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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )*
-----
DIGITAL SOUND CORPORATION
- --------------------------------------------------------------------------------
(Name of Issuer)
COMMON STOCK
- --------------------------------------------------------------------------------
(Title of Class of Securities)
2539111011
-----------------------------------------
(CUSIP Number)
Jeffrey S. Lambert, Strome Susskind Investment Management, L.P.
100 Wilshire Blvd., 15th Floor, Santa Monica, CA 90401 (310) 917-6600
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
DECEMBER 19, 1997
-----------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [_].
Check the following box if a fee is being paid with this statement [_]. (A fee
is not required only if the reporting person: (1) has a previous statement on
file reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7).
Note: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d-1(a) for other parties to whom copies are to be
sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required in the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 2539111011 SCHEDULE 13D PAGE 2 OF 74 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
STROME SUSSKIND HEDGECAP FUND, L.P.
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
SEE 13G OF STROME SUSSKIND INVESTMENT MANAGEMENT, L.P. (b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
5 ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
DELAWARE
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
1,364,680
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
1,364,680
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
1,364,680
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
SEE 13G OF STROME SUSSKIND INVESTMENT MANAGEMENT, L.P.
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
6.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
PN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
Page 3 of 74
Item 1. Security and Issuer
Common Stock, no par value
Digital Sound Corporation (the "Company")
6307 Carpenteria Aveune
Carpenteria, California 93013
Item 2. Identity and Background
a. Strome Susskind Hedgecap Fund, L.P. (the "Reporting Person")
b. 100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401
c. Principal Business: Investment Partnership
d. None.
e. None
f. Delaware
See Schedule 13G of Strome Susskind Investment Management, L.P. filed
with the Securities and Exchange Commission of even date herewith.
Item 3. Source and Amount of Funds or Other Consideration
Investment partnership funds were derived by a combination of cash
contributions to the partnership by the limited partners and,
additionally, from the use of margin by the partnership.
Item 4. Purpose of Transaction.
The shares of the issuer were purchased for investment purposes. The
partnership will consider making further sales or purchases of stock.
Item 5. Interest in Securities of the Issuer
(a) The Reporting Person has beneficial ownership of 606,050 shares
of the common stock of Digital Sound Corporation ("DGSD"). In
addition, the Reporting Person has to right to acquire 758,630 shares
of DGSD pursuant to certain Series B Preferred shares of the issuer
that are presently convertible into ten shares of DGSD common stock
for each shares of the Series B Preferred. Accordingly, the reporting
person has beneficial ownership of 1,364,680 shares
<PAGE>
Page 4 of 74
of DGSD, or 6.5% of the 22,171,004 shares outstanding, computed in
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of
1934, as amended. See Schedule 13G of Strome Susskind Investment
Management, L.P. filed with the Securities and Exchange Commission of
even date herewith.
(b) The Reporting Person shares both the power to vote or direct the
vote and the power to dispose or to direct the disposition of all
1,364,680 DGSD shares with Strome Susskind Investment Management, L.P.
("SSIM"), SSCO, Inc. ("SSCO"), and Mark E. Strome ("Strome"). The
business address of SSIM, SSCO and Strome is 100 Wilshire Blvd., 15th
Floor, Santa Monica, CA 90401.
SSIM is a Delaware limited partnership and a registered investment
adviser. SSIM is the sole general partner of and investment adviser to
the Reporting Person
SSCO is a Delaware corporation and is the sole general partner of
SSIM. The Mark E. Strome Living Trust, dated 01/16/97 (the "Trust") is
the controlling shareholder of SSCO. Mark E. Strome, a United Staes
natural person, is a settlor and trustee of the Trust.
During the last five years, neither the Reporting Person nor the
entities with which it shares voting and dispositive powers has been:
(a) convicted in a criminal proceeding, or (b) a party to a civil
proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state
securities laws or finding any violation with respect to such laws.
