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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997.
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [FEE REQUIRED]
For the transition period from __________________ to _________________
Commission File Number: 0-18280
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DIGITAL SOUND CORPORATION
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(Exact name of Registrant as specified in its charter)
California 95-3222624
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
6307 Carpinteria Avenue, Carpinteria, California 93013
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(Address of principal executive offices) (Zip Code)
(805) 566-2000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of Registrant's voting stock held by non-affiliates
of the Registrant as of January 22, 1998 was approximately $28,967,294
The number of shares outstanding of Registrant's common stock as of January 22,
1998: 20,561,593.
Documents Incorporated by Reference:
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Part of the following document is incorporated by reference to Part III of the
Form 10-K Report: Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement").
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DIGITAL SOUND CORPORATION
Annual Report on Form 10-K
December 31, 1997
TABLE OF CONTENTS
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PART I
Page
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Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 7
Item 3. Legal Proceedings..................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders................................... 8
Executive Officers of the Registrant.................................................. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Financial Data............................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 12
Item 8. Financial Statements and Supplementary Data........................................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 29
Item 11. Executive Compensation................................................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 29
Item 13. Certain Relationships and Related Transactions........................................ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 29
Signatures ............................................................................................ 31
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Trademarks - Digital Sound(R), VoiceServer(R), VoiceForms(R), MessageNet(R),
UNIVOX(R), InfoMail(R) are registered trademarks of the Company. UNIX(R) is a
registered trademark of Novell Inc. Ethernet(TM) is a trademark of Xerox
Corporation. MediaCom(TM) is a trademark of Bellcore. Windows NT(R) is a
registered trademark of Microsoft Corporation. VoiceView(R) is a registered
trademark of Radish Communications Systems, Inc.
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PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES
FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
ITEM 1. BUSINESS
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Digital Sound Corporation, a California corporation, designs, manufactures and
markets high-capacity, network-based enhanced services solutions. The Company
has two product lines, the new product line and the existing product line. The
new product line is the PulsePoint(TM) Enhanced Application Platform and
Communication-Management Suite of Applications and is sold to telecommunications
network service providers, worldwide. The existing product line is the
VoiceServer(R) Family of Multimedia Messaging Products and is sold to
telecommunications network service providers and large corporations, worldwide.
Both the PulsePoint Enhanced Application Platform and Applications and
VoiceServer(R) products integrate voice, fax and e-mail messaging applications
on a single platform for implementation with telephony and data networks to
enable Unified Messaging. Unified Messaging enables senders to send and receive
messages using telephones, cellular phones, fax machines or screen-based
devices, such as desktop or portable personal computers. The PulsePoint Enhanced
Application Platform functions in a traditional voice/fax, data and
computer/telephony environment. The VoiceServer(R) platform functions in a
traditional voice/fax environment.
The Company sells its products primarily into the public service provider market
and secondarily into the customer premises equipment (CPE) market through a
variety of channels. These channels include direct and indirect sales.
Complementing a direct sales effort, the public enhanced services markets are
served by indirect channels, including original equipment manufacturers (OEMs)
and value added resellers (VARs). Indirect distributor channels serve the CPE
market.
The public service provider market includes a broad array of established and
emerging carriers that provide voice and data services to business and
residential customers. These providers offer enhanced application services to
increase adoption, to reduce churn of their customer base and to provide
strategic differentiation of their basic services.
These enhanced services are comprised of communication-management applications,
which include voice, fax and e-mail messaging, and are provided using enhanced
services solutions located at or connected to the telephone company's central
switching offices or voice/data access servers. The CPE market encompasses
communication-management applications, which include voice and fax messaging, in
which the voice messaging system is installed on the customer's premises and is
integrated with the customer's private branch exchange systems.
On December 19, 1997, the Company consummated a private placement of the
Company's convertible securities with certain investors (collectively, the
"Investors") for an aggregate of approximately $20 million pursuant to a
Preferred Stock Purchase Agreement (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company (i) sold for cash (A) 1,785,000 shares of the
Company's Series B Convertible Preferred Stock and (B) $6,612,502.50 aggregate
principal amount of the Company's Convertible Promissory Notes (the "Notes" and
together with the Series B Convertible Preferred Stock, the "Securities") and
(ii) exchanged the 2,631,579 shares of Series A Convertible Preferred Stock held
by affiliates of Oak Investment Partners ("Oak") for 666,667 shares of the
Series B Convertible Preferred Stock. Each share of Series B Convertible
Preferred Stock is convertible into 10 shares of Common Stock, subject to
certain antidilution adjustments. The Notes were issued because the Company did
not have an adequate number of shares of the underlying Common Stock authorized
to permit the conversion of the entire $20 million of Series B Convertible
Preferred Stock. The Company sold the Securities at a price of $0.75 per share
of Common Stock on an as-converted basis. The Notes automatically convert into
the Series B Convertible Preferred Stock if the Company's shareholders approve
an amendment to the Company's Ninth Amended and
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Restated Articles of Incorporation authorizing a sufficient number of shares of
Common Stock to permit conversion of all of the Series B Convertible Preferred
Stock issuable upon conversion of the Notes ("Shareholder Approval"). Such
amendment is being submitted to the Company's shareholders for approval at the
Company's 1998 annual meeting. One of the Investors was Microsoft Corporation,
which purchased an aggregate of $5 million of the Securities. Affiliates of Oak
also purchased an aggregate of $5 million of the Securities.
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PRODUCTS
The Company's products use a common architecture, design and technology and
common hardware and software. The PulsePoint Enhanced Application Platform is
based on Microsoft(R)'s Windows NT(R) Server operating system, other Microsoft
technologies, products from Dialogic Corporation and a variety of other
technology providers. The platform is a highly-available, scalable, open-system
platform with an application development environment using state-of-the-art
computer industry solutions to enable rapid creation of integrated services.
Accompanying the platform is a Communication-Management Suite of Applications
that help end users communicate more effectively during real-time and
non-real-time communications.
The VoiceServer(R) is a single-unit, multimedia, and multiple-application
platform. Its single-system design allows multiple applications to share
resources, including ports, storage and digital signal processors. This fully
integrated design enables new applications to be added efficiently, while
reducing system costs. Since the VoiceServer(R) is completely self-contained,
downtime is reduced, reliability is increased, and ease of service is enhanced.
Hardware Products
The Company's PulsePoint Enhanced Application Platform is comprised of third
party, open-system hardware and software components, which are combined with the
company's proprietary middleware software. This platform is designed for the
messaging needs of small- to large-sized public service providers and resellers.
Its architecture supports a wide variety of port capacities from tens to
thousands of ports.
The Company's VoiceServer(R) family of products includes the following hardware
platforms:
VoiceServer(R) 2110 - Designed for the messaging needs of medium- to large-sized
organizations and the voice and fax messaging needs of small- to medium-sized
independent telephone companies ("telcos") and service bureaus. It supports up
to 25,000 mailboxes and provides from 8 to 120 voice ports.
VoiceServer(R) 3110 - Designed specifically for the unified messaging needs of
large-sized telco central offices, it supports up to 50,000 mailboxes and
provides up to 240 voice ports.
Software Products and Applications
The Company's new software products offer a spectrum of features, including
voice and fax messaging, call processing and call delivery. These applications
are written to run on Microsoft's Windows NT Server operating system using
Microsoft's Visual Studio integrated with Digital Sound's application creation
tools.
The Company currently has the following software applications available:
PulsePoint Messaging Application -- PulsePoint Messaging Application provides
messaging services for public enhanced services markets such as Competitive
Local Exchange Carriers and Internet Service Providers. A completely new
implementation, it includes flexible administration, a high-performance
object-oriented database for subscriber data and D/COM interfaces. It is a
highly flexible implementation that will allow the Company to meet the
requirements of service providers as they address the needs of their customers.
The Company's existing software products offer a spectrum of features, including
voice, fax and e-mail messaging, call processing, call delivery and audiotex
services. In addition, the Company offers enhanced speech technology products,
such as name-to-speech and speaker-independent recognition. These applications
are written for the UNIX System V operating system with proprietary extensions
(together called UNIVOX(R)) which provides voice, fax and e-mail processing,
multi-tasking capabilities and real-time processing extensions in a single
package.
InfoMail(R) 4.0 -- InfoMail is the Company's full-featured voice/fax messaging
product for CPE and public enhanced services markets. It includes advanced voice
mail features and offers flexible administration. InfoMail serves as a platform
for storing and retrieving voice and fax messages. InfoMail offers integrated
fax messaging, on-line tutorial, guest mailboxes, scheduled future delivery of
messages up to one year in advance, non-delivery notification, name delivery, a
personal reminder interface for users, user programming of calls to other
extensions and group distribution lists.
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Fax Mail -- Integrated with the InfoMail application, fax mail lets users access
a single mailbox for receiving and forwarding fax messages, allowing the user to
control when, where and how faxes are received. Voice comments can be "attached"
as a "voice cover sheet" and deposited as a single mixed-media message in the
subscriber's mailbox.
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Fax Overflow -- Integrated with the InfoMail application, this application
allows VoiceServer(R) to intercept incoming faxes when the receiving fax machine
is busy or out of service, storing them until the machine becomes available, and
then delivering to the fax machine.
Hands-Free Operation -- The Hands-free feature is provided as an InfoMail
software option. It allows users to save or delete new messages through the use
of spoken commands. It is especially convenient for cellular users.
Spoken Password -- Spoken password is an InfoMail feature that allows
subscribers to access their voice mailboxes by speaking passwords rather than
using touch-tone key presses.
InfoMail Express(TM) -- InfoMail Express integrates Internet e-mail with the
InfoMail multimedia platform to provide full unified messaging for the public
enhanced services market, and extends the unified messaging services of InfoMail
to personal computers. With InfoMail Express, users of personal computers
running Microsoft's Windows 95 and Internet Explorer can visually access
mailboxes on InfoMail Express to review voice, fax and e-mail messages.
MessageNet(R) -- The MessageNet option of InfoMail is the first high-speed
digital networking software for voice mail that is based on X.400, the industry
standard for message exchange. X.400 was selected because it supports the
transmission of voice, fax and e-mail. MessageNet provides the complete InfoMail
feature set, including real-time address confirmation of up to one million
users.
Inter-Vendor Networking -- These options provide the industry-standard protocols
for digital and analog transmission of messages among voice messaging systems
from different vendors. Audio Messaging Interchange Specification (AMIS)
networking allows for message exchange between remote VoiceServer(R)s and any
manufacturer's voice messaging system that utilizes the AMIS protocol.
CallController(TM) -- CallController provides call-processing capabilities,
which allow callers to route their calls to a specific destination by listening
to voice menus and entering responses on a telephone keypad. When integrated
with InfoMail, the caller can leave a voice message when encountering a busy
line or no answer when dialing an extension. As a flexible call processing and
audiotex application, CallController enables companies to program various
greetings.
VoiceForms(R) -- VoiceForms is an option to InfoMail that permits customers to
create and complete forms using the telephone. Like written forms, the
VoiceForms option asks specific questions and provides "electronic space" for
either voice or touch-tone key press responses. VoiceForms prompts callers to
leave necessary information, such as purchasing data and sales contact reports.
Completed VoiceForms are stored as voice messages for later transcription and
compilation. VoiceForms can also be used to provide information to callers,
such as job openings on a "voice" bulletin board.
Audiotex/Bulletin Boards -- This application allows companies to combine
InfoMail, CallController and VoiceForms to create voice information lines that
provide information, such as hours of operation, job postings, and directions,
among others.
The following application enablers are available as a part of the Company's
VoiceServer(R):
Voice Development Server (VDS) -- VDS is a software tool-kit designed to aid
VARs and OEMs in the development of customized voice and fax applications. VDS
is well suited for developers because it allows them to take advantage of the
flexible UNIX operating environment to build voice and fax applications in a
high-level programming language.
Speaker-Dependent Speech Recognition -- This application enables developers to
create applications that use spoken input instead of touch-tone key press. Used
in applications that require security, it is used in InfoMail to allow users to
speak a password to access their voice/fax mailbox. It can be used for
voice-controlled transcription of VoiceForms in which users direct the system
with verbal commands rather than by touch-tone key presses, leaving hands free
for word processing. This capability simplifies the transcription task and
increases user productivity.
Speaker Verification -- Speaker Verification is a form of speaker-dependent
recognition that confirms the identity of a speaker. The spoken password of a
caller is analyzed using complex algorithms within the
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system, which validate or reject the password, offering an additional level of
security in voice messaging and call processing applications.
Speaker-Independent Speech Recognition -- This enables developers to create
applications that allow users to respond to prompts with spoken "yes/no"
commands instead of touch-tone key presses. It is used with InfoMail's
Hands-Free interface for cellular phone users. It is used in Directory
Assistance (411) applications that offer "call completion" when they respond
"yes" or "no".
Continuous Speaker-Independent Recognition of Digits 0-9 -- This enables
developers to create applications that use spoken input instead of touch-tone
key presses. It is used for applications such as voice-activated dialing and
credit card and personal identification number collection. It does not require
speakers to pause between spoken numbers.
Name-to-Speech -- This converts text names into computer-synthesized speech.
Digital Sound has developed special algorithms to optimize the pronunciation of
proper names across a wide range of ethnic backgrounds. Name-to-speech
technology is used in InfoMail Express to speak the name of an e-mail sender
over the telephone. It can be used to provide spoken name confirmation to a
voice mail subscriber sending a message to a subscriber on a remote, networked
system.
MessageExpress(TM) -- This sophisticated protocol is designed to run over
various wireline and wireless protocols, such as TCP/IP, ISDN, VoiceView, and
X.25. Client software that resides on a personal computer, which communicates
with InfoMail Express server using the MessageExpress protocol.
SmartAnswer(TM) -- Digital Sound's patent-pending digital signal processing
(DSP) technology automatically determines whether an incoming call is from a
telephone, fax machine or computer and provides the appropriate response--voice
prompts, fax tone or remote log-in, respectively. This capability is used for
one-number deposit and retrieval of unified messages.
Datacom Interfaces
The Company provides the data communications interfaces listed below for the
PulsePoint Enhanced Application Platform and Communication-Management Suite of
Applications. These interfaces enable the PulsePoint Platform to work in
conjunction with a variety of data packet and circuit-switched networks.
. TCP/IP -- A communications protocol for internetwork routing and
reliable message delivery.
. SNMP -- An open-network management surveillance protocol.
. Protocols supported by Dialogic's DM3(TM) Quad Voice Span products
The Company provides the data communications interfaces listed below for the
VoiceServer(R) product family. These interfaces enable the VoiceServer(R) to
work in conjunction with a variety of data processing and office automation
systems.
. RS232 -- An industry-standard mechanical and electrical interface for
computers and communications line and devices.
. Ethernet -- A standard for high-speed data communications over a local
area network.
. X.400 -- An industry standard for electronic message exchange, which
the Company has adapted for voice mail networking.
. TCP/IP -- A communications protocol for internetwork routing and
reliable message delivery.
. SMTP -- A standard protocol for transferring electronic mail messages
from one computer or network to another. Simple Mail Transfer Protocol
specifies how two mail systems interact and the control message format
they use to transfer mail.
SWITCH INTEGRATIONS
The Company's existing systems have been integrated with most major telephone
switching systems, including systems offered by Lucent Technologies Inc.,
Ericsson Inc., GTE Corporation, NEC Corporation,
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Northern Telecom Limited, Intecom, ROLM, a division of Siemens AG (ROLM), and
Siemens AG, Public Communication Networks Group. The Company's systems are also
compatible with most major central office switches, including those manufactured
by Lucent Technologies Inc., Ericsson, Inc., GTE Corporation, Motorola, Inc. and
Northern Telecom Limited.
1997 PRODUCT DEVELOPMENT
To further strengthen its product line, the Company continued to incorporate new
hardware and software technologies into the VoiceServer(R) product line.
During 1997 the Company continued development of an entirely new enhanced
application platform and applications for public enhanced services markets.
The Company continued to invest in upgrading the skills of the engineering
organization. The Company's engineering and development group included 54
employees at December 31, 1997. During the years ended December 31, 1995, 1996
and 1997 the Company spent approximately $7.2 million, $8.9 million and $12.2
million, respectively, on engineering and development. To date, all of the
Company's engineering and development expenses, including software development
costs, have been charged to operations as incurred.
1998 PRODUCT DEVELOPMENT OUTLOOK
In 1998, the Company will focus development activities on adding to its new
product offerings. Specific focus will be on leveraging the rapid application
tools to round out the applications in its Communication-Management Suite of
Applications.
QUALITY ASSURANCE AND MANUFACTURING
Digital Sound satisfies the requirements of one of the most rigorous
international quality standards, ISO 9001, as indicated by the 1995 registration
to ISO 9001 of its company-wide quality management system. The ISO 9000 series
of standards represents an international consensus on the essential features of
a quality system to ensure the effective operation of any business, and more
than 90 countries have adopted the ISO 9001 series as national standards. There
have also been two large regional adoptions, CEN (European Committee for
Standardization) and COPANT (the Pan-American Standards Commission). The Company
believes its certification to the most stringent level of the series (9001)
provides significant competitive advantage, and the quality management system
implemented in support of the certification effort ensures that procedures are
implemented and responsibilities defined to provide all employees with the
ability to pursue continuous quality improvement in meeting customer
requirements.
Quality First, the Company's Total Quality Management program, was initiated in
1991 and has continued to provide improved performance and enhancement of the
quality levels of the Company's products and services. The program has been
extended to include major customers through the Partnering for Quality Program.
The Company's manufacturing operations consist principally of final assembly and
testing of subassemblies and systems. The Company uses independent manufacturers
to perform printed circuit board assembly, building of cabinets and
subassemblies and sheet metal fabrication. These suppliers all satisfy the
strictest quality standards such as ISO or MIL-SPEC. Although the Company
generally uses standard parts and components in manufacturing its products,
certain components, primarily power supplies, disk drives, interface cards and
certain semiconductors are presently available only from a single source or from
limited sources. To date, the Company has been able to obtain adequate supplies
of these components in a timely manner from existing sources. However, delay or
lack of supply from existing sources or the inability to develop alternative
sources, if and as required in the future, could adversely affect the Company's
operating results.
At December 31, 1997, the Company's quality assurance and manufacturing group
included 19 employees.
CUSTOMER SUPPORT, SALES AND MARKETING
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The Company sells its products into the public enhanced services market and the
CPE market. The enhanced services market consists of local exchange carriers,
including the Regional Bell Operating Companies ("RBOCs"), Post Telephone and
Telegraphs ("PTT's", providers of telephone and telecommunications services in
most foreign countries), independent telephone companies, service bureaus,
inter-exchange carriers, cellular service providers and internet service
providers. The Company has distribution agreements with Siemens, AG of Germany,
GPT Limited of Coventry, England, and Consultronix Systems Corporation of the
Philippines, PT Galva of Indonesia, Intecom and Volt-Delta. The CPE market
consists of major corporations, such as Southern Pacific/Union Pacific Railroad,
Baxter Health Care, the Discovery Channel, Gordon Foods, The Boston Herald,
Polaroid and Motorola. It also consists of state and local governments, such as
the County of Los Angeles, County of Riverside and the State of Oregon and
universities such as the University of California campuses at Berkeley, San
Diego and Santa Barbara. To date, over 1,895 systems have been sold to customers
in the United States, Canada, the United Kingdom, France, the Dominican
Republic, Indonesia, Mexico, Malaysia, Russia, and the Philippines.
Customer service and support are of great importance to the Company. The Company
believes that customer satisfaction is achieved through continued high levels of
quality service and support. The Company's customer support group includes field
engineers, applications specialists, implementation specialists and third party
maintenance providers and is supported by a training staff and the Company's
entire technical staff when necessary. The Company maintains a 24-hour service
and support center at its Carpinteria facility. The Company has an extensive
field service organization with offices strategically located throughout the
United States to provide on-site emergency assistance should the need arise.
Most customers' problems are resolved over the telephone by remote diagnostic
and corrective actions.
The Company maintains a training center at its Carpinteria facility to support
the needs of its customers for instructional, administrative and technical
training. Additionally, the Company maintains a staff of highly qualified
trainers available to support customers' requests for on-site training at all
levels. Prior to equipment delivery, training and implementation, personnel are
made available to the customer to ensure a smooth installation, with follow-up
visits performed to reinforce previous training and answer new questions. The
training organization also offers technical software, system maintenance,
customer support and administrative courses. The Company's customer support,
sales and marketing group included 66 employees at December 31, 1997.
During the year ended December 31, 1995, GTE and Pacific Bell Information
Services Group accounted for 46.8% and 12.6%, respectively, of the net sales for
the Company. During the year ended December 31, 1996, GTE; PT Galva, Indonesia
and GPT, England accounted for 39.8%, 13.3% and 10.5%, respectively, of the net
sales for the Company. During the year ended December 31, 1997, GTE accounted
for 58.3% of the net sales for the Company.
Export sales, principally to Canada, Europe and Indonesia, during the years
ended December 31, 1995, 1996 and 1997 accounted for 1.6%, 26.0% and 5.3%,
respectively, of the Company's net sales. The percentage decrease in export
sales for 1997 was principally a result of the uncertainties surrounding the
Asian economies.
These sales depend on the Company's continued ability to meet agreed milestones,
specifications, requirements and conditions of sales contracts in a timely
manner. The Company's goal is to meet these requirements as agreed with each
customer, however, forward-planning involves risk; there can be no assurance
that it will do so or realize the corresponding revenue.
The Company currently maintains support and sales offices and/or has sales or
technical support representatives in the following locations: Phoenix, Arizona;
Irvine, California; Carpinteria, California; San Francisco, California; San
Diego, California; Roswell, Georgia; Chicago, Illinois; Tyngsboro,
Massachusetts; Irving, Texas; Coventry, England; Munich, Germany; and Kualu
Lumpur, Malaysia.
The Company provides a system product warranty for parts and labor for a
12-month period after commencement of operations or 13 months from date of
shipment, whichever occurs first. The Company offers several options for
maintenance and support services of its products on a contractual basis after
the limited product warranty has expired. Additionally, the Company offers a
performance guarantee for the VoiceServer(R), which guarantees the system
performance will not deteriorate under maximum load conditions. Otherwise, the
Company will re-configure the system or replace it at no cost to the customer.
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BACKLOG
The Company's backlog at December 31, 1997 was $1.5 million compared to $1.6
million at December 31, 1996. The Company includes in backlog orders for
products or services to be shipped or performed within 180 days. Quarterly
revenues and operating results will depend on the volume and timing of new
orders received during a quarter, which are difficult to forecast. Because of
the possibility of customer changes in delivery schedules or cancellation of
orders, the Company's backlog as of any particular date may not result in actual
sales for any future period.
COMPETITION
The messaging industry is highly competitive and the Company believes that
competition will intensify as the industry grows, matures and consolidates. The
Company competes with different companies in the different customer markets it
serves and the principal competitive factors vary depending on the customer
market.
Digital Sound focuses primarily on selling its products in the domestic and
international public enhanced services markets. Principal competitive factors
are reliability, scalability and the ability to offer a rich suite of integrated
multimedia applications on one platform. In the public enhanced services market,
the Company's principal competitors include Lucent Technologies Inc., Comverse
Technology Inc., Brite Voice Systems Inc., InterVoice, Inc., Glenayre
Technologies Inc, Unisys and Centigram Communications Corporation.
The Company continues to develop enhancements to its products and to develop new
products in order to address what the Company believes are the emerging
requirements of the telephone companies and other telecommunication service
providers. However, there can be no assurance that product requirements will not
change as this market develops or that other companies will not be faster or
more successful in bringing comparable products to market.
In the CPE market, the Company competes primarily with two types of companies:
PBX manufacturers, including Lucent, Nortel Limited and Siemens Rolm
Communications, Inc.; and independent voice processing manufacturers, such as
Centigram, Active Voice Corp. and Applied Voice Technology, Inc.
