for which Lessor has assumed an
obligation to purchase.
4.3 Lessor leases the Equipment to Lessee and Lessee leases the Equipment
from Lessor "AS IS" and "WITH ALL FAULTS". Lessee hereby acknowledges that (i)
Lessor is not a manufacturer, supplier or dealer of such Equipment nor an agent
thereof: and (ii) LESSOR HAS NOT MADE, DOES NOT MAKE, AND HEREBY DISCLAIMS ANY
REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE
EQUIPMENT INCLUDING, BUT NOT LIMITED TO, ITS DESIGN, CAPACITY, CONDITION,
MERCHANTABILITY, OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE. Lessee
further acknowledges that Lessor is not responsible for any repairs,
maintenance, service, latent or other defects in the Equipment or in the
operation thereof, or for compliance of any Equipment with requirements of any
laws, ordinances, governmental rules or regulations including, but not limited
to, laws with respect to environmental matters, patent, trademark, copyright or
trade secret infringement, or for any direct or consequential damages arising
out of the use of or inability to use the Equipment.
4.4 Provided no Event of Default, as defined in Section 16 below, has
occurred and is continuing, Lessor agrees to cooperate with Lessee, at the sole
cost and expense of Lessee, in making any claim against a manufacturer or
supplier of the Equipment arising from a defect in such Equipment. At the
request of Lessee, Lessor shall assign to Lessee all warranties on the Equipment
available from any manufacturer or supplier to the full extent permitted by the
terms of such warranties and by applicable law.
5. Ownership; Inspection; Maintenance and Use.
5.1 The Equipment shall at all times be the sole and exclusive properly of
Lessor. Any Equipment subject to titling and registration laws shall be titled
and registered by Lessee on behalf of and in the name of Lessor at the sole cost
and expense of Lessee, Lessee shall cooperate with and provide Lessor with any
information or documents necessary for titling and registration of the
Equipment. Upon the request of
12
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Lessor, Lessee shall execute any documents or instruments which may be necessary
or appropriate to confirm, to record or to give notice of the ownership of the
Equipment by Lessor including, but not limited to, financing statements under
the Uniform Commercial Code. Lessee, at the request of Lessor, shall affix to
the Equipment, in a conspicuous place, any label, plaque or other insignia
supplied by Lessor designating the ownership of the Equipment by Lessor.
5.2 The Equipment shall be located at the address specified in the applicable
Equipment Schedule and shall not be removed therefrom without the prior written
consent of Lessor. Lessor, its agents or employees shall have the right to
enter the premises of Lessee, upon reasonable notice and during normal business
hours, for the purpose of inspecting the Equipment.
5.3 Lessee shall pay all costs, expenses, fees and charges whatsoever
incurred in connection with the use and operation of the Equipment. Lessee
shall, at all times and at its own expense, keep the Equipment in good repair
and working order, reasonable wear and tear excepted. Any maintenance contract
required by a manufacturer or supplier for the care and upkeep of the Equipment
shall be entered into by Lessee at its sole cost and expense. Lessee shall
permit the use and operation of the Equipment only by personnel authorized by
Lessee and shall comply with all laws, ordinances or governmental rules and
regulations relating to the use and operation of the Equipment.
6. Alterations and Modifications. Lessee may make, or cause to be made on
its behalf, any improvement, modification or addition to the Equipment with the
prior written consent of Lessor, provided, however, that such improvement,
modification or addition is readily removable without causing damage to or
impairment of the functional effectiveness of the Equipment. To the extent that
such improvement, modification or addition is not so removable, it shall
immediately become the property of Lessor and thereupon shall be considered
Equipment for all purposes of this Lease Agreement.
7. Quiet Enjoyment; No Defense, Set-Offs or Counterclaims.
7.1 Provided no Event of Default, as defined in Section 16 below, has
occurred and is continuing, Lessee shall have the quiet enjoyment and use of the
Equipment in the ordinary course of its business during the Initial Term or any
Extended Term without interruption by Lessor or any person or entity claiming
through or under Lessor.