(c) On December 19, 1997, the Reporting Person purchased from the
Company 75,863 Series B Preferred shares at a price per share of
$7.50. That purchase was the only transaction effected by the
reporting person with respect to Common Shares within the past 60
days. In connection with the purchase of Series B Preferred Shares,
the Reporting Person also purchased from the Company $281,032.50 in
principal amount of Convertible Notes of the Company (the "Convertible
Notes"). If shareholders of the Company approve an amendment to the
Company's articles of incorporation, the Convertible Notes held by the
Reporting Person will automatically convert into 101,151 Series B
Preferred shares.
(d) The partners of the Reporting Person have the right to
participate in the receipt of dividends from, or proceeds from the
sale of, the Common Shares acquired for the account of the Reporting
Person.
(e) Not applicable.
<PAGE>
Page 5 of 74
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect
to Securities of the Issuer.
In connection with the acquisition of the Series B Preferred Shares
held by it, the Reporting Person entered into a Preferred Stock
Purchase Agreement (the "Preferred Stock Purchase Agreement") and a
Registration Rights Agreement, each dated as of December 19, 1997 with
the Company and certain other persons, which agreements are filed as
Exhibit A and Exhibit B hereto, respectively, and are incorporated
herein by reference. With respect to the Series B Preferred Shares to
which it relates, the Preferred Stock Purchase Agreement sets forth
the terms and conditions upon which the Series B Preferred Shares and
Convertible Notes were purchased, including restrictions on transfer
of the Series B Preferred Shares. Also pursuant to the Preferred Stock
Purchase Agreement, the Company has undertaken to call a meeting of
shareholders, to be held not later than April 15, 1997, to submit to
shareholders for approval a proposal to amend the Company's articles
of incorporation to increase the number of authorized Common Shares.
The increase will serve to allow the Company to reserve a sufficient
number of Common Shares to accommodate the conversion of shares of
Series B Preferred Shares issuable upon conversion of the Convertible
Notes, which Convertible Notes shall convert automatically to Series B
Preferred Shares upon such approval by the shareholders. The
Registration Rights Agreement provides holders of the Series B
Preferred Shares with respect to such shares certain demand and
"piggyback" registration rights, subject to the conditions and
indemnifications set forth therein. The foregoing description of the
terms of the Preferred Stock Purchase Agreement and the Registration
Rights Agreement are qualified in their entirety by reference to the
specific provisions of each such agreement, which are filed as Exhibit
A and Exhibit B hereto.
From time to time the Reporting Person, may lend portfolio securities
to brokers, banks or other financial institutions. These loans
typically obligate the borrower to return the securities, or an equal
amount of securities of the same class, to the lender and typically
provide that the borrower is entitled to exercise voting rights and to
retain dividends during the term of the loan. From time to time to the
extent permitted by applicable law, the Reporting Person may borrow
the Common Shares for the purpose of effecting, and may effect, short
sale transactions, and may purchase securities for the purpose of
closing out short positions in such securities.
Except as set forth herein, the Reporting Person does not have any
contracts, arrangements, understandings or relationships with respect
to any Common Shares.
<PAGE>
Page 6 of 74
Item 7. Material to be Filed as Exhibits.
Exhibit A: Preferred Stock Purchase Agreement dated as of December 19,
1997 among the Company, the Reporting Person and certain
other persons.
Exhibit B: Registration Rights Agreement dated as of December 19, 1997
among the Company, the Reporting Person and certain other
persons.
SIGNATURE.
After reasonable inquiry and to the best of my knowkedge and belief, I
certify that the information set forth in this statement is true,
complete and correct.
STROME SUSSKIND HEDGECAP FUND, L.P.
2/2/98 /s/ Jeff S. Lambert
__________ ___________________________________
Date Jeffrey S. Lambert
Chief Financial Officer for Strome
Susskind Investment Management, L.P.
General Partner of Strome Susskind Hedgecap Fund, L.P.