In the CPE market, the Company has indirect competition from a wide variety of
products, including stand alone voice mail systems, products offering call
processing services with voice mail features. In addition, the Company has
indirect competition from products integrated with other voice mail systems,
such as personal computer modems and software designed to furnish voice
processing and voice messaging features. Competitive factors include system
performance and reliability, service and support and the capability to integrate
systems with a variety of central office and cellular switches and other
communications systems.
The Company believes that its competitive strengths include carrier-class
reliability and scalability, a modular and integrated suite of
communication-management applications, a rapid application creation environment,
state-of-the-art digital networking, software-embedded signaling technology,
easy-to-use interfaces, and the ability to integrate with the switches of
multiple manufacturers.
In the public enhanced services and CPE markets, these competitors and other new
entrants may introduce and deliver new products with expanded capabilities that
could adversely affect the competitive position of the Company. The Company
believes competition for the sale of voice processing systems in its markets
will continue to evolve as customers' applications and technology become more
sophisticated. Some of the Company's competitors have substantially greater
development, marketing and capital resources than the Company.
PATENTS, COPYRIGHTS AND TECHNOLOGY LICENSES
The Company policy on intellectual property is to develop, utilize and protect
its patents, trademarks, copyrights and trade secrets in order to maximize the
value of the Company's technological expertise and innovation.
The Company holds four United States patents and has three patent applications
pending. The Company also has one foreign patent and ten foreign patent
applications pending. The Company has registered a number of trademarks in the
United States and has a number of trademark applications pending both in the
United States and in foreign countries. The Company's software is protected by
copyright and trade secrecy
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laws. However, such protection does not ensure that the Company's competitors
will not develop similar technology. The Company periodically acquires
technology from third parties to supplement its development efforts. These
acquisitions may require prepaid license fees and/or the payment of royalties.
The Company holds a perpetual license from AT&T for the UNIX operating system.
EMPLOYEES
At December 31, 1997, the Company had 155 employees, including 66 in sales,
marketing and customer support, 54 in engineering and development, 19 in quality
assurance and manufacturing and 16 in corporate administration and finance. Many
of the Company's employees are highly skilled, and the Company's success will
depend in part on its ability to attract and retain such employees.
The Company has never had a work stoppage. No employees are represented by a
labor organization and the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
----------
The Company's corporate offices, engineering and development facilities and
manufacturing facilities are located in Carpinteria, California, in a total of
approximately 53,000 square feet. In December of 1996, the Company entered into
a new lease and consolidated into half of the facility that it currently
occupies. The move resulted in a savings of approximately 45.0% of the previous
annual lease payments. The facility is leased for a period of ten years
beginning in December 1996, with two five-year renewal options. Annual rental on
the facility was approximately $0.7 million in 1997, with the rent subject to
annual increases.
The Company currently maintains support and sales offices and/or has sales or
technical support representatives in the following locations: Phoenix, Arizona;
Irvine, California; Carpinteria, California; San Diego, California; San
Francisco, California; Roswell, Georgia; Chicago, Illinois; Tyngsboro,
Massachusetts; Irving, Texas; Coventry, England; Munich, Germany; and Kualu
Lumpur, Malaysia.
The Company believes that its current facilities are well maintained and
sufficient to satisfy its operations for the next several years.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In 1992, Octel Communications Corporation (Octel, now Lucent Technologies, Inc),
a competitor of the Company, filed suit in the United States District Court for
the Northern District of California against Theis Research, Inc. (Theis) for a
declaratory judgment that Octel's products do not infringe certain patents held
by Theis and that those patents are invalid.
In 1993, the court consolidated several actions and Theis filed a counterclaim
for infringement, a judgment of patent validity and various claims for
injunctive and monetary relief against, among others, Pacific Telesis Group,
Pacific Bell and other Pacific Bell entities (Pacific Telesis). Pacific Telesis
tendered defense of this action to various of its vendors, including the
Company, which resulted in counterclaims by Theis against the Company, Octel,
Boston Technology (now Comverse Technology Inc), Northern Telecom and most other
manufacturers of voice mail products. In 1993, the court severed trial of the
counterclaims against all counter defendants except Octel, Comverse and Northern
Telecom.
In 1994, a jury concluded that the patents held by Theis Research, Inc. were
either invalid or not infringed upon by Octel, and the counterclaims against
Pacific Telesis in which Digital Sound has intervened are currently stayed.
Theis Research appealed the findings of invalidity and noninfringement to the
U.S. Court of Appeals and on November 6, 1997 the U.S. Court of Appeals affirmed
the District Court's decision in its entirety. Theis Research has until March
30, 1998 to seek to have the matter heard before the U.S. Supreme Court. If
Theis Research is granted a hearing before the U.S. Supreme Court and the U.S.
Supreme Court reverses the judgment, Theis Research may assert claims of
infringement against Pacific Telesis and Digital Sound on these patents.
However, if the U.S. Supreme Court refuses to hear the matter or affirms the
holding, the potential for any successful counterclaim against Pacific Telesis
and Digital Sound as a supplier to Pacific Telesis is significantly reduced.
<PAGE>
Management believes, based on information currently available, including
consultations with patent counsel, that the Company is not infringing upon any
valid patents of Theis. The Company will vigorously defend the patent
infringement claims and related claims for damages. While litigation is
inherently uncertain, Management believes in view of the jury verdict in the
Octel case that the ultimate resolution of these matters will not have a
material adverse effect on the financial condition or results of operations of
the Company. Should the outcome of this litigation be unfavorable to the
Company, however, the Company would be required to fulfill its indemnification
obligations to its customers, including Pacific Telesis, by either replacing or
modifying its products to avoid infringement or by procuring a license to use
the technology, either of which could have a materially adverse effect on the
financial condition or results of operations of the Company.
Additionally, the Company is subject to pending claims and litigation primarily
related to contractual, product and employee issues. Management, after review
and consultation with the Company's counsel, believes that the liability, if
any, from the disposition of such claims and litigation would not have a
materially adverse effect on the financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Pursuant to the Instructions to Paragraph (b) of Item 401 of Regulation S-
K, the current executive officers of the Company, their ages and respective
positions with the Company are set forth in the following table.
Biographical information on each of the executive officers is set forth
following the table. There are no family relationships between any director
or executive officer and any other director or executive officer of the
Company. Executive officers serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
Served as Officer
Name Age Position Since
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mark C. Ozur 41 President 1993
Chief Executive Officer
Keith M. Beckwith 42 Vice President, Sales 1994
Americas and Europe
James C. Eby 51 Vice President, Chief Quality and Operations 1983
Officer, Assistant Secretary
Stanford D. Milnes 49 Vice President, Sales 1997
Asia/Pacific Rim
Benn Schreiber 45 Vice President, Engineering 1997
B. Robert Suh 38 Vice President, Finance, 1995
Chief Financial Officer and
Corporate Secretary
Pamela J. Thompson 39 Vice President, Marketing 1997
</TABLE>
Mr. Ozur has been President and Chief Executive Officer of the Company
since December 1994. From April 1993 to November 1994 he served as Vice
President -Chief Technical Officer. From 1990 to 1992 he was Vice President
of Precision Visuals, a software development company, and from 1978 to 1982
and 1986 to 1990 he was at Digital Equipment Corporation, a computer
hardware and software company, developing software. During 1982, he founded
Omtool Corporation, a compiler and software publishing company.
Mr. Beckwith has been Vice President, Sales since September 1994. From
January 1991 to August 1994 he was Director, Voice Information Services.
From August 1988 to December 1990 he was National Sales Manager. From
August 1986 to July 1988 he was Regional Sales Manager.
Mr. Eby has been Vice President, Chief Quality and Opera tions Officer
since September 1994. From January 1992 to August 1994 he was Vice
President - Quality Assurance and Manufacturing of the Company. From
October 1983 to December 1991 he was Vice President, Manufacturing.
Mr. Milnes has been Vice President for Asia/Pacific Rim since January 1997.
From January 1994 to January 1997 he was Vice President and Managing
Director for Brite Voice Systems, Asia Pacific. From November 1988 to
December 1993 he was Area Vice President for international marketing for
Boston Technology.
Mr. Schreiber was appointed Vice President, Engineering in August 1997.
Previously, he worked at Digital Equipment Corporation (DEC) where he was
the director of Windows NT Systems Software. Previously, Mr. Schreiber held
several other engineering management positions at DEC.
Mr. Suh has been Vice President and Chief Financial Officer since November
1995. From September 1992 to October 1995 he was Chief Financial Officer
for the Bank of Boston's European Division. From February 1988 to August
1992 he was Director of Finance for the Bank of Boston's retail franchise
throughout New England. From July 1985 to January 1988 he was a Manager in
corporate development at MCI Communications Corporation.
Ms. Thompson has been Vice President, Marketing since October 1997.
Thompson comes to Digital Sound after eight years at Motorola, Inc. where
she was most recently the Director of Strategic Businesses, responsible for
developing and implementing wireless content solutions for paging carriers
around the globe. Prior to this, Thompson was Managing Director for
Motorola Air Communications, Ltd. Previously, Thompson held other senior
management positions at Motorola, including Vice President and Director of
Asia Pacific Wireless Data Network Operations and Manager of Corporate
Strategy.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
In 1997, the Company's common stock traded in the over-the-counter market under
the NASDAQ National Market System under the symbol DGSD. (Effective February 2,
1998, the symbol was changed to PLPT.) The following tables set forth the
following range of the high and low closing prices in each quarter during 1996
and 1997 as reported by the NASDAQ National Market System.
1996
High Low
-----------------------------------------------------
1st Quarter $ 1.88 $ 1.13
2nd Quarter 2.63 1.19
3rd Quarter 2.25 1.38
4th Quarter 2.28 1.38
-----------------------------------------------------
1997
High Low
-----------------------------------------------------
1st Quarter $ 1.72 $ 1.28
2nd Quarter 1.47 0.69
3rd Quarter 1.84 0.88
4th Quarter 1.63 0.94
-----------------------------------------------------
The Company has never paid any cash dividends on its stock and anticipates that,
for the foreseeable future, it will continue to retain any earnings for use in
the operation of its business. At January 23, 1998, there were approximately 750
holders of record of the Company's common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Consolidated Selected Financial Data
Digital Sound Corporation
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 23,264 $ 31,687 $ 23,201 $ 22,332 $ 20,644
Cost of sales 8,917 13,295 10,858 8,312 10,523
--------------------------------------------------------------------------
Gross Margin 14,347 18,392 12,343 14,020 10,121
--------------------------------------------------------------------------
Selling, general and administrative 11,572 10,165 11,781 12,846 17,122
Engineering and development 7,557 6,328 7,209 8,903 12,181
Reduction in workforce 1,250 - - - -
--------------------------------------------------------------------------
Total operating expense 20,379 16,493 18,990 21,749 29,303
--------------------------------------------------------------------------
Income (loss) from operations (6,032) 1,899 (6,647) (7,729) (19,182)
Interest and other income, net 313 669 1,473 950 273
--------------------------------------------------------------------------
Income (loss) before provision for income taxes (5,719) 2,568 (5,174) (6,779) (18,909)
Provision for income taxes - (80) (14) (22) (15)
--------------------------------------------------------------------------
Net income (loss) (5,719) 2,488 (5,188) (6,801) (18,924)
--------------------------------------------------------------------------
Earnings (loss) per common share $ (.30) $ .13 $ (.26) $ (.34) $ (.93)
Earnings (loss) per common share -
assuming dilution $ (.30) $ .12 $ (.26) $ (.34) $ (.93)
Weighted average common and common
equivalent shares outstanding 18,830 21,183 19,881 20,086 20,363
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 23,370 $ 31,695 $ 25,085 $ 20,345 $ 12,131
Total assets 36,452 43,960 38,914 33,333 37,441
Long-term obligations, excluding current portion 615 127 - - -
Shareholders' equity 29,193 37,327 32,557 26,027 20,443
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
1997 Compared to 1996. Net sales decreased 7.6% from $22.3 million in 1996 to
$20.6 million in 1997, a decrease of $1.7 million. Sales to domestic U.S.
customers increased by $2.9 million, while sales to International customers
declined by $4.6 million. Due to uncertainties regarding the economic condition
in Asia, foreign sales fell sharply. In 1997, net sales from Europe and Asia
accounted for 5% of the Company's total revenue as compared to 26% coming from
outside the U.S. in 1996. Compared to the prior year, sales in the Voice
Information Services (VIS) market decreased $1.7 million while sales in the
Customer Premises Equipment (CPE) showed no change. New systems sales for the
VoiceServer(R) 1110, VoiceServer 2110 and VoiceServer 3110 family of products
decreased by $3.5 million in 1997 while sales of system upgrades and
enhancements increased by $1.8 million.
Gross margin as a percentage of net sales decreased from 62.8% in 1996 to 49.0%
in 1997, primarily as a result of the decrease in international sales and as a
result of a one-time charge to cost of sales of approximately $1.5 million in
connection with a review of the Company's operations, cost structure and balance
sheet. Excluding the one-time charge, the gross margin was 55% in 1997. Margins
on the sale of new systems decreased from 50.0% in 1996 to 46.2% in 1997. In
addition, the margin on the sale of system upgrades and enhancements and service
decreased from 70.5% in 1996 to 49.9% in 1997. This decrease in margins for
system upgrades, enhancements and service is reflective of a smaller percentage
of software upgrades, principally upgrades to the Company's latest version of
voice messaging software, InfoMail 4.0, performed in 1997.
Selling, general and administrative expenses increased from $12.8 million in
1996 to $17.1 million in 1997 as the Company invested in upgrading its personnel
and capabilities, primarily in Sales and Marketing. As a result of the increased
investment and decreased sales levels, selling, general and administrative
expenses were higher as a percentage of sales in 1997 (83.0%) as compared to
1996 (52.5%).
Engineering and development expenses increased from $8.9 million in 1996 to
$12.2 million in 1997. For 1997, engineering and development expenses reflect
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1997 and decreased sales levels, engineering and development
expenses were higher as a percentage of sales in 1997 (59.0%) as compared to
1996 (39.9%).
Interest and other income decreased from $1.0 million in 1996 to $0.3 million
1997, principally as the result of a lower average cash balance.
The provision for income taxes in 1997 was $15,000. As a result of the above,
the Company incurred a net loss of $18.9 million as of December 31, 1997
compared to a net loss of $6.8 million in 1996.
The extent and timing of new orders for the Company's existing products from VIS
providers has a substantial effect on the company's net sales. Such orders are
usually significant in size and can materially affect sales in any quarter. The
Company's operations are not subject to a particular seasonality, however,
historically first quarter sales have been less than fourth quarter sales. It is
difficult to predict receipt of new orders reliably and quarterly revenues and
operating results will depend on volume and timing of new orders received during
a quarter.
1996 Compared to 1995. Net sales decreased 3.7% from $23.2 million in 1995 to
$22.3 million in 1996 as sales to domestic U.S. customers were below planned
levels. In 1996, net sales from Europe and Asia accounted for 26% of the
Company's total revenue as compared to less than 2% coming from outside the U.S.
in 1995. Compared to the prior year, sales in the Voice Information Services
(VIS) market were unchanged while sales in the Customer Premises Equipment (CPE)
market decreased by $0.8 million. New systems sales for the VoiceServer(R) 1110,
VoiceServer 2110 and VoiceServer 3110 family of products increased by $2.3
million in 1996 while sales of system upgrades and enhancements decreased by
$3.1 million.
Gross margin as a percentage of net sales increased from 53.2% in 1995 to 62.8%
in 1996, primarily as a result of the change in the product mix and the benefit
obtained from lower valued overall inventory carried over from the prior year.
The increase in sales outside the U.S. helped margins on the sale of new systems
rise from 49.4% in 1995 to 50.0% in 1996. In addition, the margin on the sale of
system upgrades and
<PAGE>
enhancements and service increased from 54.6% in 1995 to 70.5% in 1996. This
increase in margins for system upgrades, enhancements and service is reflective
of a greater percentage of software upgrades, principally upgrades to the
Company's latest version of voice messaging software, InfoMail 4.0, performed in
1996.
Selling, general and administrative expenses increased from $11.8 million in
1995 to $12.8 million in 1996 as the Company invested in upgrading its personnel
and capabilities primarily in Sales and Marketing. As a result of the increased
investment, selling, general and administrative expenses were higher as a
percentage of sales (52.5%) in 1996 as compared to 1995 (50.8%).
Engineering and development expenses increased from $7.2 million in 1995 to $8.9
million in 1996. For 1996, engineering and development expenses reflected the
Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1996, engineering and development expenses were higher as a
percentage of sales in 1996 (39.9%) as compared to 1995 (31.0%).
Interest and other income decreased from $1.5 million in 1995 to $1.0 million in
1996, principally the result of a lower average cash balance.
The provision for income taxes in 1996 was $22,000, which is adequate to cover
corporate tax liability. As a result of the above, the Company incurred a net
loss of $6.8 million as of December 31, 1996 compared to a net loss of $5.2
million in 1995.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report to Shareholders contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21S of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in such forward-looking statements
as a result of the factors set forth below and elsewhere in this document.
Digital Sound operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
As discussed in "Part I - Item 1. Business, "the Notes automatically convert
into the Series B Convertible Preferred Stock upon Shareholder Approval. Without
such Shareholder Approval, each holder of a Note may declare the principal and
all accrued interest immediately due and payable. The Company would be obligated
to repay immediately $6,612,502.50 in aggregate principal amount of the Notes
plus 7% interest from the date of issue. There can be no assurance that the
Company will have available cash resources to repay the Notes or that it would
be able to repay the Notes in compliance with applicable law. In addition, the
Company's obligations to repay the Notes will create a default under certain of
its other agreements. In the event Shareholder Approval is not obtained,
repayment of the Notes would have a material adverse effect on the Company's
financial condition and ability to implement its business strategy.
The Company has developed and introduced its new product line, the PulsePoint
Enhanced Application Platform and Communication-Management Suite of
Applications. The new platform and applications are designed to increase the
Company's market share and boost its position in the industry. See "Part I -
Item 1. Business." The successful introduction of these and other new products
is dependent on a number of factors, some of which are beyond the Company's
control, including product acceptance in the marketplace, introduction of
competitive products by existing or new competitors, changes in technology,
price competition and other factors. Any failure of such products to achieve
acceptance in the marketplace could significantly reduce future expected
revenues or result in the need for additional expenses to bring the product to
market. Furthermore, there can be no assurance that the Company will be
successful in introducing new products or that such products will generate
significant revenues or profits. The Company's inability to successfully
generate revenues from the introduction of these new products would have a
material adverse effect on the Company's financial condition and ability to
implement its business strategy.
The Company has not been operating profitably. The Company's strategy has been
to develop new technology and to expand its marketing capabilities, with the
goal of creating successful new products and marketing them effectively, thereby
returning the Company to profitability. The Company's on-going investments in
technology and marketing require funds, and although the Company presently has a
<PAGE>
significant positive cash balance as a result of the consummation of a private
placement in December 1997 (see "Part I - Item 1. Business."), the Company's
financial resources are not unlimited, and the Company's funds eventually will
be exhausted if the Company's strategy does not succeed in returning the Company
to profitability or otherwise enable it to raise additional working capital.
The Company is in the process of identifying operating and application software
challenges related to the "Year 2000" issue. The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Software programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a major system failure or miscalculations. During 1997, the
Company completed the conversion of its primary in-house accounting, inventory,
and manufacturing control systems to a Year 2000 compliant system. The total
cost of the Year 2000 project is estimated to be $0.5 million. To date the
Company has incurred approximately $0.4 million related to the assessment of the
impact of Year 2000 on the Company and the purchase of new systems and system
modifications. The project is estimated to be completed not later than December
31, 1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with conversion to new software and modifications to
existing software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. The costs of the project and the date on
which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. If such modifications and conversions are not made, or not
completely timely, the Year 2000 issue could have a material impact on the
Company's business and consolidated results of operations.
The voice processing and messaging industry is highly competitive, with rapid
technological advances and constantly improving price/performance. As the
markets in which the Company operates continue to grow, the Company is
experiencing an increase in competition, and it expects this trend to continue.
The Company is not one of the largest providers of voice processing and
messaging equipment in the industry. Some of the Company's competitors have
substantially greater technical, marketing and financial resources and, in some
markets, a larger installed base of customers and a wider range of available
applications software.
The voice processing and messaging industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. The Company and the industry are, in general, dependent on the U.S.
domestic telephone companies for a large percentage of revenue. The suppliers to
the telephone company market, which is primarily comprised of 7 regional Bell
operating companies and GTE, have largely been decided for first generation
voice processing requirements.
The market for voice processing and messaging systems is in a period of
transition. Budgetary constraints, uncertainties resulting from the introduction
of new technologies in the telecommunications environment and changes in the
government regulations have increased uncertainties in the market. Significant
changes in the domestic U.S. industry as a result of the 1996 Telecommunications
Act make planning decisions more difficult and increase the risk inherent in the
planning process.
The Company's operating results may fluctuate for a number of reasons. The
Company has short delivery cycles and as a result does not have a large order
backlog, which makes the forecasting of revenue inherently uncertain. This
uncertainty is compounded because each quarter's revenue results predominantly
from orders booked and shipped during the third month of the quarter. Because
the Company plans its operating expenses, many of which are relatively fixed in
the short term, on the basis of its anticipated revenues, even a relatively
small revenue shortfall may cause a period's results to be substantially below
expectations. Such a revenue shortfall could arise from any number of factors,
including lower than expected demand, supply constraints, delays in the
availability of new products, overall economic conditions or natural disasters.
The international portion of the Company's business, which represented 5.3% of
revenues for the year ending December 31, 1997, is subject to a number of
inherent risks, including difficulties in building and managing international
operations and international reseller networks and international service and
support of the Company's products, difficulties or delays in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory, economic
or political changes in international markets. Disruption in the Asian economies
was the principal cause of a decrease in
<PAGE>
the Company's foreign sales, from 26.0% of total sales in 1996 to 5.3% of total
sales in 1997. Although the majority of international transactions are performed
through confirmed letters of credit, due to the competitive environment in the
international marketplace, certain international customers may require longer
payment terms; and as a result, days sales outstanding may periodically extend
beyond ninety days on amounts due from these customers.
The development of new technologies and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of new systems
requires close collaboration and continued technological advancement involving
multiple hardware and software design, manufacturing, marketing and sales teams
within the Company as well as teams at outside suppliers of key components. The
failure of any one of these elements could cause the Company's new products to
fail to meet specifications or to miss the aggressive timetables that the
Company establishes. As the variety and complexity of the Company's product
families increase, the process of planning production and inventory levels also
becomes more difficult. The Company expects to continue investing heavily in
supporting the development effort required to bring new technologies and
products to the market. To support this, substantial financial resources will be
expended.
The Company believes that its production capacity should be sufficient to
support anticipated unit volumes for the foreseeable future. The Company is
primarily engaged in the final assembly and testing of the hardware equipment.
The Company currently buys the majority of its subassembly inventory from a
limited number of suppliers. The failure of these suppliers to provide such
subassemblies on a timely basis and within specifications could have a
materially adverse effect on the Company's business. If the Company is unable to
obtain certain key components, or to effectively forecast customer demand or
manage its inventory, increased inventory obsolescence or reduced utilization of
production capacity could adversely impact the Company's gross margins and
results of operations.