7.2 Lessee acknowledges and agrees that ANY DAMAGE TO OR LOSS, DESTRUCTION,
OR UNFITNESS OF, OR DEFECT IN THE EQUIPMENT, OR THE INABILITY OF LESSEE TO USE
THE EQUIPMENT FOR ANY REASON WHATSOEVER, SHALL NOT (i) GIVE RISE TO ANY DEFENSE,
COUNTERCLAIM, OR RIGHT OF SET-OFF AGAINST LESSOR, OR (ii) PERMIT ANY ABATEMENT
OR RECOUPMENT OF, OR REDUCTION IN DAILY OR MONTHLY RENT, OR (iii) RELIEVE LESSEE
OF THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS LEASE AGREEMENT INCLUDING, BUT
NOT LIMITED TO, ITS OBLIGATION TO PAY THE FULL AMOUNT OF DAILY RENT AND MONTHLY
RENT, WHICH OBLIGATIONS ARE ABSOLUTE AND UNCONDITIONAL, unless and until this
Lease Agreement is terminated with respect to such Equipment in accordance with
the provisions of Section 10.2 below. Any claim that Lessee may have which
arises from a defect in or deficiency of the Equipment shall be brought solely
against the manufacturer or supplier of the Equipment and Lessee shall,
notwithstanding any such claim, continue to pay Lessor all amounts due and to
become due under this Lease Agreement.
8. Adverse Claims and Interests.
8.1 Except for any liens, claims, mortgages, pledges, encumbrances or
security interests created by Lessor, Lessee shall keep the Equipment, at all
times, free and clear from all liens, claims, mortgages, pledges,
13
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encumbrances and security interests and from all levies, seizures and
attachments. Without limitation of the covenants and obligations of Lessee set
forth in the preceding sentence, Lessee shall immediately notify Lessor in
writing of the imposition of any prohibited lien, claim, levy or attachment on
or seizure of the Equipment at which time Lessee shall provide Lessor with all
relevant information in connection therewith.
8.2 Lessee agrees that the Equipment shall be and at all times shall remain
personal property. Accordingly, Lessee shall take such steps as may be
necessary to prevent any person from acquiring, having or retaining any rights
in or to the Equipment by reason of its being affixed or attached to real
property.
9. Indemnities; Payment of Taxes.
9.1 Lessee hereby agrees to indemnity, defend and hold harmless Lessor, its
agents. Employees, successors and assigns from and against any and all claims,
actions, suits, proceedings, costs, expenses, damages and liabilities whatsoever
arising out of or in connection with the manufacture, ordering, selection,
specifications, availability, delivery, titling, registration, rejection,
installation, possession, maintenance, ownership, use, leasing, operation or
return of the Equipment including, but not limited to, any claim or demand based
upon any STRICT OR ABSOLUTE LIABILITY IN TORT and upon any infringement or
alleged infringement of any patent, trademark, trade secret, license, copyright
or otherwise. All costs and expenses incurred by Lessor in connection with any
of the foregoing including, but not limited to, reasonable legal fees, shall be
paid by Lessee on demand.
9.2 Lessee hereby agrees to indemnify, defend and hold Lessor harmless
against all Federal, state and local taxes, assessments, licenses, withholdings,
levies, imposts, duties, assessments, excise taxes, registration fees and other
governmental fees and charges whatsoever, which are imposed, assessed or levied
on or with respect to the Equipment or its use or related in any way to this
Lease Agreement ("Tax Assessments"), except for taxes on or measured by the net
income of Lessor determined substantially in the same manner as under the
Internal Revenue Code of 1986, as amended. Lessee shall file all returns,
reports or other such documents required in connection with the Tax Assessments
and shall provide Lessor with copies thereof. If, under local law or custom,
Lessee is not authorized to make the filings required by a taxing authority,
Lessee shall notify Lessor in writing and Lessor shall thereupon file such
returns, reports or documents. Without limiting any of the foregoing, Lessee
shall indemnify, defend and hold Lessor harmless from all penalties, fines,
interest payments, claims and expenses including, but not limited to, reasonable
legal fees, arising from any failure of Lessee to comply with the requirements
of this Section 9.2.
9.3 The obligations and indemnities of Lessee under this Section 9 for events
occurring or arising during the Initial Term or any Extended Term shall continue
in full force and effect, notwithstanding the expiration or other termination of
this Lease Agreement.