<PAGE>
Page 7 of 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
Exhibit A: Preferred Stock Purchase Agreement dated as of December 19, 1997
among the Company, the Reporting Person and certain other persons.
Exhibit B: Registration Rights Agreement dated as of December 19, 1997 among
the Company, the Reporting Person and certain other persons.
</TABLE>
<PAGE>
Page 8 of 74
Exhibit A
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>
Page 9 of 74
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 wire transfer in an amount equal to the purchase
price of
<PAGE>
Page 10 of 74
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.
<PAGE>
Page 11 of 74
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 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.
<PAGE>
Page 12 of 74
(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 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
<PAGE>
Page 13 of 74
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 "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.
<PAGE>
Page 14 of 74
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 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.
<PAGE>
Page 15 of 74
(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 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
<PAGE>
Page 16 of 74
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. 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
----------------------------------
PreferredStock 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
<PAGE>
Page 17 of 74
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;
(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 onsummation of the transactions contemplated by this
Agreement.
<PAGE>
Page 18 of 74
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.
6.3. Access to Information. The Investor has been afforded access
---------------------
toinformation 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).
<PAGE>
Page 19 of 74
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.
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:
<PAGE>
Page 20 of 74
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 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.
<PAGE>
Page 21 of 74
(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.
"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,
<PAGE>
Page 22 of 74
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 restrictionOn 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.
"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.
<PAGE>
Page 23 of 74
"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.
--------------
"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
<PAGE>
Page 24 of 74
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
(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;
<PAGE>
Page 25 of 74
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
----------------
agreementbetween the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all prior arrangements or
understandings with respect thereto.
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.
<PAGE>
Page 26 of 74
(Signature pages follow)
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
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
---
<PAGE>
Page 27 of 74
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
---
<PAGE>
Page 28 of 74
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
----------
<PAGE>
Page 29 of 74
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
----------
<PAGE>
Page 30 of 74
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
---
<PAGE>
Page 31 of 74
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
--------
<PAGE>
Page 32 of 74
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
--------
<PAGE>
Page 33 of 74
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
--------------
<PAGE>
Page 34 of 74
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
--------
<PAGE>
Page 35 of 74
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
----------------------
<PAGE>
Page 36 of 74
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
--------
<PAGE>
Page 37 of 74
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
--------------
<PAGE>
Page 38 of 74
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
--------------
<PAGE>
Page 39 of 74
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
--------------------
<PAGE>
Page 40 of 74
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
--------
<PAGE>
Page 41 of 74
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
--------
<PAGE>
Page 42 of 74
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
--------
<PAGE>
Page 43 of 74
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
--------
<PAGE>
Page 44 of 74
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
--------
<PAGE>
Page 45 of 74
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
----------
<PAGE>
Page 46 of 74
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.
<PAGE>
Page 47 of 74
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 22,312 $ 82,657.50 $ 249,997.50
Partners, L.P.
Newberg Family Trust 26,775 $ 99,187.50 $ 300,000.00
UTA DTD 12/18/90
Frederick J. Warren 44,625 $ 165,315.00 $ 500,002.50
and Robin Grace
Warren
Strome Susskind 75,863 $ 281,032.50 $ 850,005.00
Hedgecap Fund, L.P
Strome Hedgecap 13,387 $ 49,597.50 $ 150,000.00
Limited
Strome Offshore, 49,087 $ 181,845.00 $ 549,997.50
Limited
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.
Chancellor LGT 103,441 $ 383,190.00 $1,158,997.50
Private Capital
Offshore Partners
II, L.P.
Chancellor LGT 8,121 $ 30,090.00 $ 90,997.50
Private Capital
Offshore Partners I,
C.V.