The Company has historically derived a significant portion of its revenue and
operating profit from a relatively small number of customers. In 1997, the
Company derived 58% of its revenue from a single customer (GTE). Should sales to
this customer be significantly reduced, the Company's operating results could be
materially adversely affected. International proposals for large system
installations typically involve a lengthy and complex bidding and selection
process, and the ability of the Company to obtain a particular proposal award is
inherently difficult to predict. The Company believes that the opportunities for
these installations will continue to grow and intends to continue to expand its
research and development, manufacturing, sales and marketing and product support
capabilities in anticipation of such growth. However, the timing and scope of
these opportunities and the pricing and margins associated with any eventual
proposal award are difficult to forecast, and may vary substantially from
transaction to transaction. The Company's future operating results may,
accordingly, exhibit a higher degree of volatility than the operating results of
other companies in its industry that have adopted different strategies. Although
the Company is actively pursuing a number of opportunities both in and out of
the United States, both the timing of any eventual opportunities and the
probability of the Company's receipts of significant purchase orders are
uncertain. The degree of dependence by the Company on large orders, and the
investment required to enable the Company to perform such orders, without
assurance of continuing order flow from the same customers and predictability of
gross margins on any future orders, increase the risk associated with its
business.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. If revenues or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate impact on
the Company's stock price. The stock price may also be affected by broader
market trends unrelated to the Company's performance.
The Company routinely receives communications from third parties asserting
patent or other rights covering the Company's products and technologies. Based
upon the Company's evaluation, it may take no action or it may seek to obtain a
license. In any given case there is a risk that a license will not be available
with terms that the Company considers reasonable, or that litigation will ensue.
The Company expects that, as the number of hardware and software patents issued
continues to increase, and as the Company's business grows, the volume of these
third party communications will also increase.
The Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, is located near major
earthquake faults which have experienced earthquakes in the past. While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major earthquake or other disaster affecting one or more of the
Company's facilities, it is likely that
<PAGE>
insurance proceeds would not cover all of the costs incurred and, therefore, the
operations and operating results of the Company could be adversely affected.
Due to the factors noted above and elsewhere in management's discussion and
analysis of financial condition and results of operations, the Company's future
earnings and Common Stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in a fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's Common Stock. Furthermore, the Company participates in a highly
dynamic industry which often results in volatility of the Company's Common Stock
price.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, net working capital decreased by $8.2
million to $12.1 million compared to $20.3 million at December 31, 1996. In 1997
the decrease in working capital resulted principally from a reduction in
accounts receivable of $1.6 million, an increase in amounts borrowed under the
Company's credit line of $1.6 million, and an increase in shareholder notes
payable of $6.6 million. The increase in shareholder notes payable is the result
of the Company's December 1997 private placement of convertible securities; see
Notes 8 and 9 to the Consolidated Financial Statements.
At December 31, 1997, the Company had cash of $21.0 million and no long term
debt. During 1997, net cash used by operations was $13.6 million. The 1997
capital expenditures were $4.1 million, while budgeted expenditures for 1998 are
$1.6 million, principally hardware and software for test equipment. The Company
has never paid any cash dividends on its stock and anticipates that, for the
foreseeable future, it will continue to retain any earnings for use in the
operation of its business.
For the year ended December 31, 1996, net working capital decreased by $4.8
million to $20.3 million compared to $25.1 million at December 31, 1995. In 1996
the decrease in working capital resulted principally from a reduction in cash of
$5.3 million, an increase in accounts receivable of $2.3 million, a decrease in
inventory of $0.6 million, an increase in accounts payable of $0.9 million and
an increase in accrued payroll and other accrued liabilities of $0.3 million.
The decrease in cash reflects the Company's strategy of continued investment in
new product development, product enhancements and strengthening of its marketing
and sales capabilities.
At December 31, 1996, the Company had cash of $18.2 million and no long term
debt. During 1996, net cash used by operations was $4.6 million, which was
offset by $1.0 million of interest earned on cash balances. The 1996 capital
expenditures were $2.0 million.
For the year ended December 31, 1995, working capital decreased by $6.6 million
to $25.1 million compared to $31.7 million at December 31, 1994. In 1995 the
reduction in working capital resulted principally from a decrease in accounts
receivable of $3.7 million caused by substantially lower sales, a
reclassification of $1.4 million to other assets as a result of long term
investments which exceed the company's definition of cash and equivalents, a
settlement of $2.5 million as described in note 10 of Notes to Financial
Statements in the 1995 Annual Report, and a decrease in other accrued
liabilities related to sales tax payable and accrued license fees totaling $1.0
million.
At December 31, 1995, the Company had cash of $23.5 million and no long term
debt. During 1995, net cash used by operations was $4.3 million, which was
offset by $1.5 million of interest earned on cash balances.
<PAGE>
REPORT OF INDEPENDENT AUDITOR
- -----------------------------
The Board of Directors and Shareholders
Digital Sound Corporation
We have audited the accompanying balance sheets of Digital Sound Corporation as
of December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Sound Corporation at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young L.L.P.
--------------------
ERNST & YOUNG LLP
Woodland Hills, CA
January 22, 1998
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Consolidated Balance Sheets
Digital Sound Corporation
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
-----------------------
<S> <C> <C>
ASSETS
-----------------------
Current assets:
Cash, cash equivalents and pledged cash $18,187 $20,973
Accounts receivable, less allowance for doubtful accounts of $600
and $527 at December 31, 1996 and 1997, respectively 5,695 4,111
Inventories, net 3,470 3,876
Other current assets 299 169
-----------------------
Total Current assets 27,651 29,129
Property and equipment, at cost:
Computers and other equipment 11,077 9,504
Furniture and fixtures 982 999
Leasehold improvements 1,130 1,357
-----------------------
13,189 11,860
Less accumulated depreciation and amortization (10,733) (6,776)
-----------------------
2,456 5,084
Other assets:
Investment securities -- 1,030
Other assets 3,226 2,198
-----------------------
Total other assets 3,226 3,228
-----------------------
Total assets $33,333 $37,441
=======================
LIABILITIES & SHAREHOLDERS' EQUITY
-----------------------
Current liabilities:
Credit Line $ -- $ 1,581
Shareholder notes payable -- 6,613
Accounts payable 3,639 3,532
Accrued payroll and related 1,986 3,102
Other accrued liabilities 1,681 2,170
-----------------------
Total current liabilities 7,306 16,998
Commitments and contingencies
Shareholders' equity:
Preferred stock 15,000,000 shares authorized
Series A, no par value, 2,631,579 shares issued and
outstanding at December 31, 1996 5,000
Series B, no par value, 2,451,667 shares issued and
outstanding at December 31, 1997 18,110
Common stock, no par value - 50,000,000 shares authorized,
20,224,540 and 20,561,593 shares issued and outstanding
at December 31, 1996 and 1997, respectively 68,975 69,205
Accumulated Deficit (47,948) (66,872)
-----------------------
Total shareholders' equity 26,027 20,443
-----------------------
Total liabilities & shareholders' equity 33,333 37,441
-----------------------
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Operations
Digital Sound Corporation
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------
1995 1996 1997
=========================================================================================
<S> <C> <C> <C>
Net sales $23,201 $22,332 $ 20,644
Cost of sales 10,858 8,312 10,523
------- ------- --------
Gross margin 12,343 14,020 10,121
------- ------- --------
Selling, general and administrative 11,781 12,846 17,122
Engineering and development 7,209 8,903 12,181
------- ------- --------
Total operating expense 18,990 21,749 29,303
------- ------- --------
Income (loss) from operations (6,647) (7,729) (19,182)
Interest and other income, net 1,473 950 273
------- ------- --------
Income (loss) before provision for income taxes (5,174) (6,779) (18,909)
Provision for income taxes (14) (22) (15)
------- ------- --------
Net income (loss) $(5,188) $(6,801) $(18,924)
======= ======= ========
Earnings (loss) per common share $ (.26) $ (.34) $ (.93)
======= ======= ========
Weighted average common
shares outstanding 19,881 20,086 20,363
======= ======= ========
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Shareholders' Equity
Digital Sound Corporation
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Convertible Preferred Total
Preferred Stock Stock Series B Common Stock Accumulated Shareholders'
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Deficit Equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,631,579 $ 5,000 19,733,060 $68,286 $(35,959) $ 37,327
Exercise of stock options - - 109,050 166 166
Shares issued under employee
stock purchase plan 158,844 252 252
Net loss - - - - (5,188) (5,188)
---------- ------- --------- ------- ---------- ------- -------- --------
Balance, December 31, 1995 2,631,579 $ 5,000 20,000,954 $68,704 $(41,147) $ 32,557
Exercise of stock options - - 31,625 47 47
Shares issued under employee
stock purchase plan 191,961 224 224
Net loss (6,801) (6,801)
---------- ------- --------- ------- ---------- ------- -------- --------
Balance, December 31, 1996 2,631,579 $ 5,000 20,224,540 $68,975 $(47,948) $ 26,027
Exercise of stock options 4,375 7 7
Shares issued under employee
stock purchase plan 332,678 223 223
Conversion of Series A to
Series B (2,631,579) (5,000) 666,667 5,000 -
Shares issued under private
placement of convertible
securities 1,785,000 13,110 13,110
Net loss - - - - (18,924) (18,924)
---------- ------- --------- ------- ---------- ------- -------- --------
Balance, December 31, 1997 - - 2,451,667 $18,110 20,561,593 $69,205 $(66,872) $ 20,443
========== ======= ========= ======= ========== ======= ======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Digital Sound Corporation Year Ended December 31,
(In thousands) --------------------------------------------------------
1995 1996 1997
================================================== ============= ============ ===========
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,188) $ (6,801) $ (18,924)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 2,463 2,349 2,979
Provision for losses on accounts receivable (100) -- (73)
Gain on disposal of fixed assets 492 3 --
Changes in operating assets and liabilities:
Accounts receivable 3,845 (2,288) 1,657
Inventories (137) 628 (406)
Other current assets (179) 135 130
Other assets (3,732) 1,412 (504)
Accounts payable 524 927 (107)
Accrued payroll and related 234 373 1,116
Other accrued liabilities (1,034) (351) 489
- -------------------------------------------------- ------------- ------------ -----------
Net cash provided (used) by operations (2,812) (3,613) (13,643)
================================================== ============= ============ ===========
Cash flows from investing activities:
Increase in investment securities (1,030)
Additions to property and equipment (936) (1,974) (4,075)
- -------------------------------------------------- ------------- ------------ -----------
Net cash used in investing activities (936) (1,974) (5,105)
================================================== ============= ============ ===========
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 13,110
Proceeds from issuance of notes payable -- -- 6,613
Proceeds from issuance of common stock 418 271 230
Proceeds from line of credit -- -- 1,581
- -------------------------------------------------- ------------- ------------ -----------
Net cash provided by financing activities 418 271 21,534
================================================== ============= ============ ===========
Net increase (decrease) in cash and equivalents (3,330) (5,316) 2,786
Cash and equivalents at beginning of period 26,833 23,503 18,187
- -------------------------------------------------- ------------- ------------ -----------
Cash and equivalents at end of period $ 23,503 $ 18,187 $ 20,973
================================================== ============= ============ ===========
Supplemental disclosures
Cash paid for interest $ -- $ -- $ 6
Cash paid for taxes $ 35 $ 21 $ 23
================================================== ============= ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of business. Digital Sound Corporation (the Company) designs,
manufactures and markets information processing systems which enable unified
messaging.
Principles of consolidation. The consolidated financial statements include the
accounts of Digital Sound Corporation (the Company) and its wholly owned
subsidiaries Digital Sound International Corporation and DGSD Malaysia
Corporation. All significant intercompany transactions and balances have been
eliminated.
Revenue recognition. Generally sales are recognized when products are shipped
or when services are performed. Warranty costs are accrued at time of sale.
Revenue from sales of extended warranties is accounted for as deferred revenues
and recognized into income over the warranty or maintenance period.
Short term investments. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted
the provisions of SFAS 115 for investments held as of December 31, 1995. The
adoption had no effect on the financial statements. Short term investments
(principally commercial paper and discount notes with maturity dates generally
within 90 days and considered cash equivalents) are classified as "held to
maturity" based on the Company's positive intent and ability to hold the
securities until maturity. The securities are presented at amortized cost which
approximates fair value. Amortization and interest on securities classified as
"held to maturity" is included in investment income.
Engineering and development. Statement of Financial Accounting Standards No.
86, "Accounting for the Cost of Computer Software to Be Sold, Leased or
Otherwise Marketed," requires that development costs incurred in connection
with research and development of software products and enhancements to existing
software products be expensed and incurred until technological feasibility has
been established. Costs incurred subsequent to the establishment of
technological feasibility must be capitalized until the product is released for
sale. The Company considers technological feasibility to be demonstrated when a
fully functional working model has been produced. To date, all costs associated
with the development of new software products or enhancements to existing
software products have been expensed as incurred. The costs incurred beyond the
working model stage are not significant. Other engineering and development costs
are also expensed as incurred.
Inventories. Inventories are stated at the lower of standard cost (which
approximates the first-in first-out method) or market.
Property and equipment. Property and equipment are depreciated using the
straight-line method over the respective estimated useful lives, which range
from two to five years. Leasehold improvements are amortized over the period of
the lease or the estimated useful life, whichever is shorter.
Earnings (loss) per common share. During 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
Pursuant to SFAS No. 128, earnings (loss) per common share are computed based
upon the weighted average number of common shares outstanding for the period.
Diluted earnings per common share reflects the potential dilution that could
occur if securities were exercised or converted into common stock. The adoption
of SFAS No. 128 did not result in a restatement of earnings (loss) per common
share for the periods presented in the financial statements. Antidilutive
common stock equivalents were 28,728,380 in 1997, 2,651,526 in 1996, and
2,309,526 in 1995 and were excluded from this calculation.
Stock-Based Compensation. During 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Pursuant to SFAS No. 123, a company may elect to
continue expense recognition under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) or to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on the fair value methodology outlined in SFAS
No. 123. SFAS No. 123 further specifies that companies electing to continue
expense recognition under APB No. 25 are required to disclose pro forma net
income and pro forma earning per share as if fair value based accounting
prescribed by SFAS No. 123 has been applied. The Company has
<PAGE>
elected to continue expense recognition pursuant to APB No. 25. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995.
CASH, CASH EQUIVALENTS AND PLEDGED CASH. The Company considers as cash
equivalents only those investments that are short-term, highly liquid, readily
convertible to cash, and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. The Company
classifies as cash equivalents only those investments with maturities of three
months or less. The Company pledged $1.0 million to facilitate a construction
loan for the landlord to build new office space in its' existing building. These
funds became available to the Company in February 1998.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes".
The standard prescribes a liability method for calculating the provision for
income taxes, replacing the deferred method previously used by the Company.
DEFERRED LICENSE FEES. The company has entered into license agreements for which
the fees are amortized based on sales of product technology over the estimated
useful life of the technology, which is generally four years.
ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
December 31, 1997 and the reported amounts of revenues and expenses during the
year then ended. Actual results could differ from those estimates.
2. INVENTORIES
Inventories at December 31, consist of the following:
<TABLE>
<CAPTION>
- --------------------------------
(in thousands) 1996 1997
================================ ======== ========
<S> <C> <C>
Raw material and purchased parts $1,528 $2,077
Work-in-progress 1,815 1,521
Finished goods 127 278
- -------------------------------- -------- --------
$3,470 $3,876
========= ========
</TABLE>
3. CERTAIN ONE TIME CHARGES
In the fourth quarter of 1995, the Company recorded a one-time charge of
approximately $2.1 million in connection with a comprehensive and systematic
review of its operations, cost structure and balance sheet in light of expected
new product introductions. The one time charge included $0.3 million in
property and equipment write-offs, related to obsolescence of test fixtures and
other equipment used in the production of the current product line, and $1.6
million in inventory write-downs resulting from obsolescence of current
inventory that is unable to be used in the new product line due to technological
changes and enhancements. An additional $0.2 million of miscellaneous
operational charges were written-off.
Due to a longer than expected development period for the Company's new product
line, the Company continued to market the old product line through 1997. In
light of imminent new product introductions in early 1998, in the fourth quarter
of 1997 the Company recorded additional charges of approximately $1.5 million in
connection with a review of its operations, cost structure and balance sheet.
The charges included $0.5 million in property and equipment write-offs related
to obsolescence of test fixtures and other equipment used in the production of
the current product line, and $1.0 million in inventory write-downs, resulting
from obsolescence of current inventory and licenses that are unable to be used
in the new product line due to technological changes and enhancements.
4. OTHER ASSETS
Other assets at December 31 consist of the following:
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In thousands) 1996 1997
================================================================================
<S> <C> <C>
Deferred license fees, net of accumulated
amortization of $4,237 and $5,769 at
December 31, 1996 and 1997, respectively $2,938 $1,933
Other 288 265
- --------------------------------------------------------------------------------
$3,226 $2,198
================================================================================
</TABLE>
<PAGE>
5. LEASES
In December 1996, the Company entered into a new ten year lease for the
corporate headquarters in Carpinteria, California. The lease is subject to an
annual adjustment based on total sales. In December of 1996 the company
consolidated into half of the building that it currently occupies. The new
lease coupled with the consolidation of space resulted in a reduction in monthly
lease expenses of approximately 45%. The Company also leases office equipment
as well as regional office space under one to five year operating lease
agreements.
Effective January 1997, the Company entered into master lease
agreements with BancBoston Leasing Inc. and Mellon US Leasing ("the Lease
Agreements"). The BancBoston lease agreement is for a maximum of $3.0 million
in equipment cost and the term of the lease is 48 months. The BancBoston lease
agreement requires cash collateral equal to the acquisition cost of the
equipment leased. The Company has utilized $1.25 million of the BancBoston
lease agreement as of December 31, 1997.
The Mellon US Leasing lease agreement is for a maximum of $1.0 million in
equipment cost and the term of the lease is for 30 months. The Mellon lease
agreement requires collateralization via a letter of credit equal to 50% of the
acquisition cost of the equipment leased. During 1997, a bank had provided the
Company with this letter of credit, which was in turn collateralized by the
Company's certificate of deposit. Beginning in January 1998, the Company
collateralized the letter of credit with available borrowing under its credit
line. The Company has fully utilized the Mellon US Leasing lease agreement as
of December 31, 1997.
Minimum future lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------
(In thousands)
===================================================
<S> <C>
1998 $ 1,446
1999 1,322
2000 1,287
2001 1,661
2002 996
2003 and beyond 3,985
- ---------------------------------------------------
$10,697
===================================================
</TABLE>
Rent expense, including rent under noncancelable operating lease obligations,
was approximately $1.7 million, $1.5 million, and $1.6 million for the years
ended December 31, 1995, 1996 and 1997, respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(In thousands) 1996 1997
================================================================
<S> <C> <C>
Sales taxes payable $ 180 $ 202
Customer deposits 322 262
Deferred revenue 92 317
Accrued warranty reserve 360 429
Other 727 1,222
- ----------------------------------------------------------------
$1,681 $2,432
================================================================
</TABLE>
<PAGE>
7. Income Taxes
The provision for income taxes included in the Consolidated Statements of
Operations consists of:
<TABLE>
<CAPTION>
- -------------- ---- ---- ----
(In thousands) 1995 1996 1997
============== ==== ==== ====
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State 14 22 15
- -------------- ---- ---- ----
$ 14 $ 22 $ 15
============== ==== ==== ====
</TABLE>
The provision for income taxes is at a rate different than the U.S. federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
- ----------------------------------- --------- --------- ---------
(In thousands) 1995 1996 1997
=================================== ========= ========= =========
<S> <C> <C> <C>
Computed tax at statutory rate $ (1,811) $ (2,380) $ (6,523)
State taxes, net of federal benefit 9 14 10
Loss not benefited 1,854 2,336 6,519
Other (38) 52 9
- ----------------------------------- --------- --------- ---------
$ 14 $ 22 $ 15
=================================== ========= ========= =========
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
The components of deferred tax assets as of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------- --------- ---------
(In thousands) 1996 1997
============================================ ========= =========
<S> <C> <C>
Net operating loss carryforwards $ 15,003 $ 21,323
General business credit carryforwards 1,468 3,140
Alternative minimum tax credit carryforwards 190 190
Inventory accounting methods 1,813 1,833
Allowance for doubtful accounts 252 220
Accrued vacation 147 278
Warranty service 152 179
Excess of book over tax depreciation 415 296
Research expenditures accounting method 865 821
Other 58 641
============================================ ========= =========
Deferred tax assets, net 20,363 28,921
Valuation allowance (20,363) (28,921)
- -------------------------------------------- --------- ---------
Net deferred tax asset $ -- $ --
============================================ ========= =========
</TABLE>
Management determined that a valuation allowance of approximately $28.9 million,
primarily related to net operating loss and general business credit
carryforwards, was required. The valuation allowance increased approximately
$8.6 million during 1997, primarily reflecting the current year net operating
loss.
At December 31, 1997, the Company has net operating loss carryforward for
federal income tax purposes of approximately $58.4 million which expire from
2000 through 2012. The Company has net operating loss carryforwards for
California tax purposes of approximately $13.2 million at December 31, 1997
which expire from 1998 through 2002. The Company's ability to utilize the above
net operating loss carryforward may be limited due to the application of
statutory provisions.
At December 31, 1997, the Company has general business credits of approximately
$1.3 million for federal income tax purposes which expire from 1998 through
2006.
<PAGE>
8. Debt
Shareholder Notes Payable. The $6.6 million in shareholder notes payable arose
in connection with the December 1997 $20 million private placement (see Note 9).
Credit Line. On July 28, 1997, the Company entered into a Security and Loan
Agreement ("the Credit Line") with a bank for the purpose of obtaining a $5
million credit line. The credit line was secured by substantially all of the
assets of the Company, and allowed for borrowings of up to the lesser of $2
million or an amount equal to 50% of eligible domestic accounts receivable.
Interest under the Credit Line was at the prime rate plus one-half percent. The
Credit Line also allowed for borrowing up to the lesser of $3 million or an
amount equal to 90% of eligible foreign accounts receivable and inventory.
Borrowings under the Credit Line were subject to certain financial covenants and
restrictions on receivables, financial guarantees, and other related items. On
October 30, 1997, the Company was in violation of certain of the financial
covenants of the Credit Line. There were no borrowings under the Credit Line at
that time. On October 31, 1997, the Company entered into an amendment to the
Credit Line providing for a relaxation of certain financial covenants. The
amendments also allowed for borrowing up to $5 million or an amount equal to 65%
of eligible accounts receivable, foreign or domestic. The interested charged
under the Credit Line was increased to prime plus 2.0% (two percent). In
connection with the agreement, the Company issued a warrant to the bank (the
"Warrant") for the purchase of 300,000 shares of the Company's Common Stock at
an exercise price of $1.00 per share. The terms of the warrant provide for
"full ratchet" antidilution for 180 days after its issuance and for "weighted
average" antidilution thereafter. In December 1997, the Company completed a $20
million private placement of convertible securities. The "full ratchet"
antidilution provision of the Warrant effected an increase in the number of
shares of common stock issuable under the Warrant from 300,000 to 400,000 and
a decrease in the exercise price from $1.00 to $0.75.
In December 1997, due to the Company's achievement of certain milestone events,
the interest rate applicable to the Credit Line was decreased from Prime plus
two percent to Prime plus one-half percent (9% at December 31, 1997). At
December 31, 1997, the Credit Line was extended to June 30, 1998 and the amount
borrowed was approximately $1.6 million. Also at December 31, 1997, the Company
was in violation of one of the covenants of the Credit Line and received a
one-time waiver of the covenant violation.
The Company maintains a lease agreement with Mellon US Leasing. This lease
agreement is collateralized by a $500,000 standby letter of credit issued under
the Company's Credit Line. (See Note 5).
9. Shareholders' Equity and Related Items
The Company's amended Articles of Incorporation authorize 50,000,000 shares of
common stock and 15,000,000 shares of preferred stock (of which 3,373,334 have
been designated Series B), no par value, which may be issued by the Board of
Directors without further approval by the shareholders.