10. Risk of Loss; Loss of Equipment.
10.1 Lessee hereby assumes and shall bear the entire risk of loss for theft,
damage, seizure, condemnation, destruction or other injury whatsoever to the
Equipment from any and every cause whatsoever. Such risk of loss shall be
deemed to have been assumed by Lessee from and after such risk passes from the
manufacturer or supplier by agreement or pursuant to applicable law.
10.2 In the event of any loss, seizure, condemnation or destruction of the
Equipment or damage to the Equipment which cannot be repaired by Lessee, Lessee
shall immediately notify Lessor in writing. Within thirty (30) days of such
notice, during which time Lessee shall continue to pay Monthly Rent, Lessee
shall, at the option of Lessor, either (i) replace the Equipment with equipment
of the same type and manufacture and in good repair, condition and working
order, transfer title to such equipment to Lessor free and clear of all liens,
claims and encumbrances, whereupon such equipment shall be deemed Equipment for
all purposes
14
<PAGE>
of this Lease Agreement, or (ii) pay to Lessor an amount equal to the present
value of both the aggregate of the remaining unpaid Monthly Rents and the
anticipated residual value of the Equipment plus any other costs actually
incurred by Lessor. Lessor and Lessee agree that the residual value of the
Equipment at the expiration of the initial Term is reasonably anticipated to be
not less than twenty (20) percent of the Acquisition Cost of the Equipment. The
present value shall be determined by discounting the aggregate of the remaining
unpaid Monthly Rents and the anticipated residual value of the Equipment to the
date of payment by Lessee at the rate of five (5) percent per annum. When and as
requested by Lessor, Lessee shall also pay to Lessor amounts due pursuant to
Section 18 below, if any, arising as a result of the loss, seizure, replacement,
condemnation or destruction of the Equipment. Any insurance or condemnation
proceeds received by Lessor shall be credited to the obligation of Lessee under
this Section 10.2 and the remainder of such proceeds, if any, shall be paid to
Lessee by Lessor in full compensation for the loss of the leasehold interest in
the Equipment by Lessee.
10.3 Upon any replacement of or payment for the Equipment as provided in
Section 10.2 above, this Lease Agreement shall terminate only with respect to
the Equipment so replaced or paid for, and Lessor shall transfer to Lessee title
only to such Equipment "AS IS", "WITH ALL FAULTS", and WITH NO WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE.
Lessee shall pay any sales or use taxes due on such transfer.
11. Insurance.
11.1 Lessee shall keep the Equipment insured against all risks of loss or
damage from every cause whatsoever occurring during the Initial Term, or any
Extended Term for an amount not less than the higher of the full replacement
value of the Equipment or the aggregate of unpaid Daily Rent and Monthly Rent
for the balance of the Initial Term, or the Extended Term. Lessee shall also
carry public liability insurance, both personal injury and property damage,
covering the Equipment, and Lessee shall be liable for any deductible portions
of all required insurance.
11.2 All insurance required under this Section 11 shall name Lessor as
additional insured and loss payee. Such insurance shall also be with such
insurers and shall be in such forms and amounts as are satisfactory to Lessor.
All applicable policies shall provide that no act, omission or breach of
warranty by Lessee shall give rise to any defense against payment of the
Insurance proceeds to Lessor. Lessee shall pay the premiums for such insurance
and, at the request of Lessor, deliver to Lessor duplicates of such policies or
other evidence satisfactory to Lessor of such insurance coverage. In any event,
Lessee shall provide Lessor with endorsements upon the policies issued by the
insurers which evidence the existence of insurance coverage required by this
Section 11 and by which the insurers agree to give Lessor written notice at
least twenty (20) days prior to the effective date of any expiration,
modification, reduction, termination or cancellation of any such policies.
11.3 The proceeds of insurance required under this Section 11 and payable as
a result of loss or damage to the Equipment shall be applied as set forth in
Section 10.2 above. Upon the occurrence of an Event of Default as defined in
Section 16 below, Lessee hereby irrevocably appoints Lessor as its attorney-in-
fact, which power shall be deemed coupled with an interest, to make claim for,
receive payment of, execute and endorse all documents checks or drafts received
in payment for loss or damage under any insurance policies required by this
Section 11.