Chancellor LGT 57,477 $ 212,925.00 $ 644,002.50
Private Capital
Partners III, Limited
Partnership
Oak Investment 435,317 $1,612,627.50 $4,877,505.00
Partners VII,
Limited Partnership
Oak VII Affiliates 10,933 $ 40,500.00 $ 122,497.50
Fund, Limited
Partnership
Oak Investment 652,000 Surrender for
Partners V, Limited cancellation
Partnership Certificate No. 1
evidencing 2,573,684
shares of Series A
Preferred Stock
Oak V Affiliates 14,667 Surrender for
Fund, Limited cancellation
Partnership 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>
Page 48 of 74
ANNEX B
Certificate of Determination
ANNEX C
Convertible Promissory Note
<PAGE>
Page 49 of 74
ANNEX D
Registration Rights Agreement
<PAGE>
Page 50 of 74
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 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.
<PAGE>
Page 51 of 74
Exhibit B
DIGITAL SOUND CORPORATION
----------------
REGISTRATION RIGHTS AGREEMENT
Dated as of December 19, 1997
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.
-----
<PAGE>
Page 52 of 74
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.
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
<PAGE>
Page 53 of 74
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
(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.
---
<PAGE>
Page 54 of 74
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
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.
<PAGE>
Page 55 of 74
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.
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.
<PAGE>
Page 56 of 74
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
<PAGE>
Page 57 of 74
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).
<PAGE>
Page 58 of 74
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.
<PAGE>
Page 59 of 74
(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.
(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
<PAGE>
Page 60 of 74
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;
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
<PAGE>
Page 61 of 74
(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 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.
<PAGE>
Page 62 of 74
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).
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.
<PAGE>
Page 63 of 74
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 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.
<PAGE>
Page 64 of 74
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, 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.
<PAGE>
Page 65 of 74
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; 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
<PAGE>
Page 66 of 74
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.
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.
<PAGE>
Page 67 of 74
(Signature pages follow)
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
Registration Rights Agreement
SCOT B. JARVIS, an Individual
By: /s/ SCOT B. JARVIS
---------------------------------
Scot B. Jarvis, an Individual
Registration Rights Agreement
MICHAEL J. WILLNER, an Individual
By: /s/ MICHAEL J. WILLNER
---------------------------------
Michael J. Willner, an Individual
<PAGE>
Page 68 of 74
Registration Rights Agreement
SPRING POINT PARTNERS, L.P.
By: /s/ JOHN D. BOTTI
-------------------------------
John D. Botti, Managing Partner
Registration Rights Agreement
NEWBERG FAMILY TRUST UTA DTD 12/18/90
By: /s/ BRUCE NEWBERG
-------------------------------
Bruce Newberg, Trustee
Registration Rights Agreement
FREDERICK J. AND ROBIN GRACE WARREN,
as Joint Tenants
By: /s/ FREDERICK J. WARREN
-------------------------------
Frederick J. Warren
<PAGE>
Page 69 of 74
By: /s/ ROBIN GRACE WARREN
------------------------------
Robin Grace Warren
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
<PAGE>
Page 70 of 74
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
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
<PAGE>
Page 71 of 74
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
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
<PAGE>
Page 72 of 74
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
Registration Rights Agreement
CHANCELLOR LGT PRIVATE CAPITAL
OFFSHORE PARTNERS III, L.P.
By: CPCP Associates, L.P.
Its: General Partner
<PAGE>
Page 73 of 74
By: Chancellor LGT Venture Partners, Inc.
Its: General Partner
By: /s/ ALLESANDRO PIOL
-----------------------------------
Allesandro Piol, Managing
Director
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,
LIMITED PARTNERSHIP
By: Oak VII Affiliates, L.L.C.
Its: General Partner
By: /s/ BANDEL CARANO
-----------------------------------
Bandel Carano, Managing Member
<PAGE>
Page 74 of 74
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
Registration Rights Agreement
MICROSOFT CORPORATION
By: /s/ GREGORY B. MAFFEI
-----------------------------------
Title: Chief Financial Officer
-----------------------------------