In December 1997, the Company created the Series B preferred stock. The holders
of the Series B convertible Preferred Stock are entitled to dividends at the
applicable dividend rate for each share of the underlying Common Stock into
which the Series B Convertible Preferred Stock is convertible. Dividends on the
Series B Convertible Preferred Stock are not mandatory or cumulative. Upon
liquidation, the holders of the Series B Convertible Preferred Stock are
entitled to $7.50 per share plus all accrued and unpaid dividends to the extent
funds are available and subject to all amounts payable in respect of any other
shares of preferred stock of the Company that rank pari passu with the Series B
Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock
is entitled to a number of votes equal to the number of shares of Common Stock
into which such share of Series B Convertible Preferred Stock could be
converted. The Series B Convertible Preferred Stock and the Common Stock vote
together. The Series B Convertible Preferred Stock is convertible at any time
at the option of the holder into Common Stock, initially at a conversion price
(the "Series B Preferred Conversion Price") of $0.75 per share of Common Stock.
In addition to customary antidilution provisions, the Series B Preferred
Conversion Price is subject to adjustment for certain issuances of the Company's
Common Stock if the consideration per share of such issuance is less than the
Series B Preferred Conversion Price. The Series B Convertible Preferred Stock
is also subject to automatic conversion upon the earliest to occur of an event
that would cause the Series B Convertible Preferred Stock to be required to be
registered pursuant to the Securities Exchange Act of 1934, or upon the filing
with the Secretary of the Company of the written approval of the holders of more
than 50% of the outstanding shares of the Series B Convertible Preferred Stock.
<PAGE>
In December 1997, the Company consummated a private placement of convertible
securities for an aggregate of approximately $20 million (the "Transaction").
The Company (i) exchanged the Series A convertible preferred stock initially
issued for an aggregate consideration of $5 million into 666,667 shares of
Series B convertible preferred stock at a price of $7.50 per share; (ii) issued
1,785,000 shares of Series B convertible preferred stock at a price of $7.50 per
share for $13,387,500 of the funds raised in the Transaction; and (iii) issued
Notes (the "Notes") for the balance of the $20 million raised in the
Transaction, or $6,612,502.50. At the time of the Transaction, the Company had
adequate Common Stock authorized to allow for the ultimate conversion into
common stock of the Series B convertible preferred stock issued under the terms
of the Transaction and issued from the exchange of the Series A preferred stock.
The Notes will automatically convert to Series B Convertible Preferred Stock if
the Company's shareholders approve an amendment to the Ninth Amended and
Restated Articles of Incorporation authorizing a sufficient number of shares of
common stock to permit conversion to common stock of all of the Series B
Convertible preferred stock issuable upon conversion of the Notes. If the
Company's shareholders approve this amendment, the Notes will convert into an
additional 881,667 shares of Series B convertible Preferred Stock, which would
in turn be convertible into 8,881,670 shares of Common Stock. If the Company's
shareholders do not approve this amendment, the Notes will become immediately
due and payable. Pursuant to the terms of the Transaction, the Company must
hold its annual meeting of shareholders no later than April 15, 1998, subject to
certain exceptions.
1983 Stock Option Plan. The Company maintains a stock option plan which
provides for the issuance of incentive stock options (ISOs) and nonqualified
stock options (NSOs) to officers, employees, independent contractors,
consultants and advisors of the Company. In July of 1997 the Company filed a
Form S-8 to register the issuance and sales of an additional 800,000 shares
reserved under the plan. The Company has reserved 6,500,000 shares of common
stock for issuance thereunder. The Plan terminates October 31, 2003. At
December 31, 1997, options to purchase 3,911,110 shares were outstanding of
which 1,403,010 were exercisable at prices ranging from $1.25 to $3.31.
Directors' Stock Option Plan. The Company maintains a stock option plan which
provides for NSOs as equity incentives to assist the Company in recruiting and
retaining outside directors. In August of 1996 the Company filed a Form S-8 to
register the issuance and sales of an additional 200,000 shares reserved under
the plan. The director's stock option plan allows for the Company to issue
options covering up to 500,000 shares.
At December 31, 1997, options to purchase 270,600 shares were outstanding, of
which 151,850 were exercisable at prices ranging from $1.25 to $3.31 and 185,000
were available for future grant of options under the plan. The Company has
reserved 500,000 shares of common stock for issuance thereunder.
A summary of option transactions under the two option plans is as follows:
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Option Price
---------------- ---------------------
<S> <C> <C>
Outstanding at
December 31, 1994 2,153,688 $ 1.00 - 5.06
Granted 454,972 1.62 - 3.31
Exercised (109,050) 1.19 - 2.25
Canceled or expired (148,242) 1.25 - 2.75
--------- ---------------------
Outstanding at
December 31, 1995 2,351,368 1.00 - 3.31
Granted 1,434,460 1.25 - 1.97
Exercised (31,625) 1.19 - 1.63
Canceled or expired (1,089,331) 1.00 - 5.06
--------- ---------------------
Outstanding at
December 31, 1996 2,664,872 1.25 - 3.31
Granted 1,666,850 .69 - 1.56
Exercised (4,375) 1.50
Canceled or expired (415,637) .93 - 3.13
--------- ---------------------
Outstanding at
December 31, 1997 3,911,710 .69 - 3.31
========= =====================
</TABLE>
1990 EMPLOYEE STOCK PURCHASE PLAN. The Company maintains a stock purchase plan
to provide employees of the Company with a convenient means to acquire an equity
interest in the Company through payroll deductions, and to provide an incentive
for continued employment. The employee stock purchase plan reserves 2,000,000
shares of common stock for issuance under the plan.
The plan qualifies as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. All full-time employees are eligible to participate
through payroll deductions up to 10% of their compensation; participants may, at
their option, purchase shares from the Company at the lower of 85% of the fair
market value of the common stock at either the beginning or end of each six-
months option period. In the event the market price at the end of any option
period is less than 50% of the market price at the beginning of the period,
employee purchases are limited to twice the shares that could have been
purchased using the beginning market price.
During 1997, 332,678 shares were purchased at a price of $0.64. During 1996,
191,961 shares were purchased at a price of $1.17. During 1995, 158,844 shares
were purchased at prices ranging from $1.33 to $2.18. At December 31, 1997,
324,411 shares were available for future issuance under the plan.
FAIR VALUE DISCLOSURES. Stock option grants are set at the closing price of the
Company's common stock on the date of grant and the related number of shares
granted are fixed at that point in time. Therefore under the principles of APB
Opinion No. 25, the Company does not recognize compensation expense associated
with the grant of stock options. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models to provide
supplemental information regarding options granted after 1994. Pro forma
information regarding net income and earnings per share shown below was
determined as if the Company had accounted for its employee stock options and
shares sold under its stock purchase plan under the fair value method of the
Statement.
The fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1997, 1996, and 1995, respectively: risk-free interest rates of 6.25%, 6.25% and
5.40%; dividend yields for the 3 periods of 0%; volatility factors of the
expected target price of the Company's common stock of 62.8% for the 3 periods;
and expected life of the options of 5.0 for the 3 periods. These assumptions
resulted in weighted-average fair values of $1.40, $1.47 and $2.32 per share for
stock options granted in 1997, 1996 and 1995, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of
<PAGE>
traded options such as vesting restrictions and extremely limited
transferability. In addition, the assumptions used in option valuation models
(see above) are highly uncertain, particularly the expected stock price
volatility of the underlying stock. Because changes in these uncertain input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the option vesting periods. The pro forma effect on net
income for 1997, 1996 and 1995 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995. Pro forma
information in future years will reflect the amortization of a larger number of
stock options granted in several succeeding years. The Company's pro forma
information is as follows (in thousands, except per share information):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
(in thousands) 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss - as reported $ (18,924) $ (6,801) $ (5,188)
Net loss - pro forma (19,428) (7,097) (5,232)
Loss per share - as reported $ (.93) $ (.34) $ (.26)
Loss per share - pro forma $ (.95) $ (.35) $ (.26)
============ ============ ============
</TABLE>
Information regarding outstanding stock options and warrants as of December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ---------------------------------------
Weighted Average
Weighted-Average Remaining Weighted-Average
Price Range Shares Exercise Price Contractual Life Shares Exercise Price
- ------------ ------------- --------------------- --------------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
$0.69-$1.53 2,471,485 $1.38 4.84 478,102 $1.13
$1.56-$2.00 1,406,000 $1.69 2.65 797,748 $1.72
$2.38-$3.31 334,225 $2.77 1.78 227,473 $2.80
============ ============= ===================== ===================== ============ ======================
</TABLE>
<PAGE>
10. Employee Benefit Plan
In 1994, the Company established a 401(k) plan the (the "Plan") covering
substantially all of its employees. The Plan allows eligible employees to
contribute up to 15% of their compensation. Company contributions are voluntary
and at the discretion of the Board of Directors. Contributions made by the
Company for the year ended December 31, 1997 and 1996 and 1995 totaled $23,224,
$31,440, and $32,615, respectively.
11. Contingencies
In 1992, Octel Communications Corporation (Octel, now Lucent Technologies Inc.)
a competitor of the Company, filed suit in the United States District Court for
the Northern District of California against Theis Research, Inc. (Theis) for a
declaratory judgment that Octel's products do not infringe certain patents held
by Theis and that those patents are invalid.
In 1993, the court consolidated several actions and Theis filed a counterclaim
for infringement, a judgment of patent validity and various claims for
injunctive and monetary relief against, among others, Pacific Telesis Group,
Pacific Bell and other Pacific Bell entities (Pacific Telesis). Pacific Telesis
tendered defense of this action to various of its vendors, including the
Company, which resulted in counterclaims by Theis against the Company, Octel,
Boston Technology (now Comverse Technology Inc), Northern Telecom and most other
manufacturers of voice mail products. In 1993, the court severed trial of the
counterclaims against all counter defendants except Octel, Boston Technology and
Northern Telecom.
In 1994, a jury concluded that the patents held by Theis Research, Inc. were
either invalid or not infringed upon by Octel, and the counterclaims against
Pacific Telesis in which Digital Sound has intervened are currently stayed.
Theis Research appealed the findings of invalidity and noninfringement to the
U.S. Court of Appeals and on November 6, 1997 the U.S. Court of Appeals affirmed
the District Court's decision in its entirety. Theis Research has until March
30, 1998 to seek to have the matter heard before the U.S. Supreme Court. If
Theis Research is granted a hearing before the U.S. Supreme Court and the U.S.
Supreme Court reverses the judgment, Theis Research may assert claims of
infringement against Pacific Telesis and Digital Sound on these patents.
However, if the U.S. Supreme Court refuses to hear the matter or affirms the
holding, the potential for any successful counterclaim against Pacific Telesis
and Digital Sound as a supplier to Pacific Telesis is significantly reduced.
Management believes, based on information currently available, including
consultations with patent counsel, that the Company is not infringing upon any
valid patents of Theis. The Company will vigorously defend the patent
infringement claims and related claims for damages. While litigation is
inherently uncertain, Management believes in view of the jury verdict in the
Octel case that the ultimate resolution of these matters will not have a
material adverse effect on the financial condition or results of operations of
the Company. Should the outcome of this litigation be unfavorable to the
Company, however, the Company would be required to fulfill its indemnification
obligations to its customers, including Pacific Telesis, by either replacing or
modifying its products to avoid infringement or by procuring a license to use
the technology, either of which could have a materially adverse effect on the
financial condition or results of operations of the Company.
Additionally, the Company is subject to pending claims and litigation primarily
related to contractual, product and employee issues. Management, after review
and consultation with the Company's counsel, believes that the liability, if
any, from the disposition of such claims and litigation would not have a
materially adverse effect on the financial condition or results of operations of
the Company.
12. Significant Customers
During the year ended December 31, 1997, one customer accounted for 58% of the
Company's net sales. During the year ended December 31, 1996, three customers
accounted for 40%, 13% and 11% of the Company's net sales. During the year ended
December 31, 1995, two customers accounted for 47% and 13% of the Company's net
sales. No other customer accounted for sales of 10% or more. A majority of the
Company's sales are made to telecommunications companies. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. In 1997 export sales accounted for 5%
of the Company's net sales as compared to 26% in 1996.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information concerning Directors required by this item is incorporated by
reference to Page 8-9 of the 1998 Proxy Statement. Information concerning
Executive Officers required by this item appears after Part I, Item 4 of this
report.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is incorporated by reference to Pages
10-11 of the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is incorporated by reference to Page 5-7
of the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Title
------- -----
<S> <C>
10.40 Description of Registrant's Executive Bonus Plan for 1998.
11.01 Computation of Earnings (Loss) per Common Share.
23.00 Consent of Ernst & Young, LLP, independent auditors.
10.57 Purchase Agreement between GTE Communication Systems
Corporation and Digital Sound Corporation (Contract Number
120900-92-01), dated January 13, 1993, and Amendments Nos. 1
through 9 thereto.
27 Financial Data Schedule
</TABLE>
The following exhibits to the Company's Registration Statement under the
Securities Act of 1933, as amended (filed January 19, 1990, Registration No.
33-33066), and the amendments thereto, are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
Number Title
------- -----
<S> <C>
3.01 Registrant's Articles of Incorporation, as amended to date.
3.02 Registrant's By-Laws, as amended to date.
10.12 Form of Indemnity Agreement with Directors.
</TABLE>
The following exhibits to the Company's Form 10-K for 1996 or subsequently filed
Form 10-Qs for 1997 are incorporated herein by reference:
Exhibit
Number Title
------- -----
<PAGE>
<TABLE>
<S> <C>
10.08 *The Amended and Restated Stock Option Plan for Independent
Directors of Digital Sound Corporation, (The Directors' Plan).
10.10 *Registrant's Preferred Stock Purchase Agreement
10.35 *Letter agreement between Registrant and Mark C. Ozur.
10.38 *Registrant's 1983 Stock Option Plan.
10.39 *Registrant's Employee Stock Purchase Plan
10.43 *Amendment dated March 26, 1993 to the Registrant's 1983 Stock
Option Plan.
10.44 Lease Agreement by and between the Registrant and Bluffs Group III
dated October 1, 1996.
EXHIBIT
NUMBER TITLE
- ------- -----
10.45 Lease Agreement by and between the Registrant and BancBoston
Leasing, Inc., dated January 8, 1997.
10.46 Amendment dated April 4, 1997 to the Registrant's 1983 Stock Option
Plan.
10.47 Amendment dated March 26, 1993 to the Registrant's Employee Stock
Purchase Plan.
10.48 Amendment dated April 4, 1997 to the Registrant's Employee Stock
Purchase Plan.
10.49 Line of Credit Agreement between Registrant and Imperial Bank dated
July 28, 1997.
10.50 Security and Loan Agreement Domestic Facility by and between
Registrant and Imperial Bank dated July 28, 1997.
10.52 First Amendment and Waiver to Digital Sound Corporation Credit
Terms and Conditions by and between Registrant and Imperial Bank
dated October 30, 1997.
10.53 First Amendment to Security and Loan Agreement, Domestic Credit by
and between Registrant and Imperial Bank dated October 30, 1997.
10.54 Warrant Purchase Agreement by and between Registrant and Imperial Bank
dated October 30, 1997
10.55 Antidilution Agreement by and between Registrant and Imperial Bank dated
October 30, 1997.
10.56 Registration Rights Agreement by and between Registrant and Imperial
Bank dated October 30, 1997
The following exhibits to the Company's Form 8-K dated December 23, 1997, are
incorporated by herein by reference:
3.03 Certificate of Determination.
10.1 Preferred Stock Purchase Agreement dated December 19, 1997.
10.2 Form of Convertible Promissory Note.
10.3 Registration Rights Agreement dated December 19, 1997
(b) In December 1997, the Registrant filed the following report on a Form 8K:
Preferred Stock Purchase Agreement dated December 19, 1997.
Certificate of Determination.
Form of Convertible Promissory Note.
Registration Rights Agreement dated December 19, 1997.
- ------
*Management contract or compensatory plan or arrangement required to be filed as
an Exhibit to the Form 10-K Report pursuant to Item 14(c).
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 25, 1997.
DIGITAL SOUND CORPORATION
By: /s/ B. Robert Suh
---------------------
B. Robert Suh
Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
Chief Executive Officer:
President,
/s/ Mark C. Ozur Chief Executive Officer, February 25, 1998
- ------------------------ and Director
Mark C. Ozur
Chief Financial Officer:
/s/ B. Robert Suh Vice President, Finance February 25, 1998
- ----------------------- Chief Financial Officer
B. Robert Suh
Directors:
/s/ John D. Beletic Director February 25, 1998
- -----------------------
John D. Beletic
/s/ Bandel L. Carano Director February 25, 1998
- -----------------------
Bandel L. Carano
/s/ J. David Hann Director February 25, 1998
- -----------------------
J. David Hann
/s/ Frederick J. Warren Director February 25, 1998
- -----------------------
Frederick J. Warren
<PAGE>
DIGITAL SOUND CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Amount in thousands)
<TABLE>
<CAPTION>
Balance at Addition Deductions Balance
beginning charged to from at end
of period earnings allowance of period
================================================================================================
<S> <C> <C> <C> <C>
December 31, 1995
Allowance for doubtful receivables $ 700 $ 34 $(134) $ 600
Accrued warranty reserve $ 375 $ 232 $(232) $ 375
- ------------------------------------------------------------------------------------------------
December 31, 1996
Allowance for doubtful receivables $ 600 $ 60 $ (60) $ 600
Accrued warranty reserve $ 375 $ 217 $(232) $ 360
- ------------------------------------------------------------------------------------------------
December 31, 1997
Allowance for doubtful receivables $ 600 $ 393 $(466) $ 527
Accrued warranty reserve $ 360 $ 589 $(520) $ 429
================================================================================================
</TABLE>
<PAGE>
Exhibit 10.40
DIGITAL SOUND CORPORATION
DESCRIPTION OF REGISTRANT'S
EXECUTIVE OFFICER BONUS PLAN FOR 1998
The Company's 1998 Executive Officer Bonus Plan (the "Plan") is based solely on
achieving the Company's 1998 revenue target. The Plan provides that if 100% of
the revenue target is attained, a cash bonus equivalent to 20% of base salary
will be earned. If revenue exceeds the annual target by 50%, then the maximum
bonus of 75% of base salary will be earned. If revenue exceeds the annual
target but by less than 50%, the percentage earned will be linearly prorated.
There will be no bonus if the target is not reached.
<PAGE>
EXHIBIT 10.57
CONTRACT NUMBER: 120900-92-01
PURCHASE AGREEMENT
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. TERM............................................................... 49
2. PURCHASE AND DISTRIBUTION OF PRODUCT(S)............................ 49
3. PRICE.............................................................. 50
4. TERMS OF PAYMENT................................................... 50
5. PRICE REVISIONS.................................................... 50
6. PURCHASING FORECAST................................................ 50
7. THIRD PARTY PURCHASES.............................................. 51
8. REPORTS............................................................ 51
9. BAR CODING......................................................... 51
10. PRECEDENCE OF DOCUMENTS........................................... 51
11. PURCHASE ORDER INFORMATION........................................ 51
12. DELIVERY.......................................................... 52
13. PACKAGING......................................................... 54
14. BILLING........................................................... 54
15. BILL OF SALE...................................................... 54
16. INSPECTION AND ACCEPTANCE......................................... 54
17. PRODUCT(S) STANDARDIZATION........................................ 55
18. TECHNOLOGICAL OR SPECIFICATION CHANGE/PRODUCT(S)
DELETION/SUBSTITUTION.................................................. 56
19. UNSATISFACTORY CONDITION SITUATIONS............................... 57
20. PRODUCT(S) CHANGES................................................ 57
21. QUALITY ASSURANCE REPORTING....................................... 59
22. PRODUCT(S) SERVICES AND SUPPORT................................... 59
23. TRADEMARK LICENSE................................................. 59
24. INFRINGEMENT...................................................... 59
25. USE OF CONFIDENTIAL INFORMATION................................... 61
26. PROPRIETARY RIGHTS................................................ 61
27. PUBLICITY......................................................... 62
28. COMPLIANCE WITH LAWS.............................................. 62
29. FORCE MAJEURE..................................................... 63
30. ASSIGNMENT........................................................ 63
31. TAXES............................................................. 64
32. RECORDS........................................................... 64
33. RIGHT OF ACCESS................................................... 64
34. PLANT AND WORK RULES.............................................. 65
35. LIABILITY......................................................... 65
36. TOXIC SUBSTANCES AND HAZARDOUS PRODUCT(S)......................... 66
37. CANCELLATION 0F PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENTS... 66
38. TERMINATION....................................................... 67
39. NOTICES........................................................... 68
40. REGISTRATION...................................................... 70
41. NONWAIVER......................................................... 70
42. SEVERABILITY...................................................... 70
43. SECTION HEADINGS.................................................. 70
44. SURVIVAL OF OBLIGATIONS........................................... 71
45. CHOICE OF LAW..................................................... 71
46. ENTIRE AGREEMENT.................................................. 71
EXHIBIT A: GTE AFFILIATED ENTITIES.................................... 72
EXHIBIT B: SUPPLIER PRODUCT(S)......................................... 72
EXHIBIT C: SUPPLIER PRODUCT(S) PRICING................................ 72
EXHIBIT D: GTE BAR CODING............................................. 72
EXHIBIT E: GTE SHIPPING AND CARRIER ROUTING INSTRUCTIONS.............. 72
EXHIBIT F: SUPPLIER PRODUCT(S) DELIVERY INTERVAL...................... 72
EXHIBIT G: GTE PACKAGING CONFIGURATION DEFINITIONS.................... 72
EXHIBIT H: GTE STANDARDIZA'NON POLICY................................. 72
EXHIBIT I: GTE QUALITY ASSURANCE REPORTING............................ 72
EXHIBIT J: GTE PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS........... 72
EXHIBIT K: SUPPLIER'S ADDITIONAL SOFTWARE LICENSING TERMS............. 72
</TABLE>
<PAGE>
PURCHASE AGREEMENT
THIS AGREEMENT is made by and between Digital Sound Corporation, a State of
California Corporation with principal offices at 6307 Carpinteria Avenue,
Carpinteria, California 93013 (hereinafter referred to as "SELLER") and GTE
Communication Systems Corporation, a Delaware Corporation, acting by and through
the GTE Supply Division with principal offices located at GTE Place, West
Airfield Drive, DFW Airport, Texas 75261 (hereinafter referred to as
"CUSTOMER"), for the benefit of itself and the GTE Affiliated Entities
(hereinafter referred to as "Affiliates") listed in Exhibit A.
WHEREAS, the parties agree and understand that CUSTOMER and/or Affiliates may
purchase products from SELLER on the same terms and conditions as CUSTOMER
hereunder. In such event, the Affiliate shall also be a "CUSTOMER" hereunder.
It is the intent of the parties that CUSTOMER and/or Affiliates may make
purchases according to the terms and conditions hereunder.
WHEREAS, the parties hereto desire to enter into an agreement on a non-exclusive
basis to govern the purchase for use or distribution of SELLER'S product(s)
listed in Exhibit B, attached to this Agreement (hereinafter called
"PRODUCT(S)"), to CUSTOMER.
THEREFORE, in consideration of the mutual promises and covenants contained
herein, the parties agree as follows:
1. TERM
This Agreement shall be effective on the date of signing of this Agreement, and
shall continue in effect thereafter for a period of two (2) years unless
terminated or modified by either party in accordance with the provisions of this
Agreement. This Agreement shall be automatically terminated unless renewed by
CUSTOMER for a period not greater than one (1) year by written notice to SELLER
not less than thirty (30) days prior to the expiration date. At the end of each
twelve month period either party shall have the option to review Agreement terms
and adjust such terms as mutually agreed upon by the parties.
2. PURCHASE AND DISTRIBUTION OF PRODUCT(S)
(a) This Agreement covers the terms and conditions for the purchase and sale
of SELLER'S PRODUCT(S) listed in Exhibit B.