11.4 Notwithstanding anything herein, Lessor shall not be under any duty to
examine any evidence of insurance furnished hereunder, or to ascertain the
existence of any policy or coverage, or to advise Lessee of any failure to
comply with the provisions of this Section 11.
15
<PAGE>
12. Surrender To Lessor. Immediately upon the expiration of the Initial Term
or any Extended Term or at any other termination of this Lease Agreement, Lessee
shall surrender the Equipment to Lessor in good repair and working order,
reasonable wear and tear excepted, by assembling and delivering the Equipment,
ready for shipment, to a place or carrier, as Lessor may designate, within the
state in which the Equipment was originally delivered to Lessee or to which the
Equipment was thereafter moved with the written consent of Lessor. All costs of
removal, assembly, packing and delivery of such Equipment to the place
designated by Lessor shall be borne by Lessee,
13. Fair Market Value Purchase Option. Lessor hereby grants to Lessee the
option to purchase all, but not less than all, Equipment set forth on any
Equipment Schedule at the expiration of the applicable Initial Term or Extended
Term. Any such purchase shall be for cash in an amount equal to the then fair
market value of such Equipment, as determined in good faith by Lessor. This
purchase option may be exercised by Lessee, provided that no Event of Default,
as defined in Section 16 below, has occurred and is continuing. Lessee shall
notify Lessor in writing of its intention to exercise its purchase option at
least thirty (30) days prior to the expiration of the Initial Term or any
Extended Term. Upon payment of the fair market value by Lessee to Lessor,
Lessor shall transfer title to the Equipment to Lessee "AS IS", "WITH ALL
FAULTS" and WITH NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR
ANY PARTICULAR PURPOSE.
14. Financial Statements. Lessee shall annually, within ninety (90) days
after the close of the fiscal year for Lessee, furnish to Lessor financial
statements of Lessee, including a balance sheet as of the close of such year and
statements of income and retained earnings for such year, prepared in accordance
with generally accepted accounting principles, consistently applied from year to
year, and certified by independent public accountants for Lessee. If requested
by Lessor, Lessee shall also provide quarterly financial statements of Lessee,
similarly prepared for each of the first three quarters of each fiscal year,
certified (subject to normal year-end audit adjustments) by the chief financial
officer of Lessee and furnished to Lessor within sixty (60) days following the
end of the quarter, and such other financial information as may be reasonably
requested by Lessor.
15. Delayed Payment Charge. Lessee shall pay to Lessor interest upon the
amount of any Daily Rent, Monthly Rent or other sums not paid by Lessee when due
and owing under this Lease Agreement, from the due date thereof until paid, at
the rate of one and one half (1 1/2) percent per month, but if such rate
violates applicable law, then the maximum rate of interest allowed by such law.
16. Default.
16.1 The occurrence at any of the following events shall constitute an event
of default ("Event of Default") under this Lease Agreement.