(b) Pursuant to the terms of this Agreement, SELLER hereby agrees to sell to
CUSTOMER, and CUSTOMER may purchase from SELLER, if it submits purchase
orders for them, (1) the PRODUCT(S) listed in Exhibit B and (2) other
goods for which SELLER accepts a purchase order hereunder at the
<PAGE>
price as quoted to CUSTOMER in writing with respect to each such
transaction.
(c) The parties agree that CUSTOMER may purchase the PRODUCT(S) for its own
use, for resale to end users and/or for distribution to other parties.
(d) This Agreement is non-exclusive and shall not be construed (1) to require
CUSTOMER to purchase any specific amount of PRODUCT(S) from SELLER or (2)
to require CUSTOMER to sell any, all or a portion of PRODUCT(S) it
orders, or restrict the purchase, resale and/or distribution of
PRODUCT(S) to any geographic area.
3. PRICE
(a) The prices for all PRODUCT(S) to be paid by CUSTOMER are those prices
specified in Exhibit B as discounted per Exhibit C. Installation charges
listed in Exhibit B are the maximum allowable unless installation is
beyond the committed installation date and due to fault of CUSTOMER.
(b) SELLER represents that the prices for the purchase of any PRODUCT(S)
hereunder are no less favorable than those offered to other purchasers in
comparable transactions.
4. TERMS OF PAYMENT
Payment shall be due thirty (30) days from the date of receipt of goods or
receipt of SELLER'S invoice, whichever occurs later.
5. PRICE REVISIONS
(a) SELLER may propose price increases annually but only after the
anniversary date of this Agreement by giving ninety (90) days written
notice to CUSTOMER. SELLER shall honor all prices for PRODUCT(S) for
which purchase orders have been issued prior to the effective date of
such increases.
(b) Price decreases shall be effective immediately upon announcement by
SELLER and shall apply to all purchase orders which have not been
delivered prior to the announcement date.
6. PURCHASING FORECAST
CUSTOMER estimates that it may purchase from SELLER in the aggregate amount,
eleven million four hundred thousand dollars ($11,400,000) of SELLER'S
PRODUCT(S) during the first twelve (12) months of this Agreement. The purchase
forecast is only a projection or estimate and is not to be construed as a
commitment to
<PAGE>
purchase that or any amount. In no case shall CUSTOMER be responsible for any
billback or related nonconformance charges should CUSTOMER'S purchases fail to
meet projected levels, nor shall failure to purchase the estimated amount of
SELLER'S PRODUCT(S), or any of SELLER'S PRODUCT(S), be a breach of this
Agreement by CUSTOMER.
7. THIRD PARTY PURCHASES
SELLER agrees to consider CUSTOMER's Supply Division as a possible furnisher of
goods or services which SELLER may acquire from a third party. Accordingly
CUSTOMER shall provide SELLER with a listing of goods and services which it may
be able to provide. SELLER shall, however be the sole authority for procurement
selections from third party suppliers.
8. REPORTS
When requested by CUSTOMER, SELLER shall, for purchase orders placed directly
with the SELLER by an Affiliate other than GTE Supply, provide CUSTOMER, at each
address as referenced in Section 39, a quarterly purchase report by ordering
location, listing PRODUCT(S) purchased under this Agreement, description, part
number, quantities shipped and associated net prices.
9. BAR CODING
SELLER agrees to comply with GTE standards in the development of a Bar Coding
Program as outlined in Exhibit D, as mutually agreed by both parties and based
on SELLER'S capability.
10. PRECEDENCE OF DOCUMENTS
All purchase orders shall be subject to and governed by the provisions contained
herein. Additional conditions appearing on the face or reverse side of any
CUSTOMER'S purchase order which do not conflict with the terms and conditions of
this Agreement shall be a part of this Agreement with respect to such purchase
order if accepted by SELLER'S order acknowledgment. The terms and conditions of
this written Agreement shall control over any conflicting or inconsistent terms
and conditions contained in any purchase order. Upon receipt of CUSTOMER'S
purchase order, SELLER shall acknowledge receipt, verification of information,
and required ship date. SELLER'S acknowledgment is to be forwarded to CUSTOMER
within ten (10) days of receipt of purchase order. Unless CUSTOMER specifically
agrees in a separate writing, no additional or different terms and conditions
appearing on the face or reverse side of any SELLER'S acknowledgment or invoice
shall become part of such purchase order.
11. PURCHASE ORDER INFORMATION
<PAGE>
(a) Unless otherwise mutually agreed in writing by the parties, the following
information shall normally be contained in the purchase order:
(1) Description of PRODUCT(S), including any numerical alphabetical
identification, including SELLER'S part number, referenced in the
price list herein;
(2) Requested delivery date;
(3) Applicable price;
(4) Location to which the PRODUCT(S) is to be shipped;
(5) Location to which invoices shall be rendered for payment;
(6) CUSTOMER'S purchase order number;
(7) Configurations (if applicable);
(8) Delivery requirements;
(9) A reference to any applicable quotation given by SELLER to CUSTOMER;
and
(10) Quantity to be shipped.
(b) All purchase orders, acknowledgments and subsequent invoicing may be
communicated between CUSTOMER and SELLER by way of postal services,
facsimile transmission and electronic data interchange according to
industrial standards as developed to meet both parties' needs or as
otherwise mutually agreed to by both parties.
(c) SELLER may enforce each purchase order only against the entity which has
submitted the purchase order.
(d) Unless otherwise agreed to in writing, any written purchase order placed
by CUSTOMER for PRODUCT(S) or services specified herein shall be subject
to the terms and conditions of this Agreement.
12. DELIVERY
(a) Shipments of PRODUCT(S) shall be made FOB Origin freight collect or
prepaid and added to the invoice as may be specified on individual
purchase orders. When CUSTOMER requests SELLER to arrange the
transportation of the PRODUCT(S), SELLER shall ship all PRODUCT(S)
freight collect in accordance with the GTE Shipping and Carrier Routing
Instructions, Exhibit
<PAGE>
E, unless otherwise specified on the CUSTOMER'S purchase order. In the
absence of shipping instructions, SELLER shall select the carrier listed
in the GTE Shipping and Carrier Routing Instructions on behalf of
CUSTOMER, but SELLER shall not assume any liability for shipment nor
shall the carrier be construed as an agent of SELLER. If SELLER is
instructed by CUSTOMER to ship prepaid & add, SELLER shall select a
carrier based on best rate as negotiated by SELLER. In such instance,
CUSTOMER shall only pay SELLER'S net transportation costs, inclusive of
all applicable discounts, allowances and refunds.
(b) Failure of SELLER to ship PRODUCT(S) in accordance with CUSTOMER'S
freight routing instructions shall result in charge-backs to the SELLER
for excess freight charges.
(c) Unless instructed otherwise by CUSTOMER, SELLER shall, for purchase
orders placed hereunder, (1) ship PRODUCT(S) in accordance with specific
shipping instructions; (2) see that all subordinate documents bear
CUSTOMER'S purchase order number; (3) enclose a packing list with each
shipment and when more than one package is shipped, identify the one
containing the packing list; (4) mark CUSTOMER'S purchase order number on
all packages and shipping papers; (5) render invoices showing CUSTOMER'S
purchase order number; (6) render separate invoices for each shipment or
purchase order; (7) forward shipping notices with invoices; (8) invoice
CUSTOMER by mailing or otherwise transmitting invoices, bills, and
notices to the billing address on the purchase order; and (9) make
available Bill of Lading upon request.
(d) Standard delivery for PRODUCT(S) shall be as specified in Exhibit F and
may be amended only by written document signed by both parties hereto.
FOB delivery times shall be from the date of receipt of CUSTOMER'S
purchase order.
(e) SELLER shall ship PRODUCT(S) to CUSTOMER within the time period stated in
Exhibit F with a minimum ninety-six percent (96%) service level. Service
level shall be calculated as total line items shipped complete, as
compared to the total number of line items ordered that have been
purchased for delivery within SELLER'S stated delivery interval. SELLER
shall provide CUSTOMER, on a quarterly basis at the addresses as
referenced in Section 39, shipping reports delineating the following
information:
(1) CUSTOMER'S purchase order number;
(2) Date CUSTOMER'S purchase order received by SELLER;
(3) Date purchase order shipped complete from SELLER;
<PAGE>
(4) Total number of line items scheduled for shipment in the period;
(5) Total number of line items shipped complete in the period;
(6) Percent (%) of line items shipped complete in the period;
(7) Total number of units scheduled for shipment in the period;
(8) Total number of units shipped in the period; and
(9) Percentage (%) of units shipped complete in the period (fill rate).
13. PACKAGING
PRODUCT(S) shall be packaged and packed at no additional charge for shipment in
suitable containers which shall provide protection against damage during the
domestic shipment, handling and storage in reasonably dry, unheated quarters.
Refer to Exhibit G for packaging configuration definitions. Corrugated shipping
containers shall comply with requirements of Item 222 of the National Motor
Freight Code, Series NMFC 100-P. Containers of any type that are too heavy or
too large to be palletized shall be skidded to facilitate fork truck and/or
mechanized handling.
14. BILLING
SELLER shall render invoices to CUSTOMER, for each shipment made, unless
otherwise specified, at the address listed on CUSTOMER'S purchase order.
Invoices shall include, but not be limited to (1) purchase order number; (2)
purchase order line number; (3) PRODUCT(S) identification number; (4) ship to
address; (5) quantity shipped and billed; (6) net invoice amount; (7) net unit
cost; and (8) any special instructions as requested by CUSTOMER.
15. BILL OF SALE
SELLER agrees, upon request by CUSTOMER, to execute and deliver to CUSTOMER a
bill of sale evidencing conveyance of PRODUCT(S), free and clear of all liens,
security interests and encumbrances, together with such other documents as may
be necessary by CUSTOMER.
16. INSPECTION AND ACCEPTANCE
(a) All PRODUCT(S) ordered pursuant to this Agreement shall be subject to
inspection by CUSTOMER after delivery to determine its conformity with
CUSTOMER'S purchase order. If the PRODUCT(S) delivered does not
<PAGE>
conform with CUSTOMER'S purchase order, CUSTOMER shall have the right to
reject such PRODUCT(S). PRODUCT(S) which has been delivered and rejected,
in whole or in part, shall be returned to SELLER at SELLER'S risk and
expense. CUSTOMER shall have a period of thirty (30) days following
arrival of PRODUCT(S) at the delivery destination specified by CUSTOMER
within which to inspect the PRODUCT(S) for conformity with CUSTOMER'S
purchase order and SELLER'S advertised and published specifications and
to provide SELLER with written notice of any discrepancy or rejection. If
CUSTOMER does not provide SELLER with such written notice of a
discrepancy or rejection within such thirty (30) day period, the
PRODUCT(S) shall be deemed accepted by CUSTOMER, unless otherwise agreed
by the parties in writing. CUSTOMER shall notify SELLER and arrange for
the return of PRODUCT(S) as required.
(b) Inspection or failure to inspect on any occasion shall not affect
CUSTOMER'S rights under the "WARRANTY" provisions of Exhibit J herein or
any other rights or remedies available to CUSTOMER whether at law or in
equity.
17. PRODUCT(S) STANDARDIZATION
(a) During the term of this Agreement, SELLER shall comply with GTE's
PRODUCT(S) Standardization Policy as set forth in Exhibit H.
(b) Hardware/software problems identified during CUSTOMER's Standardization
Management testing of new hardware/software releases are to be corrected
in accordance with the following priority schedule:
Priority One (1) - must be corrected prior to on-line
implementation.
Priority Two (2) - must be corrected prior to commercial release.
Priority Three (3) - must be corrected in the first product update.
Priority Four (4) - possible design request or future feature
enhancement.
Priority Five (5) - monitor on-line performance or verify
commercial release documentation.
The Priority assigned to a particular hardware/software problem shall be
determined by CUSTOMER's Standardization Management.
<PAGE>
(c) CUSTOMER reserves the right to test new releases or feature enhancements
prior to CUSTOMER's distribution. SELLER will not distribute
commercially available system version releases to CUSTOMER without
written approval from CUSTOMER. Software corrections (Patches and/or
Point releases) will be provided at no charge for ninety (90) days from
the date of written approval of the new release by CUSTOMER.
(d) SELLER will work in good faith with CUSTOMER to follow guidelines to
ensure the necessary tracking, reporting and processing of Product Design
Requests submitted by CUSTOMER.
(e) At the commencement of this Agreement, SELLER will provide a best efforts
Product enhancement/availability schedule for the next two (2) years and
update such schedule each quarter. Software (load) enhancements must be
made available, and the cost of each software (load) enhancement must not
exceed ****** (***) percent of the initial software (load) expense.
18. TECHNOLOGICAL OR SPECIFICATION CHANGE/PRODUCT(S) DELETION/SUBSTITUTION
(a) SELLER is required to give CUSTOMER notice one hundred twenty (120) days
in advance of any technological or specification change,
software/firmware revision, PRODUCT(S) deletion or manufacturer
discontinuance that shall significantly impact PRODUCT(S) operation,
interchangeability with existing PRODUCT(S), appearance, warranty, life
cycle or GTE engineering/quality approvals of any PRODUCT(S). SELLER
shall, at the time of notification, provide CUSTOMER with (1) a
PRODUCT(S) change number; (2) a description of such change; (3) reason
for change; (4) a description of the impact of such change upon (i)
reliability, (ii) PRODUCT(S) specifications, (iii) form, fit or function;
(5) proposed price impact (if any); and (6) proposed effective date for
such change and recommended implementation schedule therefore.
Notwithstanding the foregoing, if SELLER makes any change with material
impact to the PRODUCT(S) which SELLER in its reasonable discretion
decides must be released on less than one hundred twenty (120) days
notice (e.g., a bug fix or change for safety reasons), SELLER will give
CUSTOMER the foregoing notification as soon as commercially practicable.
(b) In the event that SELLER and CUSTOMER shall fail to reach agreement on
any such change in PRODUCT(S) to be made by SELLER, then, in addition to
all other rights and remedies at law or in equity or otherwise, CUSTOMER
shall, at no cost or liability, have the right to terminate this
Agreement and any and all pending purchase orders for PRODUCT(S) affected
by such change.
<PAGE>
(c) SELLER agrees if the required one hundred twenty (120) days notice is not
provided, SELLER shall accept at CUSTOMER'S option, a PRODUCT(S) exchange
or return for all unsold PRODUCT(S) in CUSTOMER'S inventory which were
received or shipped prior to the date of such notice. Such option must
be made by CUSTOMER within one hundred twenty (120) days after SELLER'S
notification. Any PRODUCT(S) returned must be unused, undamaged and in
the original carton and may, at CUSTOMER'S option, be returned for one
hundred percent (100%) credit of the price paid or an equal dollar value
exchange for any other PRODUCT(S) offered under this Agreement.
19. UNSATISFACTORY CONDITION SITUATIONS
If at any time during normal operation the CUSTOMER encounters an unsatisfactory
condition in the PRODUCT(S), SELLER agrees to meet the following time frames for
resolving the condition:
(a) Conditions which affect public or employee safety or the ability to track
and collect revenue, or which cause major degradation of service, SELLER
shall acknowledge within ****** (**) days of notification and must
provide a permanent resolution within ****** (**) days of notification.
(b) Conditions which affect service, but have a temporary solution to reduce
the impact, or which have potential for major service degradation, SELLER
shall acknowledge within ****** (**) days of notification and must
provide a permanent resolution within ******* (**) days of notification.
(c) Conditions which are not service or safety affecting but which have
potential to adversely affect normal maintenance and/or administration of
telephone service, SELLER shall acknowledge within **** (**) days and
provide a permanent resolution within **************** (**) days of
notification.
(d) CUSTOMER and SELLER may agree to action dates other than those stated
above that shall correct unsatisfactory conditions due to upgrades,
technological changes, etc. If an exception to the above corrective
action time frames occurs, the SELLER is bound by the newly agreed upon
date.
20. PRODUCT(S) CHANGES
(a) After PRODUCT(S) has shipped to CUSTOMER, if SELLER issues changes
affecting such PRODUCT(S) and a change is identified as necessary for the
PRODUCT(S) to continue to meet SELLER'S published specifications, design
criteria or is an identified correction of deficiency as a result of an
Unsatisfactory Condition Report (refer to Section 19), SELLER shall
provide prompt notification of required changes to GTE Standardization
Management. SELLER shall, at its expense, furnish and install the parts
<PAGE>
necessary to implement any such changes made within a ten (10) year
period from the date of shipment of PRODUCT(S) by SELLER to CUSTOMER.
Upgrades and enhancements are not covered in this subsection or in the
other subsections of this Product Changes provision.
(b) If CUSTOMER and SELLER ascertain that PRODUCT(S) or part thereof subject
to such change is readily returnable, CUSTOMER shall remove and shall
return such PRODUCT(S) or part to SELLER'S facility and SELLER, at its
expense, shall implement such changes at its facility and return such
changed PRODUCT(S) or part to CUSTOMER'S designated location. If removed
PRODUCT(S) returned to SELLER for modification creates an out-of-service
condition, SELLER shall make suitable arrangements to provide replacement
PRODUCT(S) such that no out-of-service condition shall occur.
(c) Any PRODUCT(S) maintained in CUSTOMER'S inventory subject to such change
shall be returned to SELLER'S facility to implement changes and return to
CUSTOMER'S stocking location at SELLER'S expense. If such changes create
an adverse impact on the PRODUCT(S) warranty or CUSTOMER'S ability to
sell the PRODUCT(S) as new, then SELLER shall accept at CUSTOMER'S
option, a PRODUCT(S) exchange or return for all unchanged PRODUCT(S) in
CUSTOMER'S inventory.
(d) All change notifications provided by SELLER to CUSTOMER shall contain the
following information:
(1) description of change;
(2) reason for change;
(3) impact on customer service (i.e., outages, system downtime);
(4) price impact, if known;
(5) effective date of changes; and
(6) implementation schedule of change.
(e) CUSTOMER may request SELLER to make changes to SELLER'S PRODUCT(S). Upon
receipt of a written document describing in detail the changes requested
by CUSTOMER, SELLER shall respond in writing to CUSTOMER within thirty
(30) days. If SELLER agrees to undertake such modifications for
CUSTOMER, the response shall quote a proposed implementation schedule and
a cost for such changes to PRODUCT(S).
<PAGE>
21. QUALITY ASSURANCE REPORTING
(a) Unless specified otherwise, quality and reliability reporting
requirements shall be as defined in GTE Standardization Management's
Quality and Reliability Document, known as the TO-15 Process, as set
forth in Exhibit I. SELLER shall submit Form TQ-15 and related documents
to CUSTOMER for performance verification, as required, on a quarterly
basis. Verification may include on-site audits of documentation, process
reviews and product quality discussions.
(b) CUSTOMER has the right to rate SELLER'S performance in accordance with
CUSTOMER'S internal rating algorithm. Upon request, CUSTOMER agrees to
provide rating information to SELLER without charge.
(c) SELLER agrees to have a field reliability and delivery performance
tracking system in place as mutually agreed between CUSTOMER and SELLER
and shall continue the tracking system for as long as this Agreement is
in effect. The tracking system shall provide timely internal data
collection enabling SELLER to arrive at solutions to delivery, quality
and reliability problems related to assembly, subassembly or other
repairable module deficiencies as measured against CUSTOMER'S
requirements.
22. PRODUCT(S) SERVICES AND SUPPORT
During the term of this Agreement, SELLER shall provide PRODUCT(S) services and
support as set forth in Exhibit J.
23. TRADEMARK LICENSE
SELLER hereby grants to CUSTOMER the non-exclusive right to use SELLER'S trade
name and trademark. The SELLER'S trade name and trademark are registered in the
United States. SELLER reserves the right to prior review and approval of
CUSTOMER'S use of the SELLER'S trade name, trademark, and all relevant
advertising material and SELLER agrees not to unreasonably withhold or delay
such approval. In the event of termination of this Agreement, SELLER has the
right to withdraw this consent with respect to uses by CUSTOMER following
termination.
24. INFRINGEMENT
(a) SELLER shall defend at its own expense all third party claims,
proceedings and/or suits alleging infringement or misappropriation of any
patent, trademark, copyright, trade secret or violation of any other
intellectual property or proprietary rights by reason of the use or sale
of any PRODUCT(S) furnished to CUSTOMER under this Agreement, or the use
of any licensed PRODUCT(S) within the scope of the licenses granted under
this Agreement, and shall defend, indemnify, protect and save
<PAGE>
CUSTOMER harmless from all claims, actions, suits, costs, expenses,
damages, including reasonable attorney's fees and payments, as a result
of such claim of infringement or misappropriation; and if the use or
resale shall be enjoined, SELLER shall, at its option, replace the
enjoined PRODUCT(S), licensed PRODUCT(S) or service with a suitable
substitute free of the infringement or misappropriation; or shall procure
for CUSTOMER'S benefit a license or other right to use or resell the
same, or shall remove the enjoined PRODUCT(S) and refund to CUSTOMER the
amount paid to SELLER therefor, plus CUSTOMER'S direct, incidental and/or
consequential damages for such infringing or misappropriated PRODUCT(S).
CUSTOMER agrees that any such recovery of consequential damages shall
have an upper limit of two hundred fifty thousand dollars ($250,000) per
claim or occurrence. SELLER shall have total control over the defense,
negotiation and settlement of each case, provided, however, that CUSTOMER
shall be permitted to participate in such defenses, negotiation, or
settlement by counsel of its own choosing and expense.
(b) CUSTOMER shall give SELLER prompt notice of any claims of such
infringement or misappropriation and of all suits and, except as
otherwise indicated herein, full opportunity and authority to assume the
sole defense thereof, where SELLER is obligated to indemnify CUSTOMER
hereunder, including appeals, and to settle such suits, and shall furnish
upon SELLER'S request and at SELLER'S expense all disclosable information
and reasonable assistance available to CUSTOMER. This Section 24 states
SELLER's entire liability and obligations with respect to claims of
infringement of proprietary rights of any kind and is CUSTOMER's sole and
exclusive remedy for any breach of Exhibit J Section 1 (a)(i) with
respect to infringement of proprietary rights.
(c) No undertaking of SELLER in this Section shall apply to any infringement
misappropriation or any claim of infringement or misappropriation which
arises solely from SELLER's adherence to CUSTOMER's written instructions
or directions or which arise solely from the use of PRODUCT(S) with
equipment, devices, or software not supplied by SELLER other than (1)
commercial merchandise which is available on the open market with which
PRODUCT(S) is designed to operate or (2) items of SELLER origin, design
or selection. Each party shall defend or settle, at its own expense, any
action or suit against the other for which ft is responsible.
25. USE OF CONFIDENTIAL INFORMATION
(a) Any specifications, drawings, sketches, models, samples, tools, computer
programs, technical information, or confidential business information or
data, written, oral or otherwise (hereinafter called "Information")
furnished by the parties to one another hereunder shall remain the
property of the supplier of
<PAGE>
such Information. All copies of such Information in written, graphic or
other tangible form shall be returned to the supplier upon request except
for a single archival copy.
(b) If clearly marked as confidential, and unless such Information was
previously known to the recipient to be free from any obligation to keep
it confidential or until It has been or is subsequently made public by
the supplier or a third party, without breach of any obligation of
confidentiality, it shall be treated as confidential by the recipient,
and shall be used by the recipient only in connection with fulfilling the
obligations of the recipient which arise pursuant to this Agreement,
unless the prior written consent of the supplying party is obtained.
Orally disclosed confidential Information shall be reduced to writing
within twenty (20) days of disclosure and marked as confidential. Such
Information shall only be distributed to those employees who have a need
to know.
(c) Each party shall treat the other's Information in accordance with a
standard of care reasonably calculated to prevent inadvertent or
accidental disclosure. Nothing herein shall be construed as waiving the
right of any party to require the other party to execute a written
nondisclosure agreement, containing reasonable additional terms and
conditions, prior to the supplying of particular confidential Information
from time to time. Such additional terms and conditions shall not be
inconsistent, with the terms and conditions of this Agreement.
26. PROPRIETARY RIGHTS
(a) Nothing herein shall be construed as affecting SELLER's (and its
licensor') ownership, and CUSTOMER acknowledges and agrees that SELLER
(and its licensor') retains all ownership of any and all patent rights,
patent applications, rights to apply for patents, copyrights, trademarks,
trade secrets and all other proprietary rights in and to the PRODUCT(S),
including without limitation, the software portions of the PRODUCT(S) in
all formats and mediums including ROMS, EPROMS and all other firmware
devices.
(b) CUSTOMER will take all steps reasonably necessary and advisable to
preserve and protect SELLER's confidential information and proprietary
rights in connection with any proposal, bid or contract between CUSTOMER
and any part of any foreign, federal, state or local government,
including without limitation the use of appropriate confidentiality
legends and restricted rights notices in the name of SELLER on any
written material submitted by CUSTOMER in connection with any such
proposal, bid or contract.
(c) SELLER hereby licenses the "Software," as defined in Exhibit K to
CUSTOMER for use with the hardware portions of the PRODUCT(S)
<PAGE>
pursuant to the terms and conditions of this Agreement, including the
Additional Software Terms attached as Exhibit K.
27. PUBLICITY
The parties agree to submit to one another for written approval all advertising,
sales promotion, press releases and other publicity matters relating to the
PRODUCT(S) furnished or the services performed by them pursuant to this
Agreement whereby their respective names or marks are mentioned or language from
which the connection of said names or marks therewith may be inferred or
implied, and the parties further agree not to publish or use such advertising,
sales promotions, press releases, or publicity matters without such prior
written approval. Such approval shall not be unreasonably withheld or delayed
by either party.
28. COMPLIANCE WITH LAWS
(a) The parties hereto shall comply with the provisions of all applicable
federal, state, county and local laws, ordinances, regulations and codes
(including procurement of required permits or certificates) in their
respective performance hereunder including, but not limited to the
standards promulgated by the Occupational Safety and Health Act,
Executive Order 11246, as amended, relative to Equal Employment
Opportunity, Section 503 of the Rehabilitation Act of 1973 and Section
402 of the Vietnam Veterans Readjustment Assistance Act of 1974 and all
applicable laws, orders and regulations concerning immigrants and non-
discrimination in the employment of minorities, females, veterans and the
handicapped. Irrespective of whether a specification is furnished, if
PRODUCT(S) or containers furnished are required to be constructed,
packaged, labeled or registered in a prescribed manner, the SELLER shall
comply with federal law and, in addition, with applicable state or local
law. Each party agrees to indemnify the other, and defend the other
party against, any claims, loss or damage sustained because of its
noncompliance hereunder.
(b) Without prejudice to the generality of the foregoing, CUSTOMER agrees to
comply strictly and fully with all export controls imposed on the
PRODUCT(S) by any country or organization of nations within whose
jurisdiction CUSTOMER operates or does business. CUSTOMER agrees not to
export or permit exportation of any part of the PRODUCT(S) or any related
technical data or any direct product of any related technical data,
outside of the United States without first (a) obtaining any required
written permission to do so from the United States Office of Export
Administration and other appropriate governmental agencies of the United
States; or, (b) complying fully and strictly with all requirements of any
general license exempting the exportation from the requirement for that
permission. These restrictions also apply to re-exportation from the
United States of imported items.
<PAGE>
29. FORCE MAJEURE
(a) Neither SELLER nor CUSTOMER shall be responsible for any delay or failure
in performance of any part of this Agreement to the extent that such
delay or failure is caused by fire, flood, explosion, war, strike,
embargo, government requirement, civil or military authority, acts of
God, inability to obtain raw materials or supplies of PRODUCT(S), acts or
omissions of carriers and other similar causes beyond its control
(hereinafter called "Condition(s)"). If any such Condition(s) occurs,
the party delayed or unable to perform shall promptly give notice to the
other party and, if such Condition(s) remains at the end of thirty (30)
days thereafter, the party affected by the other's delay or inability to
perform may elect to (1) terminate such purchase order or part thereof,
or (2) suspend such purchase order for the duration of the Condition(s),
and at the option of the suspending party, buy elsewhere comparable
material to be bought or sold under such purchase order, and apply to any
commitment the value of such purchase, and resume performance of such
purchase order once the Condition(s) ceases, with an option in the
affected party to extend the period of this Agreement up to the length of
time the Condition(s) endured.
(b) Unless written notice is given within thirty (30) days after the affected
party is notified of the Condition(s), (a)(2) above shall be deemed
selected.
30. ASSIGNMENT
(a) Except as otherwise provided herein, the rights and obligations of the
parties hereunder shall neither be assigned nor delegated without the
prior written consent of the other party, which shall not be unreasonably
withheld, provided that any party may assign or delegate their respective
rights and obligations hereunder, in whole or in part, to any parent or
subsidiary or affiliate of CUSTOMER or SELLER in existence at the time of
execution of this Agreement, upon prior written notice to the other.
Such assignment shall not diminish any rights or duties that SELLER or
CUSTOMER may have had prior to the effective date of assignment.
(b) The limitation on assignment does not apply to an assignment confined
solely to monies due or to become due under this Agreement, provided
CUSTOMER or SELLER is given thirty (30) days prior written notice of such
assignment. Assignment of monies shall be void to the extent that it
attempts to impose upon CUSTOMER or SELLER obligations to the assignee
additional to the payment of such monies, or to preclude CUSTOMER or
SELLER from dealing solely and directly with the other in all matters
pertaining hereto, including negotiation of amendments or settlement of
amounts due. In the event CUSTOMER or SELLER makes such an assignment it
is and shall remain responsible for payment hereunder.
<PAGE>
31. TAXES
CUSTOMER shall be liable for and shall reimburse SELLER for payments of Federal
Manufacturers' and Retailers' Excise Taxes, state and local sales taxes and use
taxes, as applicable, with respect to transactions under this Agreement. Taxes
payable by CUSTOMER shall be separately stated in SELLER'S invoices and shall
not be included in SELLER'S prices. CUSTOMER shall not be liable for any tax
for which a valid exemption certificate acceptable to the applicable, state
taxing authorities is furnished by CUSTOMER to SELLER.
32. RECORDS
SELLER shall maintain complete and accurate records of all amounts billable to
and payments made by CUSTOMER hereunder in accordance with generally accepted
accounting practices. SELLER shall retain such records for a period of three
(3) years from the date of final shipment for PRODUCT(S) or services covered by
this Agreement. SELLER agrees to provide supporting documentation concerning
any disputed amount of invoice to CUSTOMER within thirty (30) days after
CUSTOMER provides written notification of the dispute to SELLER. SELLER shall
retain such records for three (3) years from date of invoice.
33. RIGHT OF ACCESS
SELLER and CUSTOMER shall permit reasonable access during normal working hours
to its facilities in connection with work hereunder. No charge shall be made
for such visits. It is agreed that reasonable prior notification shall be given
when access is required. CUSTOMER may inspect any material that CUSTOMER has
ordered.
34. PLANT AND WORK RULES
The respective agents and employees of the parties shall, while on premises of
the other, comply with all plant rules, regulations and reasonable company
standards for security, including (where required by Government Regulations)
submission of satisfactory clearance from U.S. Department of Defense and other
federal authorities concerned.
35. LIABILITY
(a) Notwithstanding anything to be contrary herein, SELLER shall indemnify
and save harmless CUSTOMER from any loss or damages (including reasonable
attorney's fees) incurred by CUSTOMER because of claims, suits, or
demands of any kind including personal injury or property damage to the
extent such loss or damage is caused by or results from defective
PRODUCT(S) manufactured by SELLER or the negligent acts or omissions of
SELLER or its employees or agents provided (1) CUSTOMER promptly
<PAGE>
notifies SELLER in writing of any suits, claims, or demands against
CUSTOMER for which SELLER is responsible under this indemnity; (2)
CUSTOMER gives SELLER full opportunity and authority to assume the sole
defense of and settlement of such suits; and (3) CUSTOMER furnishes to
SELLER upon request all information and reasonable assistance available
to CUSTOMER for defense against any such suit, claim, or demand.
(b) All work performed under this Agreement by any party shall be performed
as an independent contractor and not as an agent of any other party.
Persons furnished by the respective parties shall be solely the employees
or agents of such parties, respectively, and shall be under the sole and
exclusive direction and control of such parties. They shall not be
considered employees of the other party for any purpose. Each party
shall be responsible for compliance with all laws, rules and regulations
involving their respective employees or agents, including (but not
limited to) employment of labor, hours of labor, health and safety,
working conditions and payment of wages. Each party shall also be
responsible, respectively, for payment of taxes, including federal,
state, and municipal taxes, chargeable or assessed with respect to its
employees or agents, such as social security, unemployment, worker's
compensation, disability insurance and federal and state income tax
withholding.
(c) SELLER agrees to maintain during the term hereof all insurance and/or
bonds required by law or this Agreement, including, but not limited to
(1) Worker's Compensation and related insurance as prescribed by the law
of the state in which SELLER'S services are performed; (2) employer's
liability insurance with limits of at least $500,000 for each occurrence,
and (3) comprehensive general liability insurance including PRODUCT(S)
liability, and, if the use of motor vehicles is required, comprehensive
motor vehicle liability insurance, each with limits of at least
$2,000,000 for combined single limit for bodily injury, including death
and/or property damage. SELLER shall, if requested by CUSTOMER, prior to
rendering such services, furnish certificates or adequate proof of the
foregoing insurance. Notwithstanding the above, SELLER and CUSTOMER
shall each have the option, where permitted by law, to self-insure any or
all of the foregoing risks.
(d) The parties expressly agree and understand that Seller's liability shall
in no event exceed ************* dollars ($*********) for any one
occurrence, whether the claim arises under this Agreement, in contract,
tort or otherwise.
36. TOXIC SUBSTANCES AND HAZARDOUS PRODUCT(S)
(a) SELLER warrants to CUSTOMER that each PRODUCT(S) furnished by SELLER
hereunder or in performance of purchase orders placed hereunder is safe
for normal use, is nontoxic, presents no abnormal hazards to persons or
the environment, and may be disposed of as normal refuse.
<PAGE>
(b) All system cards shall be clearly labeled with the letters "ESD" (Electro
Static Discharge) for proper printed wire card handling.
37. CANCELLATION 0F PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENTS
(a) In the event that SELLER shall be in material breach or default of any of
the terms, conditions or covenants of this Agreement, including, but not
limited to, SELLER'S failure to tender delivery of the PRODUCT(S) on or
before the delivery date stated on SELLER'S acknowledgement, then, in
addition to all other rights and remedies of law or equity or otherwise,
CUSTOMER shall have the right to immediately cancel all applicable
purchase orders without any obligation or liability to SELLER for said
cancellation.
(b) In the event that CUSTOMER shall be in material breach or default of any
of the terms, conditions or covenants of this Agreement, including, but
not limited to, timely payment for PRODUCT(S) purchased and such breach
shall continue for a period of thirty (30) days after CUSTOMER'S receipt
of SELLER'S written notice thereof, then, in addition to all other rights
and remedies of law or equity or otherwise, SELLER shall have the right
to suspend delivery of PRODUCT(S) on outstanding purchase orders or
revoke existing acceptances. Default by an Affiliate shall not affect
any other Affiliate party to this Agreement.
(c) SELLER will defer or cancel shipment of items subject to purchase orders
upon CUSTOMER's written request, if that request is received by SELLER a
reasonable time prior to the scheduled shipment date. All deferments and
cancellations will be subject to certain charges as a percentage of the
discounted prices of the items to be deferred or canceled. That
percentage will depend upon the number of days prior to the scheduled
shipment date that SELLER receives a written request for deferment, or
cancellation as follows:
<TABLE>
<CAPTION>
Percentage Percentage
Days Deferment Cancellation
Notice Charge Charge
<S> <C> <C>
Beyond **% of **% **%
Delivery Lead Time
Interval
**% or less of **% **%
Delivery Lead Time
Interval
</TABLE>
<PAGE>
If equipment canceled is sold by SELLER within ****** (**) days of
requested delivery date, then no cancellation charges will apply. If
equipment canceled is sold by SELLER but not within ****** (**) days of
requested delivery date, then a ** percent (*%) charge will apply.
CUSTOMER will have no right to defer shipment of any item developed,
made or modified to CUSTOMER's special order. Any request for deferment
of any item for more than ***** (**) days, and the third (3rd) request
for any deferment of shipment of any item, will be treated as a
cancellation of the deferred shipment and a new order.
38. TERMINATION
(a) CUSTOMER may terminate this Agreement without cause, effective
immediately, upon written notice to the other party.
(b) Upon termination of this Agreement, without cause pursuant to this
Section, CUSTOMER shall not be liable to SELLER, either for compensation
or for damages of any kind or character whatsoever, whether on account of
the loss by SELLER of present or prospective profits on sales or
anticipated sales, or expenditures, investments or commitments made in
connection therewith or in connection with the establishment, development
or maintenance of SELLER'S business, or on account of any other cause or
thing whatsoever, provided that termination shall not prejudice or
otherwise affect the rights or liabilities of SELLER with respect to
PRODUCT(S) theretofore ordered hereunder, or any indebtedness then owing
by either party to the other.
(c) Either party may terminate this Agreement, effective immediately, without
liability for said termination, upon written notice to the other party,
if any of the following events occur:
(1) The other files a voluntary petition in bankruptcy;
(2) The other is adjudged bankrupt;
(3) A court assumes jurisdiction of the assets of the other under a
federal reorganization act;
(4) A trustee or receiver is appointed by a court for all or a
substantial portion of the assets of the other;
(5) The other becomes insolvent of suspends its business;
<PAGE>
(6) The other makes an assignment of its assets for the benefit of its
creditors except as required in the ordinary course of business; or
(7) The identity of the other's business is materially changed by sale
of its business, transfer of control of its outstanding stock,
merger or otherwise.
(d) Either party may immediately terminate this Agreement for a material
breach or default of any of the terms, conditions or covenants of this
Agreement by the other, provided that such termination may be made only
following the expiration of a thirty (30) day period during which the
other party has failed to cure such breach after having been given
written notice of such breach. This paragraph shall not apply to
CUSTOMER'S cancellations or SELLER'S revocations under Section 37.
39. NOTICES
Any notice or demand given under the terms of this Agreement or pursuant to
statute shall be in writing and shall be given or made by telegram, telecopy or
similar communication or by certified or registered mail return receipt
requested, proper postage paid and addressed to the respective parties as
follows:
To CUSTOMER:
GTE Supply
700 Hidden Ridge
Irving, Texas 75038
Attention: Director - Central Procurement (HQW02B28)
and
GTE Service Corporation
700 Hidden Ridge
Irving, Texas 75038
Attention: Director - CPS Standardization (HQW01N60)
and
GTE Supply
GTE Place, West Airfield Drive
DFW Airport, Texas 75261
Attention: Director - Materials Management/Purchasing (D03B58)
and
<PAGE>
GTE Service Corporation
700 Hidden Ridge
Irving, Texas 75038
Attention: Director - Consumer Network Services (HQE02B60)
<PAGE>
To SELLER:
Digital Sound Corporation
6307 Carpinteria Avenue
Carpinteria, California 93013
Attention: Vice President, Sales
Such notice or demand shall be deemed to have been given or made when received
or seventy-two (72) hours after being sent whichever occurs first, or upon
electronic confirmation of receipt, if sent by telegraph or telecopy. The above
may be changed at any time by giving thirty (30) days prior written notice as
above provided.
40. REGISTRATION
PRODUCT(S) furnished hereunder shall comply, to the extent applicable, with the
requirements of the Federal Communications Commission's Rules and Regulations,
as may be amended, including those sections concerning the labeling of such
PRODUCT(S) and the suppression of radiation to specified levels. If the
PRODUCT(S) generates interference harmful to radio communications, and such
PRODUCT(S) was installed in accordance with such Rules and Regulations, then
SELLER shall provide to CUSTOMER methods for suppressing the interference. If
the interference cannot be reasonably suppressed, SELLER shall, at CUSTOMER'S
option, accept return of the PRODUCT(S), refund to CUSTOMER the price paid for
the PRODUCT(S) and bear all expenses for removal and shipment of such
PRODUCT(S). Nothing herein shall be deemed to diminish or otherwise limit
SELLER'S obligations under respective "WARRANTY" provisions herein.
41. NONWAIVER
Either party's failure to enforce any of the provisions of this Agreement and/or
any purchase order or to exercise any option hereunder shall in no way be
construed as a waiver of such provisions, rights, or options or in any way be
deemed to affect the validity of this Agreement or any purchase order.
42. SEVERABILITY
If any of the provisions of this Agreement shall be invalid or unenforceable,
such invalidity or unenforceability shall not invalidate or render unenforceable
the entire Agreement, but rather the entire Agreement shall be construed as if
not containing the particular invalid or unenforceable provision or provisions,
and the rights and obligations of SELLER and CUSTOMER shall be construed and
enforced accordingly.
43. SECTION HEADINGS
The headings of the sections herein are inserted for convenience only and are
not intended to affect the meaning or interpretation of this Agreement.
<PAGE>
44. SURVIVAL OF OBLIGATIONS
The respective obligations of SELLER and CUSTOMER under this Agreement which by
their nature would continue beyond the termination, cancellation or expiration
hereof, shall survive termination, cancellation or expiration hereof.
45. CHOICE OF LAW
The construction, interpretation and performance of this Agreement shall be
governed by and construed in accordance with the domestic laws of the state of
Texas.
46. ENTIRE AGREEMENT
This Agreement and the exhibits hereto constitute the entire agreement between
SELLER and CUSTOMER. No modifications shall be made to this Agreement unless in
writing and signed by appropriate representatives of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
their authorized corporate representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Harry Bruner /s/ C. W. Barlow
- ------------------- -------------------
Harry Bruner C. W. Barlow
Vice President, Sales President
Dated: December 21, 1992 Dated: January 13, 1993
Approved as to form and legality
/s/ Connie E. Nicholos
-------------------------
Attorney, GTE Telephone Operations
Dated: December 15, 1992
<PAGE>
EXHIBIT A: Revised List of GTE Affiliated Entities that are entitled to purchase
under the Purchase Agreement.
EXHIBIT B: DGSD Domestic Version Price/Product List
EXHIBIT C: DGSD Product Pricing Discount for GTE
EXHIBIT D: GTE Bar Coding
EXHIBIT E: GTE Shipping and Carrier Routing Instructions
EXHIBIT F: DGSD Product(S) Delivery Interval
EXHIBIT G: GTE Packaging Configuration Definitions
EXHIBIT H: GTE Standardization Policy
EXHIBIT I: GTE Quality Assurance Reporting
EXHIBIT J: GTE Product(S) Services And Support Requirements
Exhibit J ATTACHMENT A: DGSD Product(S) Warranty
Exhibit J ATTACHMENT B: DGSD Product Repair Rates
Exhibit J ATTACHMENT C: DGSD Repair Parts Pricing
Exhibit J ATTACHMENT D: DGSD Working Hour Schedule & Contact Information &
Escalation Matrix
Exhibit J ATTACHMENT E: DGSD Training Rates
Exhibit J ATTACHMENT F: GTE Training Standards
EXHIBIT K: DGSD'S Additional Software Licensing Terms
<PAGE>
AMENDMENT NO. 1
TO
PURCHASE AGREEMENT NO. 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
This Amendment No. 1 to the Purchase Agreement - No. 120900-92-01 (the
"Agreement"), by and between GTE Communication Systems Corporation ("CUSTOMER")
for the benefit of itself and the GTE Affiliated Entities (as defined in the
Agreement) and Digital Sound Corporation ("SELLER"), shall be effective as of
September 30, 1993.
WHEREAS CUSTOMER and SELLER desire to amend Exhibit A to the Agreement, GTE
Affiliated Entities; and
WHEREAS CUSTOMER and SELLER desire to amend Exhibit J, Section 6, Product(s)
Maintenance; and
WHEREAS CUSTOMER and SELLER desire to amend Exhibit J, Attachment E,
Comprehensive Hardware and Software Maintenance For Non-Warranty Products; and
WHEREAS CUSTOMER and SELLER desire to amend Agreement to include Section 47,
DISPUTE RESOLUTION.
NOW, THEREFORE, the parties agree that the Agreement is hereby amended as
follows:
1. Exhibit A to the Agreement, GTE Affiliated Entities, is hereby deleted in
its entirety and replaced with a new Exhibit A, GTE Affiliated Entities,
attached hereto.
2. In Exhibit J, Section 6 to the Agreement, Product(s) Maintenance, the
words "shall be in accordance with the terms and conditions as set forth
in Attachment E" shall be replaced with "pursuant to issuance of
CUSTOMER'S purchase order shall be in accordance with the terms and
conditions as set forth in Attachment E for services provided for 1993.
Services provided by SELLER to CUSTOMER beginning January 1, 1994,
pursuant to issuance of CUSTOMER'S purchase order, shall be mutually
agreed upon by year end 1993."
3. Exhibit J, Attachment E to the Agreement, Comprehensive Hardware and
Software Maintenance For Non-Warranty Products is hereby deleted and
<PAGE>
replaced in its entirety with a new Attachment E, Comprehensive Hardware
and Software Maintenance For Non-Warranty Products, attached-hereto.
4. The Agreement shall be amended to include Section 47, Dispute Resolution,
as follows:
47. DISPUTE RESOLUTION
(a) The parties desire to resolve disputes arising out of this Agreement
without litigation. Accordingly, except for action seeking a
temporary restraining order or injunction related to the purposes of
this Agreement, or suit to compel compliance with this dispute
resolution process, the parties agree to use the following
alternative dispute resolution procedure as their sole remedy with
respect to any controversy or claim arising out of or relating to
this Agreement or its breach.
(b) At the written request of a party, each party shall appoint a
knowledgeable, responsible representative to meet and negotiate in
good faith to resolve any dispute arising under this Agreement. The
parties intend that these negotiations be conducted by non-lawyer,
business representatives. The discussions shall be left to the
discretion of the representatives. Upon agreement, the
representatives may utilize other alternative dispute resolution
procedures such as mediation to assist in the negotiations.
Discussions and correspondence among the representatives for
purposes of these negotiations shall be treated as confidential
information developed for purposes of settlement, exempt from
discovery and production, which shall not be admissible in the
arbitration described below or in any lawsuit without the
concurrence of all parties. Documents identified in or provided
with such communications, which are not prepared for purposes of the
negotiations, are not so exempted and may, if otherwise admissible,
be admitted in evidence in the arbitration or lawsuit.
(c) If the negotiations do not resolve the dispute within sixty (60)
days of the initial written request, the dispute shall be submitted
to binding arbitration by a single arbitrator pursuant to the
Commercial Arbitration Rules of the American Arbitration
Association. A party may demand such arbitration in accordance with
the procedures set out in those rules. Discovery shall be
controlled by the arbitrator and shall be permitted to the extent
set out in this Section. Each party may submit in writing to a
party, and that party shall so respond, to a maximum of any
combination of thirty-five (35) (none of which
<PAGE>
may have subparts) of the following: interrogatories, demands to
produce documents and requests for admission. Each party is also
entitled to take the oral deposition of one (1) individual of
another party. Additional discovery may be permitted upon mutual
agreement of the parties. The arbitration hearing shall be commenced
within sixty (60) days of the demand for arbitration and the
arbitration shall be held in Dallas, Texas. The arbitrator shall
control the scheduling so as to process the matter expeditiously.