(a) Lessee fails to pay any Daily Rent or any Monthly Rent when due and such
failure to pay continues for ten (10) consecutive days; or
(b) Lessee fails to pay any other sum required hereunder, and such failure
continues for a period of ten (10) days following written notice from Lessor; or
(c) Lessee fails to maintain the insurance as required by Section 11 above and
such failure continues for ten (10) days after written notice from Lessor; or
(d) Lessee violates or fails to perform any other term, covenant or condition
of this Lease Agreement or any other document, agreement or instrument executed
pursuant hereto or in connection herewith, which failure is not cured within
thirty (30) days after written notice from Lessor; or
(e) Lessee ceases to exist or terminates its independent operations by reason
of any discontinuance, dissolution, liquidation, merger, sale of substantially
all of its assets, or otherwise ceases doing business as a
16
<PAGE>
going concern; or
(f) Lessee (i) applies for or consents to the appointment of, or the taking
of possession by, a receiver, custodian, trustee, liquidator or similar official
for itself or for all or a substantial part of its property, (ii) is generally
not paying its debts as such debts become due, (iii) makes a general assignment
for the benefit of its creditors, (iv) commences a voluntary case under the
United States Bankruptcy Code, as now or hereafter in effect, seeking
liquidation, reorganization or other relief with respect to itself or its debts,
(v) files a petition seeking to take advantage of any other law providing for
the relief of debtors, (vi) takes any action under the laws of its jurisdiction
of incorporation or organization similar to any of the foregoing, or (vii) takes
any corporate action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case is commenced, without the application or consent of
Lessee, in any court of competent jurisdiction, seeking (i) the liquidation,
reorganization, dissolution, winding up of Lessee or composition or readjustment
of the debts of Lessee, (ii) the appointment of a trustee, receiver, custodian,
liquidator or similar official for Lessee or for all or any substantial part of
its assets, or (iii) similar relief with respect to Lessee under any law
providing for the relief of debtors; or an order for relief is entered with
respect to Lessee in an involuntary case under the United States Bankruptcy
Code, as now or hereafter in effect, or an action under the laws of the
jurisdiction of incorporation or organization of Lessee, similar to any of the
foregoing, is taken with respect to Lessee without its application or consent;
or
(h) Lessee makes any representation or warranty herein or in any statement or
certificate at any time given in writing pursuant to or in connection with this
Lease Agreement, which is false or misleading in any material respect; or
(i) Lessee defaults under any promissory note, credit agreement, loan
agreement, conditional sales contract, guaranty, lease, indenture, bond,
debenture or other material obligation whatsoever, and a party thereto or a
holder thereof is entitled to accelerate the obligations of Lessee thereunder;
or Lessee defaults in meeting any of its trade, tax or other current obligations
as they mature, unless such obligations are being contested diligently and in
good faith; or
(j) Any party to any guaranty, letter of credit, subordination or credit
agreement or other undertaking, given for the benefit of Lessor and obtained in
connection with this Lease Agreement, breaches, fails to continue, contests, or
purports to terminate or to disclaim such guaranty, letter of credit,
subordination or credit agreement or other undertaking; or such guaranty, letter
of credit, subordination agreement or other undertaking becomes unenforceable;
or a guarantor of this Lease Agreement shall die, cease to exist or terminate
its independent operations.
16.2 No waiver by Lessor of any Event of Default shall constitute a waiver of
any other Event of Default or of the same Event of Default at any other time.
17. Remedies.
17.1 Upon the occurrence of an Event of Default and while such Event of
Default is continuing, Lessor, at its sole option, upon its declaration, and to
the extent not inconsistent with applicable law, may exercise any one or more of
the following remedies:
(a) Lessor may terminate this Lease Agreement whereupon all rights of Lessee
to the quiet enjoyment and use of the Equipment shall cease;
(b) Whether or not this Lease Agreement is terminated, Lessor may cause
Lessee, at the sole cost and expense of Lessee, to return any or all of the
Equipment promptly to the possession of Lessor in good repair and working order,
reasonable wear and tear excepted. Lessor, at its sole option and through its
employees, agents or contractors, may peaceably enter upon the premises where
the Equipment is located and take immediate possession of and remove the
Equipment, all without liability to Lessor, its employees, agents or contractors
for such entry. LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHTS TO NOTICE AND/OR HEARING PRIOR TO THE REPOSSESSION OR
REPLEVIN OF THE EQUIPMENT BY LESSOR, ITS EMPLOYEES, AGENTS OR CONTRACTORS;
17
<PAGE>
(c) Lessor may proceed by court action to enforce performance by Lessee of
this Lease Agreement or pursue any other remedy Lessor may have hereunder, at
law, in equity or under any applicable statute, and recover such other actual
damages as may be incurred by Lessor;
(d) Lessor may recover from Lessee damages, not as a penalty but as
liquidation for all purposes and without limitation of any other amounts due
from Lessee under this Lease Agreement, in an amount equal to the sum of (i) any
unpaid Daily Rents and/or Monthly Rents due and payable for periods prior to the
repossession of the Equipment by Lessor plus any interest due thereon pursuant
to Section 15 above, (ii) the present value of all future Monthly Rents required
to be paid over the remaining Initial Term or any Extended Term after
repossession of the Equipment by Lessor, determined by discounting such future
Monthly Rents to the date of payment by Lessee at a rate of five (5) percent per
annum, and (iii) all costs and expenses incurred in searching for, taking,
removing, storing, repairing, restoring, refurbishing and leasing or selling
such Equipment; or
(e) Lessor may sell, lease or otherwise dispose of any or all of the
Equipment, whether or not in the possession of Lessor, at public or private sale
and with or without notice to Lessee, which notice is hereby expressly waived by
Lessee, to the extent permitted by and not inconsistent with applicable law,
Lessor shall then apply against the obligations of Lessee hereunder the net
proceeds of such sale, lease or other disposition, after deducting therefrom (i)
the present value of the residual value of the Equipment at the expiration of
the Initial Term, which is anticipated by Lessor and Lessee to be not less than
twenty (20) percent of the Acquisition Cost, such present value to be determined
by discounting the residual value to the date of sale, lease or other
disposition at a rate of five (5) percent per annum, and (ii) all costs incurred
by Lessor in connection with such sale, lease or other disposition including,
but not limited to, costs of transportation, repossession, storage,
refurbishing, advertising or other fees, Lessee shall remain liable for any
deficiency, and any excess of such proceeds over the total obligations owed by
Lessee shall be retained by Lessor. If any notice of such sale, lease or other
disposition of the Equipment is required by applicable law, ten (10) days
written notice to Lessee shall be deemed reasonable.
17.2 No failure on the part of Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or remedy hereunder shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
Each right and remedy provided hereunder is cumulative and not exclusive of any
other right or remedy including, without limitation, any right or remedy
available to Lessor at law, by statute or in equity.
17.3 Lessee shall pay all costs and expenses including, but not limited to,
reasonable legal fees incurred by Lessor arising out of or in connection with
any Event of Default or this Lease Agreement. Lessee shall also be liable for
any amounts due and payable to Lessor under any other provision of this Lease
Agreement including, but not limited to, amounts due and payable under Section
18 below.
18. Tax Indemnification.
18.1 Lessee represents and warrants that the Equipment is and will remain,
during the entire Initial Term and any Extended Term, property used in a trade
or business or for the production of income within the meaning of Section 167 of
the Internal Revenue Code of 1986, as amended ("Code"). Lessee further
acknowledges and agrees that, pursuant to the Code, Lessor or its affiliated
group, as defined in Section 1504 of the Code ("Affiliated Group"), shall be
entitled to deductions for the recovery of the Acquisition Cost of the Equipment
over the recovery period as set forth in the applicable Equipment Schedule,
using the Accelerated Cost Recovery System as provided by Section 168 (b) (1) of
the Code ("ACRS Deductions").
18.2 If as a result of any reason or circumstance whatsoever, except as
specifically set forth in Section 18.3 below, Lessor or its Affiliated Group
shall not be entitled to, shall not be allowed, shall suffer recapture of or
shall lose any ACRS Deductions, then Lessee shall pay to Lessor, upon demand, a
sum to be computed
18
<PAGE>
by Lessor in the following manner. Such sum, after deduction of all federal,
state and local income taxes payable by Lessor as a result of the receipt of
such sum, shall be sufficient to restore Lessor or its Affiliated Group to
substantially the same position, on an after-tax basis, as it would have been in
but for the loss of such ACRS Deductions. In making its computation, Lessor or
its Affiliated Group shall consider, but shall not be limited to, the following
factors: (i) the amounts and timing of any net loss of tax benefits resulting
from any such lack of entitlement to or loss, recapture, or disallowance of ACRS
Deductions but offset by any tax benefits derived from any depreciation or other
capital recovery deductions or exclusions from income allowed to Lessor or its
Affiliated Group with respect to the same Equipment; (ii) penalties, interest or
other charges imposed; (iii) differences in tax years involved; and (iv) the
time value of money at a reasonable rate determined, in good faith, by Lessor.
For purposes of computation only, the amount of indemnification payments
hereunder shall be calculated on the assumption that Lessor and its Affiliated
Group have or will have, in all tax years involved, sufficient taxable income
and the tax liability to realize all tax benefits and incur all losses of tax
benefits at the highest marginal Federal corporate income tax rate in each year.