The parties may submit written briefs. The arbitrator shall rule on
the dispute by issuing a written opinion within thirty (30) days
after the close of hearings. The times specified in this Section may
be extended upon mutual agreement of the parties or by the
arbitrator upon a showing of good cause. Judgement, upon the award
rendered by the arbitrator may be entered in any court having
jurisdiction.
(d) Each party shall bear its own cost of these procedures. A party
seeking discovery shall reimburse the responding party the cost of
production of documents (to include search time and reproduction
time costs). The parties shall equally share the fees of the
arbitration and the arbitrator.
5. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the
Agreement to be executed by their duly authorized representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ E. Hovanek /s/ Larry K. Henry
- ---------------- --------------------
E. Hovanek Larry K. Henry
Vice President, Finance Vice President - General Manager
Dated: October 27, 1993 Dated: October 8, 1993
APPROVED AS TO FORM AND LEGALITY
/s/ (illegible)
------------------
Attorney GTE Telephone Operations 10/6/93
<PAGE>
ATTACHMENTS TO AMENDMENT NO. 1
EXHIBIT A: Revised List of GTE Affiliated Entities that are entitled to purchase
under the Purchase Agreement.
Exhibit J ATTACHMENT E: Terms for Comprehensive Hardware And Software
Maintenance For Non-Warranty Products
<PAGE>
January 7, 1993
GTE Communication Systems Corporation
GTE Supply Division
GTE Place
West Airfield Drive
DFW Airport, TX 75261
RE: Amendment 2 [Software Escrow Deposit] to Purchase Agreement
Gentlemen:
GTE Communication Systems Corporation ("GTE") and Digital Sound Corporation
("DGSD") are parties to Purchase Agreement No. 120900-92-01 executed on January
13, 1993 ("the Agreement"). The parties wish to amend the subject Agreement to
provide for a software escrow deposit for the benefit of GTE. In furtherance of
this premise, GTE agrees to execute the Licensee of Record Acceptance document
attached hereto and incorporated herein by this reference. Upon execution by
GTE, GTE will become a Licensee of Record on DGSD's Escrow No. 490-9 at Brambles
NSD, Inc. located in San Jose, CA 95131.
This document and its attachments shall become Amendment 2 to the Agreement. In
all other respects the Agreement is ratified and confirmed and shall continue in
full force and effect according to its terms and conditions.
Very truly yours,
AGREED AND ACCEPTED
/s/ Keith Beckwith for GTE COMMUNICATION SYSTEMS
- ---------------------
Keith Beckwith
Director, VIS Sales
by: /s/ Michelle Monger
-----------------------
Michelle Monger
Approved as to Form
/s/ Joe A. Garza
------------------
Law Dept. 2/1/94
<PAGE>
ATTACHMENTS TO AMENDMENT NO. 2
Licensee Of Record Acceptance Relating To Software Deposit Agreement
Software Deposit Agreement Between Digital Sound Corporation And National Safe
Depository
National Safe Depository Inventory List InfoMail And Univox Source Q3 1993
<PAGE>
AMENDMENT NO. 3
TO
PURCHASE AGREEMENT NO. 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
This Amendment No. 3 to the Purchase Agreement No. 120900-92-01 (the
"Agreement"), by and between GTE Communication Systems Corporation ("CUSTOMER")
for the benefit of itself and the GTE Affiliated Entities (as defined in the
Agreement) and Digital Sound Corporation ("SELLER"), shall be effective as of
January 1, 1994.
WHEREAS CUSTOMER and SELLER desire to amend Exhibit J, Attachment E, to include
Attachment E-1 to the Agreement, Comprehensive Hardware and Software Maintenance
for Non-Warranty PRODUCT(S).
NOW, THEREFORE, the parties agree that the Agreement is hereby amended as
follows:
1. Exhibit J, Attachment E, to the Agreement, is hereby amended to include
Attachment E-1 that is attached hereto and incorporated herein by this
reference.
2. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to the
Agreement to be executed by their duly authorized representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Jim Eby /s/ Larry K. Henry
- ------------------------- -------------------------------
Jim Eby Larry K. Henry
Vice President, Chief Quality Vice President - General Manager
and Operations Officer
Dated: March 31, 1994 Dated: April 8, 1994
APPROVED AS TO FORM
/s/ Joe A. Garza
----------------
Law Dept. 3/25/94
<PAGE>
ATTACHMENT TO AMENDMENT NO. 3
Exhibit J ATTACHMENT E-1: Comprehensive Hardware And Software Maintenance For
Non-Warranty Products
<PAGE>
AMENDMENT NO. 4
TO
PURCHASE AGREEMENT NO. 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
This Amendment No. 4 to Purchase Agreement No. 120900-92-01 (the "Agreement"),
by and between GTE Communication Systems Corporation ("CUSTOMER") for the
benefit of itself and the GTE Affiliated Entities (as defined in the Agreement)
and Digital Sound Corporation ("SELLER"), shall be effective as of June 15,
1994.
WHEREAS CUSTOMER and SELLER desire to set out certain terms and conditions
applicable to purchases by CUSTOMER of SELLER'S PRODUCT(S) for VoiceServer
Systems with fax capability during 1994 and 1995.
NOW, THEREFORE, the parties agree that the Agreement is hereby amended as
follows:
1. EXHIBIT B is hereby amended to include EXHIBIT B-1 ("VOICESERVER SYSTEMS
WITH FAX CAPABILITIES PRODUCTS & PRICING") which is attached hereto and
incorporated herein by this reference.
2. The following paragraph (d) is hereby added to Section 21, QUALITY
ASSURANCE REPORTING as follows:
(d) SELLER agrees to utilize its Quality First TQM Program to provide
for continuous improvement in quality levels of PRODUCT(S). The
parties agree to jointly develop a process for the ongoing
monitoring of PRODUCT reliability, system availability, and progress
reporting.
3. In Section 35, LIABILITY, paragraph (c) is hereby deleted in its entirety
and replaced with the following:
(c) SELLER agrees to maintain during the term hereof all insurance
and/or bonds required by law or this Agreement, including, but not
limited to (i) Workers' Compensation and related insurance as
prescribed by the law of the state in which SELLER'S services are
performed; (ii) employer's liability insurance with limits of at
least five hundred thousand dollars ($500,000) for each occurrence,
and (iii) comprehensive general liability insurance including
products liability, and, if the use of motor vehicles is required,
comprehensive motor vehicle
<PAGE>
liability insurance, each with limits of at least two million
dollars ($2,000,000) for combined single limit for bodily injury,
including death, and/or property damage. SELLER shall cause CUSTOMER
to be included as an Additional Insured under said policies (as "GTE
Corporation and its affiliates and subsidiaries") and CUSTOMER'S
coverage under such policies shall be primary. SELLER shall, prior
to rendering such services, furnish certificates or evidence of the
foregoing insurance indicating the amount and nature of such
coverage, the expiration date of each policy, and stating that no
material change which affects CUSTOMER'S coverage and rights to
collect under any such policy or cancellation of any such policy
shall be effective unless thirty (30) days' prior written notice is
given to CUSTOMER. Notwithstanding the above, SELLER and CUSTOMER
shall each have the option, when permitted by law, to self-insure
any or all of the foregoing risks. CUSTOMER shall provide SELLER
with written notification prior to the filing of any claim against
any such policy.
4. The following paragraph (o) is hereby added to Section 11, TRAINING of
EXHIBIT J, GTE PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS:
(o) For each VoiceServer System with fax capabilities purchased by
CUSTOMER in 1994 and 1995, SELLER shall provide, at no cost to
CUSTOMER, ****** training slots in a Fax Administration training
class. CUSTOMER employees attending these training sessions must
have previously completed either SELLER'S InfoMail Software
Administration training class or SELLER'S Installation and
Maintenance training classes, costs of which shall be in accordance
with paragraph (f) above. If, at the request of CUSTOMER, such Fax
Administration training class(es) are conducted at a location other
than SELLER'S principal place of business, CUSTOMER shall be
responsible for payment to SELLER for instructor's reasonable travel
and living expenses. In no event shall CUSTOMER be responsible for
such expenses which exceed what CUSTOMER would reasonably reimburse
its own employees for such travel and living taken at the request
and behalf of CUSTOMER.
5. The following subparagraph (1) is hereby added to paragraph (a) of
Section 1, WARRANTY of EXHIBIT J, GTE PRODUCT(S) SERVICES AND SUPPORT
REQUIREMENTS:
<PAGE>
(1) Notwithstanding the provisions of Paragraph (a) above, the warranty
period for all VoiceServer Systems with fax capability purchased
hereunder in 1994 shall be the longer of one (1) year from the date
the PRODUCT(S) are placed in service, such date not to be later than
ninety (90) days after delivery to CUSTOMER, or through December 31,
1995, whichever date occurs later. All other terms and conditions
of this Section 1, WARRANTY shall apply to all VoiceServer Systems
with fax capabilities for the duration of this warranty period. The
warranty period for VoiceServer Systems with fax capabilities
purchased by CUSTOMER in 1995 shall be as described in Paragraph (a)
above.
6. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 4 to the
Agreement to be executed by their duly authorized representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Keith M. Beckwith /s/ Larry K. Henry
- -------------------------- -------------------------------
Keith M. Beckwith Larry K. Henry
Vice President, Sales Vice President - General Manager
Dated: October 21, 1994 Dated: October 10, 1994
APPROVED AS TO FORM
/s/ Joe A. Garza
------------------
Law Dept. 10/04/94
<PAGE>
ATTACHMENT TO AMENDMENT NO. 4
EXHIBIT B-1
Product Description & Pricing Information for VoiceServer Systems With Fax
Capabilities
<PAGE>
AMENDMENT NO. 5
TO
PURCHASE AGREEMENT NO. 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
This Amendment No. 5 to Purchase Agreement No. 120900-92-01 (the "Agreement"),
by and between GTE Communication Systems Corporation ("CUSTOMER") for the
benefit of itself and the GTE Affiliated Entities (as defined in the Agreement)
and Digital Sound Corporation ("SELLER"), shall be effective as of December 31,
1994.
WHEREAS, the Agreement bears a termination date of January 12, 1995; and
WHEREAS CUSTOMER and SELLER desire to extend the term of the Agreement.
NOW, THEREFORE, the parties agree that the Agreement is further amended as
follows:
1. Section 1, TERM is hereby amended to extend the term of the Agreement
until February 28, 1995.
2. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 5 to the
Agreement to be executed by their duly authorized representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Mark C. Ozur /s/ signed on behalf of M. R. Redmond
- ------------------ ---------------------------------------
Mark C. Ozur M. R. Redmond
President and CEO Director - Contract Management
Dated: December 31, 1994 Dated: 12/27/94
APPROVED AS TO FORM
/s/ Joe A. Garza
------------------
Law Dept. 12/19/94
<PAGE>
AMENDMENT NO. 6
TO
CONTRACT NUMBER 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
This Amendment No. 6 to Contract Number 120900-92-01 (the "Agreement"), by and
between GTE Communication Systems Corporation ("CUSTOMER") for the benefit of
itself and the GTE Affiliated Entities (as defined in the Agreement) and Digital
Sound Corporation ("SELLER"), shall be effective as of January 1, 1995.
WHEREAS, the Agreement bears a termination date of January 12, 1995; and
WHEREAS, Amendment No. 5 to the Agreement extended the termination date to
February 28, 1995; and
WHEREAS CUSTOMER and SELLER desire to extend the term of the Agreement; and
WHEREAS CUSTOMER and SELLER desire to amend Exhibit A, GTE Affiliated Entities,
Exhibit B, Supplier Product(s), Exhibit C, Supplier Product(s) Pricing, Exhibit
E, GTE Shipping and Carrier Routing Instructions, EXHIBIT H, GTE Standardization
Policy, and certain attachments to EXHIBIT J, GTE Product(s) Services and
Support Requirements; and
WHEREAS CUSTOMER and SELLER desire to make other modifications to the terms and
conditions of the Agreement.
NOW, THEREFORE, the parties agree that the Agreement is hereby amended as
follows:
1. In Section 1, TERM, the first sentence is hereby deleted in its entirety
and replaced with the following:
This Agreement shall be effective on the date of signing of this
Agreement, and shall continue in effect through December 31, 1996 unless
terminated or modified by either party in accordance with the provisions
of this Agreement.
2. In Section 13, PACKAGING, the third sentence is hereby deleted in its
entirety and replaced with the following:
<PAGE>
Corrugated shipping containers shall comply with the requirements of Item
222 of the National Motor Freight Code, Series NMFC 100-S, which may be
amended from time to time.
3. Section 18, TECHNOLOGICAL OR SPECIFICATION CHANGE/PRODUCT(S)
DELETION/SUBSTITUTION, of the Agreement is hereby deleted in its
entirety.
4. Section 19, UNSATISFACTORY CONDITION SITUATIONS, of the Agreement is
hereby deleted in its entirety.
5. Section 20, PRODUCT(S) CHANGES, of the Agreement is hereby deleted in its
entirety.
6. Section 21, QUALITY ASSURANCE REPORTING, of the Agreement is hereby
deleted in its entirety.
7. The following paragraph (c) is hereby added to Section 30, ASSIGNMENT:
(c) If CUSTOMER sells, exchanges or otherwise disposes of all or a
portion of the assets of, or CUSTOMER's interest in, any business
unit in which PRODUCT are used, then CUSTOMER shall have the right,
upon written notice to SELLER, to assign to such third party all
licenses and rights granted under this Agreement with respect to
such PRODUCT; provided that the third party agrees to be bound by
all obligations of CUSTOMER to SELLER that pertain to the PRODUCT.
8. In Section 39, NOTICES, the address for the Director-Materials
Management/Purchasing is hereby amended as follows:
GTE Supply
5615 High Point Drive
PO Box 169001
Irving, Texas 75016-9001
Attention: Director - Materials Management/Purchasing (HQA02JO2)
9. EXHIBIT A to the Agreement, "GTE AFFILIATED ENTITIES" is hereby amended
to substitute the GTE Affiliated Entities listed on the attached Exhibit
A(1).
10. EXHIBIT B to the Agreement, "SUPPLIER PRODUCT(S)", and EXHIBIT B-1 to the
Agreement, "VOICESERVER SYSTEMS WITH FAX CAPABILITIES PRODUCT(S) &
PRICING" as amended in Amendment No.
<PAGE>
4 to the Agreement, is hereby amended to substitute the Supplier
Product(s) listed on the attached Exhibit B(1).
11. EXHIBIT C to the Agreement, "SUPPLIER PRODUCT(S) PRICING" is hereby
amended to substitute the Supplier Product(s) Pricing listed on the
attached Exhibit C(1).
12. EXHIBIT E to the Agreement, "GTE SHIPPING AND CARRIER ROUTING
INSTRUCTIONS" is hereby amended to substitute the GTE Shipping and
Carrier Routing Instruction (May 1994) listed on the attached Exhibit
E(1).
13. EXHIBIT G to the Agreement, "GTE PACKAGING CONFIGURATION DEFINITIONS" is
hereby amended to substitute the GTE Packaging Configuration Definitions
listed on the attached Exhibit G(1).
14. EXHIBIT H to the Agreement, "GTE STANDARDIZATION POLICY" is hereby
amended to substitute the Standardization Policies, Procedures and Terms
listed on the attached Exhibit H(1).
15. Section 6, PRODUCT(S) MAINTENANCE of Exhibit J, GTE PRODUCT(S) SERVICES
AND SUPPORT REQUIREMENTS, as amended in Amendment No. 1 to the Agreement,
is deleted in its entirety and replaced with the following:
Hardware and software maintenance for each year of this Agreement
pursuant to issuance of CUSTOMER's purchase orders shall be in accordance
with the terms and conditions set forth in Attachment E, which may be
changed each year as mutually agreed to by the parties.
16. ATTACHMENT C, "SUPPLIER REPAIR PARTS PRICING" of EXHIBIT J, GTE
PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS, is hereby amended to
substitute the Supplier Repair Parts Pricing listed in the attached
Attachment C(1).
17. ATTACHMENT D, "SELLER WORKING HOUR SCHEDULE AND CONTACT INFORMATION" of
EXHIBIT J, GTE PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS, is hereby
amended to substitute the Seller Working Hour Schedule and Contact
Information & Escalation Matrix listed in the attached Attachment D(1).
18. ATTACHMENT E(1), "COMPREHENSIVE HARDWARE AND SOFTWARE MAINTENANCE FOR
NON-WARRANTY PRODUCTS" of EXHIBIT J, GTE PRODUCT(S) SERVICES AND SUPPORT
REQUIREMENTS, is hereby amended to substitute the Hardware and Software
Maintenance listed in the attached Attachment E(1).
<PAGE>
19. ATTACHMENT G, "SELLER TRAINING RATES" of EXHIBIT J, GTE PRODUCT(S)
SERVICES AND SUPPORT REQUIREMENTS, is hereby amended to substitute the
Supplier Training Rates listed in the attached Attachment G(1).
20. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the
Agreement to be executed by their duly authorized representatives.
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Keith M. Beckwith /s/ Larry K. Henry
- ----------------------- --------------------
Keith M. Beckwith Larry K. Henry
Vice President, Sales Vice President-General Manager
Dated: March 9, 1995 Dated: March 6, 1995
APPROVED AS TO FORM
/s/ Joe A. Garza
------------------
Law Dept. 03/01/95
<PAGE>
Attachments To Amendment No. 6
Exhibit A(1): Revised List Of GTE Affiliated Entities That Are Entitled To
Purchase Under The Purchase Agreement.
Exhibit B(1): DGSD Domestic Version Price/Product List
Exhibit C(1): DGSD Product Pricing Discount For GTE
Exhibit E(1): GTE Packaging, Shipping And Carrier Routing Instruction
Exhibit E(1) Attachment A: Detail Of 42 X 42 Inch Pallet To Be Used In Shipping
Exhibit E(1) Attachment B: GTE Area Routing Instructions And Carrier Contacts
Exhibit E(1) Attachment C: Carrier Routing Instruction For GTE Supply/GTE
Telephone Operations
Exhibit G(1): GTE Packaging Configuration Definitions
Exhibit H(1): GTE Standardization Policies, Procedures And Terms
Exhibit J Attachment C(1): DGSD Repair And Exchange Pricing For GTE
Exhibit J Attachment D(1): DGSD Contact Information And Escalation Matrix In The
Event Of Product Degradation
Exhibit J Attachment E(1): Hardware And Software Maintenance Terms
Exhibit J Attachment G(1): DGSD Training Rates For GTE And Process Description
For Training Courses Available
<PAGE>
AMENDMENT NUMBER 7
TO
PRODUCT PURCHASE AGREEMENT NUMBER 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
1. PARTIES
This Amendment Number 7 to Product Purchase Agreement Number 120900-92-01
(Agreement) between Digital Sound Corporation, a California corporation, with
offices at 6307 Carpinteria Avenue, Carpinteria, California 93013 (SELLER) and
GTE Communication Systems Corporation, a Delaware corporation, acting through
its GTE Supply Division on behalf of itself and its Affiliates, with offices at
700 Hidden Ridge, Irving, Texas 75038 (CUSTOMER).
2. EFFECTIVE DATE
This Amendment Number 7 shall be effective January 1, 1996.
3. CHANGES TO TERMS
(a) Exhibit A(1), GTE AFFILIATED ENTITIES, as amended in Amendment Number 6
dated January 1, 1995, is deleted in its entirety and replaced with a new
Exhibit A(2), GTE AFFILIATED ENTITIES, included as Attachment I to this
Amendment.
(b) Exhibit B(1), SUPPLIER PRODUCT(S), as amended in Amendment Number 6, is
deleted in its entirety and replaced with a new Exhibit B(2), SUPPLIER
PRODUCT(S), included as Attachment II to this Amendment.
(c) The first sentence of subsection 3(b) of Exhibit J, GTE PRODUCT(S)
SERVICES AND SUPPORT REQUIREMENTS, is deleted in its entirety and
replaced with the following:
"SELLER agrees to sell to CUSTOMER the replacement parts or proprietary
components for said repairs at prices as set forth in the column
identified as "LIST PRICE" of Attachment C(2), SUPPLIER REPAIR PARTS
PRICING."
(d) Subsection 5(a) of Exhibit J, GTE PRODUCT(S) SERVICES AND SUPPORT
REQUIREMENTS, is deleted in its entirety and replaced with the following:
"(a) SELLER agrees, in the event of a failure that causes a customer
service impairment caused by PRODUCT(S)
<PAGE>
furnished under this Agreement, to ship replacement parts at the
most expedient means available within twenty four (24) hours of
verbal notification by CUSTOMER. There shall be no charge for the
expedited service.
(1) If the defective part is under warranty, there shall be no
charge for the replacement part, providing, however, that
CUSTOMER returns such defective part within sixty (60) days
after SELLER's shipment of the replacement part. If SELLER has
not received such defective part within such sixty (60) day
period, SELLER may invoice CUSTOMER for such replacement part at
the price as set forth in the column identified as "LIST PRICE"
of Attachment C(2), SUPPLIER REPAIR PARTS PRICING."
(2) If the defective part is not under warranty, SELLER shall
invoice CUSTOMER for such replacement part at the price as set
forth in the column identified as "30 DAYS R/E PRICE" of
Attachment C(2) of this Exhibit J. If CUSTOMER does not return
such defective part to SELLER within sixty (60) days after
SELLER's shipment of the replacement part, SELLER may invoice
CUSTOMER for the difference between the "30 DAYS R/E PRICE" and
the "LIST PRICE" for such replacement part as set forth in
Attachment C(2)."
(e) Attachment C(1), SUPPLIER REPAIR PARTS PRICING, of Exhibit J, GTE
PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS, as amended in Amendment
Number 6, is deleted in its entirety and replaced with a new Attachment
C(2), SUPPLIER REPAIR PARTS PRICING, included as Attachment III to this
Amendment.
(f) Attachment E(1), HARDWARE AND SOFTWARE MAINTENANCE, of Exhibit J, GTE
PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS, as amended in Amendment
Number 6, is deleted in its entirety and replaced with a new Attachment
E(2), HARDWARE AND SOFTWARE MAINTENANCE, included as Attachment IV to
this Amendment.
4. ALL OTHER TERMS
All other terms and conditions of the Agreement shall remain in full force and
effect.
Each party represents that it has executed this Agreement through its authorized
corporate representative:
<PAGE>
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ Keith M. Beckwith /s/ Gary D. Klingsporn
- ----------------------- ------------------------
Keith M. Beckwith Gary D. Klingsporn
Vice President, Sales Contract Manager
Dated: January 18, 1996 Dated: January 16, 1996
APPROVED AS TO FORM
/s/ Joe A. Garza
------------------
Law Dept. 01/15/96
<PAGE>
ATTACHMENTS to AMENDMENT NO. 7
EXHIBIT A(2): Revised List of GTE Affiliated Entities that are entitled to
purchase under the Purchase Agreement.
EXHIBIT B(2): DGSD Domestic Version Price/Product List
Exhibit J ATTACHMENT C(2): DGSD'S Repair And Exchange Pricing For GTE
Exhibit J ATTACHMENT E(2): Terms for Comprehensive Hardware And Software
Maintenance For Non-Warranty Products
<PAGE>
AMENDMENT NUMBER 8
TO
PRODUCT PURCHASE AGREEMENT NUMBER 120900-92-01
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
1. PARTIES
This Amendment Number 8 to Product Purchase Agreement Number 120900-92-01
(Agreement) between Digital Sound Corporation, a California corporation, with
offices at 6307 Carpinteria Avenue, Carpinteria, California 93013 (SELLER) and
GTE Communication Systems Corporation, a Delaware corporation, acting through
its GTE Supply Division on behalf of itself and its Affiliates, with offices at
700 Hidden Ridge, Irving, Texas 75038 (CUSTOMER).
2. EFFECTIVE DATE
This Amendment Number 8 shall be effective January 1, 1997.
3. CHANGES TO TERMS
(a) Section 1, TERM, is amended as follows
The words . . . "continue in effect through December 31, 1996" . . .
shall be deleted and replaced with . . . "shall continue in effect until
December 31, 1998".
(b) Subsection 24(b), of Section 24, INFRINGEMENT is deleted in its entirety
and replaced with the following:
24. INFRINGEMENT
(b) Except for the negligence provisions, the procedures set forth
in subsection (b) of Section 35, INDEMNIFICATION AND INSURANCE
shall apply in the case of any claims of infringement,
misappropriation or violation of intellectual property rights
for which indemnification will be sought.
(c) Section 35, LIABILITY and Amendment No. 4 item number 3 are deleted in
its entirety and replaced with the following:
35. INDEMNIFICATION AND INSURANCE
(a) SELLER shall indemnify, defend, and hold harmless CUSTOMER and
its affiliates, officers, agents, and employees, from all
claims, suits, actions, demands, damages, liabilities, expenses
(including fees and disbursements of counsel), judgements,
settlements and penalties of every kind based on (i)
<PAGE>
personal injury, death, or property damage to the extent any of
the foregoing is proximately caused by either any defective
PRODUCT provided by SELLER, its officers, employees,
subcontractors or agents, or by the negligent or willful acts or
omissions of SELLER, its officers, employees, subcontractors or
agents, or (ii) strict liability in tort or product liability of
any other kind in connection with any PRODUCT provided by
SELLER, its officers, employees, subcontractors or agents or the
use, resale or distribution of any such PRODUCT by CUSTOMER. The
foregoing indemnity, to the extent permitted by law, shall apply
in the case of all claims that arise from the negligence,
misconduct or other fault of CUSTOMER, provided, however, that
if a claim is the result of the joint negligence, joint
misconduct, or joint fault of SELLER and CUSTOMER, the amount of
the claim for which CUSTOMER is entitled to indemnification
shall be limited to that portion of such claim that is
attributable to the negligence, misconduct or other fault of
SELLER. The obligations of this provision are in addition to
SELLER obligation to provide insurance and shall not be limited
by any limitation on the amount or type of damages, compensation
or benefits payable by SELLER under the Worker's Compensation
Acts, Longshoremen and Harborworker's Act, Disability Benefits
Act or any other employee benefit act.
(b) CUSTOMER shall promptly notify SELLER in writing of any suits,
claims or demands covered by this indemnity. Promptly after
receipt of such notice, SELLER shall assume the defense of such
claim with counsel reasonably satisfactory to CUSTOMER. If
SELLER fails, within a reasonable time after receipt of such
notice, to assume the defense with counsel reasonably
satisfactory to CUSTOMER, or if, in the reasonable judgement of
CUSTOMER, a direct or indirect conflict of interest exists
between the parties with respect to the claim, then CUSTOMER
shall have the right to undertake the defense, compromise and
settlement of such claim for the account and at the expense of
SELLER. Notwithstanding the above, if CUSTOMER in its sole
discretion so elects, CUSTOMER may also participate in the
defense of such actions by employing counsel at its own expense,
without waiving SELLER's obligations to indemnify or defend.
SELLER shall not settle or compromise any claim or consent to
the entry of any judgement without the prior written consent of
CUSTOMER and without an unconditional release of all liability
by each claimant or plaintiff to CUSTOMER. Such consent shall
be timely given and shall not be reasonably withheld.
(c) SELLER agrees to maintain during the term all insurance or bonds
required by law or this Agreement, including, but not limited to
(i) Workers Compensation and related insurance as
<PAGE>
prescribed by the law of the state in which SELLER's services
are performed or PRODUCT are delivered; (ii) employer's
liability insurance with limits of at least five hundred
thousand dollars ($500,000) for each occurrence, and (iii)
comprehensive general liability insurance including Services
liability, and, if the use of motor vehicles is required,
comprehensive motor vehicle liability insurance, each with
limits of at least two million dollars ($2,000,000) for combined
single limit for bodily injury, including death, and/or property
damage. SELLER shall cause CUSTOMER to be included as an
additional insured under said policies (as "GTE Corporation and
its affiliates and subsidiaries") and CUSTOMER's coverage under
such policies shall be primary. SELLER shall waive its rights of
subrogation against CUSTOMER for Workers' Compensation claims.
SELLER shall, prior to rendering such SERVICES, furnish
certificates or evidence of the foregoing insurance indicating
the amount and nature of such coverage, the expiration date of
each policy, and stating that no material change or cancellation
of any such policy shall be effective unless thirty (30) days'
prior written notice is given to CUSTOMER.
(d) All work performed under this Agreement by any party shall be
performed as an independent contractor and not as an agent of
any other party. Persons furnished by the respective parties
shall be solely the employees or agents of such parties,
respectively, and shall be under the sole and exclusive
direction and control of such parties. They shall not be
considered employees of the other party for any purpose. Each
party shall be responsible for compliance with all laws, rules
and regulations involving their respective employees or agents,
including (but not limited to) employment of labor, hours of
labor, health and safety, working conditions and payment of
wages. Each party shall also be responsible, respectively, for
payment of taxes, including federal, state, and municipal taxes,
chargeable or assessed with respect to its employees or agents,
such as social security, unemployment, worker's compensation,
disability insurance and federal and state income tax
withholding.
(e) The parties expressly agree and understand that SELLER's
liability shall in no event exceed ********** dollars
($*********) for any one (1) occurrence, whether the claim
arises under this Agreement, in contract, tort or otherwise.
Such limitation does not apply to loss or claims arising from
death, personal injury or damage to real or tangible personal
property or to claims of infringement.
(d) The Agreement is hereby amended to include Section 48, CENTURY
COMPLIANCE. "SELLER agrees to the terms and conditions as listed in
Exhibit L, CENTURY COMPLIANCE".
<PAGE>
(e) Exhibit A(2), GTE AFFILIATED ENTITIES, as amended in Amendment Number 7
dated January 1, 1996, is deleted in its entirety and replaced with a new
Exhibit A(3), GTE AFFILIATED ENTITIES, included as Attachment I to this
Amendment.
(f) Exhibit B(3), SUPPLIER PRODUCT(S), as amended in Amendment Number 7, is
deleted in its entirety and replaced with a new Exhibit B(3), SUPPLIER
PRODUCT(S), included as Attachment 11 to this Amendment.
(g) This Agreement is hereby amended to add Exhibit L, CENTURY COMPLIANCE,
included as Attachment III to this Amendment.
(h) Attachment E(2), HARDWARE AND SOFTWARE MAINTENANCE (1996), of Exhibit J,
GTE PRODUCT(S) SERVICES AND SUPPORT REQUIREMENTS, as amended in Amendment
Number 7 dated January 1, 1996, is deleted in its entirety and replaced
with a new Attachment E(3), HARDWARE AND SOFTWARE MAINTENANCE (1997),
included as Attachment IV to this Amendment:
4. ALL OTHER TERMS
All other terms and conditions of the Agreement shall remain in full force and
effect.
Each party represents that it has executed this Agreement through its authorized
corporate representative:
DIGITAL SOUND CORPORATION GTE COMMUNICATION SYSTEMS
CORPORATION
/s/ B. Robert Suh /s/ Richard E. Potter
- ------------------- -----------------------
B. Robert Suh Richard E. Potter
Vice President and CFO Manager-Contract/Management
Dated: February 18, 1997 Dated: February 12, 1997
APPROVED AS TO FORM AND LEGALITY
/s/ J. R. Seastrom
--------------------
Attorney, GTE Telephone Operations
Date: 2/11/97
<PAGE>
ATTACHMENTS TO AMENDMENT NO. 8
EXHIBIT A(3): Revised List of GTE Affiliated Entities that are entitled to
purchase under the Purchase Agreement.
EXHIBIT B(2): DGSD Domestic Version Price/Product List
EXHIBIT L: Details Of Century Compliance Obligation For Procured Systems
Exhibit J ATTACHMENT E(2): Terms for Comprehensive Hardware And Software
Maintenance For Non-Warranty Products
<PAGE>
EXHIBIT 10.57
AMENDMENT NUMBER 9
TO
PRODUCT PURCHASE AGREEMENT NUMBER 120900-92-01
- ----------------------------------------------
BETWEEN
GTE COMMUNICATION SYSTEMS CORPORATION
AND
DIGITAL SOUND CORPORATION
1. PARTIES
This Amendment Number 9 to Product Purchase Agreement Number 12090092-01
(Agreement) is made between Digital Sound Corporation, a California corporation,
with offices at 6307 Carpinteria Avenue, Carpinteria, California 93013
(SELLER) and GTE Communication Systems Corporation, a Delaware corporation,
acting through Its GTE Supply Division with offices at 700 Hidden Ridge,
Irving, Texas 75038 (CUSTOMER).
2. EFFECTIVE DATE
This Amendment Number 9 shall be effective October 1, 1997.
3. PURPOSE
The principal purpose of this Amendment is to provide for the commercial
availability to CUSTOMER of SELLER's Open Enhanced Application Platform,
System Software, and OnPoint Messaging, in accordance with the milestones,
specifications and other requirements set out in Attachment A to this
Amendment. The Amendment also provides for continued purchase of SELLER's
products, extension of the term of the Agreement, and other matters as set
out below.
4. PURCHASE COMMITMENT
(a) SELLER agrees to make commercially available to CUSTOMER SELLER's Open
Enhanced Application Platform, System Software, and OnPoint Messaging, in
accordance with the milestones, specifications and other requirements set
out in Attachment A to this Amendment. CUSTOMER agrees to purchase from
SELLER in the aggregate amount of fifty million dollars ($50,000,000.00)
of SELLER's PRODUCT(S) and/or related services during the period from
October 1, 1997 through the remaining term of this Agreement (the
"Purchase Commitment").
(b) If SELLER does not accomplish the development substantially in accordance
with the milestones set out in Attachment A, and does not meet the
milestones on time, with the commercial availability to CUSTOMER of the
platform, software and OnPoint Messaging that meets CUSTOMER's acceptance
and standardization criteria, by the final milestone date set out in
Attachment A, CUSTOMER may
<PAGE>
exercise the option not to be bound by the Purchase Commitment. If SELLER
does not meet an interim milestone, no later than five (5) business days
after the failed milestone date, CUSTOMER shall give SELLER written
notice setting out the nature of the failure, or the milestone shall be
deemed to have been met. SELLER shall have ten business (10) days from
receipt of the notice to cure the failure. If the failure is not cured
within this time, CUSTOMER may terminate the Purchase Commitment by
giving SELLER written notice. If the failure is cured within this time,
CUSTOMER shall give SELLER written notice confirming the cure. Unless
otherwise agreed in writing, the days consumed to cure a failure shall
not result in changes to subsequent milestone dates, which shall remain
in effect as stated in Attachment A.
(c) SELLER's timely performance of the final milestone for commercial
availability of the Open Enhanced Application Platform, System Software,
and OnPoint Messaging, as set out in Attachment A, is a condition
precedent to Customers Purchase Commitment, unless waived in writing by
CUSTOMER. If SELLER does not meet this final milestone, CUSTOMER may
terminate the Purchase Commitment, including the minimum purchase
commitment in Section 4(d) of this Amendment (if any), by giving SELLER
written notice within thirty (30) days of the date for performance of the
final milestone.
(d) If SELLER meets all of the milestones in Attachment A specified to be
completed by the end of 1998, CUSTOMER agrees to purchase a minimum of
Fifteen Million Dollars ($15,000,000) in SELLER's products and/or related
services from SELLER during the period beginning October 1, 1997, through
and including December 31, 1998, and said purchase shall be applied
towards the Fifty Million Dollar ($50,000,000) aggregate Purchase
Commitment.
(e) The milestones can only be changed by mutual written agreement between
SELLER and CUSTOMER. CUSTOMER may request modifications to deliverables
set out in Attachment A. Such request must be made in writing. Upon
receipt of such request, SELLER shall notify CUSTOMER in writing prior to
starting work on the requested modification that SELLER is capable of
performing the modification and that additional time may be required to
complete said modification. If the parties mutually agree in writing to
the delay the date(s) set out in Attachment A for SELLER's delivery of
the deliverable to make CUSTOMER's requested modification, then SELLER
shall be excused for the time period set out in the mutual agreement and
CUSTOMER will otherwise honor its Purchase Commitment.
(f) SELLER agrees that, except for the specific functions assigned to
CUSTOMER in Attachment A, SELLER is not relying on participation by
CUSTOMER in order for SELLER to meet the milestones set out in Attachment
A. Nevertheless, if SELLER's performance of the requirements set out in
Attachment A is dependent upon CUSTOMER or a CUSTOMER contractor or
supplier, and if CUSTOMER or CUSTOMER's contractor or supplier fails to
perform and such failure proximately causes SELLER to fail to timely
deliver, then SELLER shall be excused for the time period of the delay
and CUSTOMER will otherwise honor its purchase obligations.
<PAGE>
SELLER commits that it has sufficient control over all of SELLER's
subcontractors to meet the milestones, and agrees that a failure of a
subcontractor of SELLER to perform shall not excuse SELLER from meeting
the milestones.
(g) If CUSTOMER terminates the Purchase Commitment, SELLER nevertheless
agrees to use Its best efforts to support all of the platform acquired
and implemented by CUSTOMER. Termination of the Purchase Commitment does
not alter CUSTOMER's rights to purchase the platform and related products
under this Agreement.
5. RELATED AGREEMENTS
SELLER and CUSTOMER, acting through GTE Service Corporation, are
contemporaneously entering into the following related agreements: (a) Software
Professional Services Agreement; (b) Joint Software Development Agreement; (c)
Letter of Agreement Concerning Accelerated Development of Software; and (d)
Master Source Code and Technology Escrow Agreement (the 'Related Agreements").
The Master Source Code and Technology Escrow Agreement is made part of this
Agreement and is attached as Attachment E to this Amendment. In case of
conflict between terms of any of these Related Agreements and this Amendment or
this Agreement, the terms of the Related Agreements shall govern.
6. CHANGES TO TERMS
(a) Section 1, TERM, is amended as follows:
The words: 'shall continue in effect until December 31, 1998" shall be
deleted and replaced with the words: "shall continue in effect until
March 31, 2001."
(b) Section 6, PURCHASING FORECAST, is deleted in its entirety and replaced
with a new Section 6, PURCHASING FORECAST, as follows:
"Customer estimates that ft may purchase from Seller, in the aggregate
amount, the purchase forecast quantities set out in Attachment B.
Attachment B may be amended from time to time by the mutual agreement of
the parties. The purchase forecast is only an estimate or projection and
is not be to construed as a commitment to purchase that or any amount.
In no case shall Customer be responsible for any bill back or related
nonconformance charges should Customer's purchase fail to meet the
projected levels in Attachment B, nor shall failure to purchase the
estimated amount of Seller's Products in Attachment B, or any of Seller's
Products be a breach of this Agreement by customer."
(c) Section 25, USE OF CONFIDENTIAL INFORMATION, is amended by adding the
following subsection (d):
"(d) Attachment A and A-1 through A-7 are designated as confidential
business information of the party supplying the material, and are to
be treated as Information under the Agreement. The parties shall
not use this Information, or any portion thereof or any derivations
therefrom, for any purpose not related to this Agreement, nor
disclose this
<PAGE>
Information or portions thereof or derivations therefrom to third
parties."
(d) Section 38 (a) is deleted in its entirety.
(e) Section 38 (b) is amended as follows:
In the first line after the beginning words, 'Upon termination of this
Agreement insert the words "pursuant to Section 38(e) or termination of
the Purchase Commitment pursuant to the provisions of Amendment 9," and
delete the words "without cause pursuant to this Section."
(f) Section 38(c)(7) is deleted in its entirety.
(g) A new Section 38 (e) is added to the Agreement as follows:
"In addition to any other rights afforded to CUSTOMER under this
Agreement, if SELLER or any of its subsidiaries shall sell, transfer,
assign or otherwise dispose of all or substantially all of the assets of
SELLER, if SELLER agrees to do any of the foregoing, or if a Change of
Control of SELLER shall occur, then CUSTOMER may terminate, at CUSTOMER'S
sole option, Customer's Purchase Commitment, by giving SELLER thirty
(30)days written notice, which shall be provided within thirty (30) days
of receipt by CUSTOMER of written notice from SELLER of an applicable
event triggering the application of this provision."
"A 'Change in Control' shall mean the direct or indirect acquisition of
the beneficial ownership of twenty percent (20%) or more of the
outstanding voting securities of SELLER, whether in a single transaction
or a series of transactions, by any person, group, corporation, or other
entity who is engaged, directly or through any of its affiliates, in any
business engaged in by GTE Corporation or any of its Affiliates (a
'Communications Company"), or the announcement by any person, group,
corporation, other entity or Communications Company of its intent to
acquire twenty percent (20%) or more of the outstanding voting securities
of SELLER."
(h) Section 44, SURVIVAL OF OBLIGATIONS, is amended as follows:
After the words: "beyond the termination, cancellation or expiration
hereof insert the words: 'including but not limited to, any obligation to
defend and indemnify, any warranty obligation, any obligation to escrow
software code and technology pursuant to any software and technology
agreement, any confidentiality or non-disclosure obligations and any
obligations under the dispute resolution clause of this Agreement."
(i) Exhibit A(3), GTE AFFILIATED ENTITIES, as amended in Amendment Number 8,
dated January 1, 1997, is deleted in its entirety and replaced with a new
Exhibit A(4), GTE AFFILIATED ENTITIES, included as Attachment C to this
Amendment.
A new Exhibit B, Attachment A, PULSEPOINT PRODUCTS, is added and included
as Attachment D to this Amendment.
<PAGE>
(k) Exhibit C(l), SUPPLIER PRODUCT(S) PRICING, is deleted in its entirety and
replaced with the following:
EXHIBIT C(2)
SUPPLIER PRODUCT(S) PRICING
CUSTOMER shall receive a **** percent (**%) discount from the list prices
as set forth in Exhibit B, with the exception that no discount shall
apply to those items identified as "non-discountable'. Such discount
shall apply to all system components, including hardware and software,
except as otherwise provided for in this Exhibit C(2).
CUSTOMER shall receive a ****** percent (**%) discount from the list
prices as set forth in Exhibit B for hard disk drives, whether purchased
individually or as a part of a configured "3110" system.
CUSTOMER shall receive a **** percent (**%) discount from the list prices
as set forth in Exhibit B, Attachment A, PULSEPOINT PRODUCTS, with the
exception that no discounts shall apply to those items identified as
"nondiscountable."
(l) Attachment E(3), HARDWARE AND SOFTWARE MAINTENANCE (1997), Section C,
APPLICABILITY, is hereby amended to add the following:
"The hardware and software maintenance services described in this
Attachment shall also apply to CUSTOMER's entire installed base of
PulsePoint PRODUCT(S) as of October 1, 1997.
7. ALL OTHER TERMS
All other terms and conditions of the Agreement shall remain in full force
and effect.
Each party represents that it has executed this Agreement through its authorized
corporate representative:
DIGITAL SOUND CORPORATION GTE COMMUNICATIONS SYSTEMS
CORPORATION
/s/ Keith M. Beckwith /s/ Larry K. Henry
- ------------------------ ---------------------
Keith M. Beckwith Larry K. Henry
Vice President Sales, Vice President - General Manager
Americas and Europe
Date: November 17, 1997 Date: November 17, 1997
APPROVED AS TO FORM AND LEGALITY
/s/ (signature illegible)
---------------------------
Attorney GTE Telephone Operations
11/14/97
<PAGE>
ATTACHMENTS TO AMENDMENT NO. 9
Attachment A: Software Applications & Features Specifications and Related
Milestone Dates
Attachment A lists milestones and other requirements that apply to the
development and commercial availability to GTE of DGSD's Open Enhanced
Application Platform, System Software, and OnPoint Messaging. The requirements
stated in this Attachment incorporate the specifications and other standards and
references set out in Attachments A-1 through A-7, which are part of this
Attachment A. The milestones set forth in this Attachment A must be completed
for the Purchase Commitment to remain in effect as set forth in Paragraph 4 of
Amendment No. 9.
Attachment A-1: Technical Specifications and Description of GTE networking plans
Attachment A-2: Architectural Specifications for GTE's Centralized Voicemail
Attachment A-3: Architectural Specifications for Digital Sound Corporation's
Messaging Platform
Attachment A-4: Definitions and Requirements for Messaging Standards
Attachment A-5: Technical Summary of Digital Sound Corporation's Proprietary
Rapid Application Creation Environment
Attachment A-6: Product Requirements' Specification for Voice Messaging
Application
Attachment A-7: GTE Sample/Mock Marketing Literature: Voice Mail User Guide
Attachment B: Digital Sound Corporation Product Milestone Chart and Correlated
Non-binding GTE Forecast
Attachment C: Revised List of GTE Affiliated Entities that are entitled to
purchase under the Purchase Agreement.
Attachment D: Digital Sound Corporation PulsePoint Product Description and Price
List
Attachment E: Master Source Code and Technology Escrow Agreement (to be attached
at a later date).
<PAGE>
EXHIBIT 11.01
DIGITAL SOUND CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
(in thousands, except share and per share)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income (loss) $ (5,719) $ 2,488 $ (5,188) $ (6,801) $ (18,924)
----------- ----------- ----------- ----------- -----------
Applicable common and common
stock equivalent shares:
Weighted average shares
common stock 18,830,141 19,474,315 19,880,879 20,085,551 20,362,525
Assumed conversion of
convertible preferred stock
on date of issuance - 821,918 - - -
Shares available upon exercise
of other options and warrants
outstanding based on an average
market price of $3.32, $2.04,
$1.63 and $1.29 for 1994, 1995,
1996 and 1997, respectively,
using the "treasury stock" method.
Because of the antidilutive effect
the "treasury stock" method was
not used in 1993, 1995, 1996 or 1997. - 495,345 - - -
=========== =========== =========== =========== ===========
Total 18,830,141 20,791,578 19,880,879 20,085,551 20,362,525
=========== =========== =========== =========== ===========
Earnings (loss) per common share $ (.30) $ 0.13 $ (0.26) $ (0.34) $ (0.93)
Earnings (loss) per common share
-- assuming dilution $ (.30) $ 0.12 $ (0.26) $ (0.34) $ (0.93)
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23.0
Consent of Ernst & Young LLP Independent Auditors
We consent to the use of our report dated January 22, 1998 included in the
Annual Report on Form 10-K of Digital Sound Corporation for the year ended
December 31, 1997 with respect to the consolidated financial statements included
in this form 10-K.
Our audits also included the financial statement schedule of Digital Sound
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-09755, Form S-8 No. 33-35019, Form S-8 No. 33-42184, Form S-8
No. 33-50376, Form S-8 No. 33-67000, Form S-8 No. 84730, and Form S-8 No. 333-
31783) pertaining to the 1983 Employee Stock Option Plan, the Directors' Stock
Option Plan and the Employee Stock Purchase Plan of Digital Sound Corporation or
our report dated January 22, 1998, with respect to the financial statements and
schedule of Digital Sound Corporation included in this Annual Report on Form 10-
K for the year ended December 31, 1997.
By /s/ Ernst & Young L.L.P.
- ---------------------------
Ernst & Young L.L.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,973
<SECURITIES> 0
<RECEIVABLES> 4,638
<ALLOWANCES> 527
<INVENTORY> 3,876
<CURRENT-ASSETS> 29,129
<PP&E> 11,860
<DEPRECIATION> (6,776)
<TOTAL-ASSETS> 37,441
<CURRENT-LIABILITIES> 16,998
<BONDS> 0
0
18,110
<COMMON> 69,205
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,441
<SALES> 20,644
<TOTAL-REVENUES> 20,644
<CGS> 10,523
<TOTAL-COSTS> 29,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> (18,909)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (18,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,924)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