Upon request, Lessor shall provide Lessee with the methods of computation used
in determining any sum that may be due and payable by Lessee under this Section
18.
18.3 Lessee shall not be obligated to pay any sums required under this
Section 18 in the event that lack of entitlement to, or loss, recapture or
disallowance of any ACRS Deductions results from one or more of the following
events: (i) a disqualifying disposition due to the sale of the Equipment by
Lessor when no Event of Default, as defined in Section 16 above, has occurred,
(ii) a failure of Lessor or its Affiliated Group to timely claim any ACRS
Deductions for the Equipment in its tax return, and/or (iii) the fact that
Lessor or its Affiliated Group does not have, in any taxable year or years,
sufficient taxable income or tax liability to realize the benefit of any ACRS
Deductions that are otherwise allowable to Lessor or its Affiliated Group.
18.4 The representations, obligations and indemnities of Lessee under this
Section 18 shall continue in full force and effect, notwithstanding the
expiration or other termination of this Lease Agreement.
19. Assignment; Sublease.
19.1 Lessor may sell, assign or otherwise transfer all or any part of its
right, title and interest in and to the Equipment and/or this lease Agreement to
a third-party assignee, subject to the terms and conditions of this Lease
Agreement including, but not limited to, the right to the quiet enjoyment of the
Equipment by Lessee as set forth in Section 7.1 above. Such assignee shall
assume all of the rights and obligations of Lessor under this Lease Agreement
and shall relieve Lessor therefrom. Thereafter, all references to Lessor herein
shall mean such assignee. Notwithstanding any such sale, assignment or
transfer, the obligations hereunder shall remain absolute and unconditional as
set forth in Section 7.2 above.
19.2 Lessor may also pledge, mortgage or grant a security interest in the
Equipment and assign this Lease Agreement as collateral. Each such pledgee,
mortgagee, lienholder or assignee shall have any and all rights as may be
assigned by Lessor but none of the obligations of Lessor hereunder. Any pledge,
mortgage or grant of security interest in the Equipment or assignment of this
Lease Agreement shall be subject to the terms and conditions hereof including,
but not limited to, the right to the quiet enjoyment of the Equipment by Lessee
as set forth in Section 7.1 above. Lessor, by reason of such pledge, mortgage,
grant of security interest or collateral assignment, shall not be relieved of
any of its obligations hereunder which shall remain absolute and unconditional
as set forth in Section 7.2 above. Upon the written request of Lessor, Lessee
shall acknowledge such obligations to the pledgee, mortgagee, lienholder or
assignee.
19.3 LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR PLEDGE ANY
OF ITS INTEREST IN THIS LEASE AGREEMENT OR ANY OF THE EQUIPMENT, WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR. Any such sale, transfer, assignment, sublease,
conveyance or pledge, whether by operation of law or otherwise, without the
prior written consent of
19
<PAGE>
Lessor, shall be void.
20. Optional Performance By Lessor. If an Event of Default, as defined in
Section 16 above, occurs and is continuing, Lessor in its sole discretion may
pay or perform such obligation in whole or in part, without thereby becoming
obligated to pay or to perform the same on any other occasion or to pay any
other obligation of Lessee. Any payment or performance by Lessor shall not be
deemed to cure any Event of Default hereunder. Upon such payment or performance
by Lessor, Lessee shall pay forthwith to Lessor the amount of such payment or an
amount equal to all costs and expenses of such performance, as well as any
delayed payment charges on such amounts as set forth in Section 15 above.
21. Compliance and Approvals. Lessee warrants and agrees that this Lease
Agreement and the performance by Lessee of all of its obligations hereunder have
been duly authorized, do not and will not conflict with any provision of the
charter or bylaws of Lessee or of any agreement, indenture, lease or other
instrument to which Lessee is a party or by which Lessee or any of its property
is or may be bound. Lessee warrants and agrees that this Lease Agreement does
not and will not require any governmental authorization, approval, license or
consent except those which have been duly obtained and will remain in effect
during the entire Initial Term and any Extended Term.
22. Miscellaneous.
22.1 The section headings are inserted herein for convenience of reference
and are not part of and shall not affect the meaning or interpretation of this
Lease Agreement.
22.2 Any provision of this Lease Agreement which is unenforceable in whole or
in part in any jurisdiction shall, as to such jurisdiction, be ineffective only
to the extent of such unenforceability without invalidating any remaining part
or other provision hereof and shall not be affected in any manner by reason of
such enforceability in any other jurisdiction. The validity and interpretation
of this Lease Agreement and the rights and obligations of the parties hereto
shall be governed in all respects by the laws of The Commonwealth of
Massachusetts without giving effect to the conflicts of laws provisions thereof.
22.3 This Lease Agreement, including all Equipment Schedules and Certificates
of Acceptance, constitutes the entire agreement between Lessor and Lessee.
Lessor and Lessee agree that this Lease Agreement shall not be amended, altered
or changed except by a written agreement signed by the parties hereto. LESSEE
ACKNOWLEDGES THAT THERE HAVE BEEN NO REPRESENTATIONS, EXPRESS OR IMPLIED, BY
LESSOR OTHER THAN AS SET FORTH HEREIN AND LESSEE EXPRESSLY CONFIRMS THAT IT HAS
NOT RELIED UPON ANY REPRESENTATIONS BY LESSOR, EXCEPT THOSE SET FORTH HEREIN, AS
A BASIS FOR ENTERING INTO THIS LEASE AGREEMENT.
22.4 Any notice required to be given by Lessee or Lessor hereunder shall be
deemed adequately given if sent by registered or certified mail, return receipt
requested, to the other party at their respective addresses stated herein or at
such other place as either party may designate in writing to the other.
22.5 Lessee agrees to execute and deliver such additional documents and to
perform such further acts as may be reasonably requested by Lessor in order to
carry out and effectuate the purposes of this Lease Agreement. Upon the written
request of Lessor, Lessee further agrees to execute any instrument necessary for
filing or recording this Lease Agreement or to confirm the ownership of the
Equipment by Lessor. Lessor is hereby authorized to insert in any Equipment
Schedule the serial numbers of the Equipment and other identifying marks or
similar information and to sign, on behalf of Lessee, any Uniform Commercial
Code financing statements.
20
<PAGE>
22.6 This Lease Agreement cannot be canceled or terminated except as
expressly provided herein.
22.7 Whenever the context of this Lease Agreement requires, the singular
includes the plural and the plural includes the singular. Whenever the word
Lessor is used herein, it includes all assignees and successors in interest of
Lessor. If more than one Lessee are named in this Lease Agreement, the
liability of each shall be joint and several.
22.8 All agreements, indemnities, representations and warranties of Lessee
made herein and all rights and remedies of Lessor shall survive the expiration
or other termination of this Lease Agreement, whether or not expressly provided
herein.
22.9 Any waiver of any power, right, remedy or privilege of Lessor hereunder
shall not be effective unless in writing signed by Lessor.
22.10 This Lease Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same Instrument.
IN WITNESS WHEREOF, Lessor and Lessee, each by its duly authorized officer or
agent, have duly executed and delivered this Lease Agreement, which is intended
to take effect as a sealed instrument, as of the day and year first written
above.
DIGITAL SOUND CORPORATION
/s/ B. Robert Suh
- ---------------------------------------
B. Robert Suh
Vice President, Chief Financial Officer
and Corporate Secretary
Accepted at Boston, Massachusetts
BANCBOSTON LEASING INC.
/s/ Steven McCarthy
- ---------------------------------------
Steven McCarthy
Assistant Vice President
21
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<PAGE>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-01-1997
<CASH> 12,472
<SECURITIES> 0
<RECEIVABLES> 5,657
<ALLOWANCES> 581
<INVENTORY> 3,383
<CURRENT-ASSETS> 22,420
<PP&E> 14,580
<DEPRECIATION> (10,742)
<TOTAL-ASSETS> 30,291
<CURRENT-LIABILITIES> 8,885
<BONDS> 0
0
5,000
<COMMON> 68,982
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,291
<SALES> 3,359
<TOTAL-REVENUES> 3,359
<CGS> 1,915
<TOTAL-COSTS> 6,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (4,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,628)
<EPS-PRIMARY> (0.23)
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