-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KELcPi6GGSSWh7P08WauHcea5Stnw4UH62ETTphWCyYsKkNUgqmI5IIebU4GduZ9 UHd+nluOLUir5W6MKkkWUA== 0000899140-97-000809.txt : 19971230 0000899140-97-000809.hdr.sgml : 19971230 ACCESSION NUMBER: 0000899140-97-000809 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971229 SROS: NASD GROUP MEMBERS: LOUIS M. BACON GROUP MEMBERS: MOORE CAPITAL MANAGEMENT INC /NEW GROUP MEMBERS: MOORE GLOBAL INVESTMENTS, LTD. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL SOUND CORP CENTRAL INDEX KEY: 0000718576 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 953222624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-49601 FILM NUMBER: 97745594 BUSINESS ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 BUSINESS PHONE: 8055662255X2154 MAIL ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: MOORE CAPITAL MANAGEMENT INC /NEW CENTRAL INDEX KEY: 0000924178 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 1251 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2127827325 MAIL ADDRESS: STREET 1: 1251 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 SC 13D 1 SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Digital Sound Corporation (Name of Issuer) Common Stock, no par value (Title of Class of Securities) 253911101 (CUSIP Number) Stephen R. Nelson, Esq. Moore Capital Management, Inc. 1251 Avenue of the Americas New York, New York 10020 (212) 782-7102 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) December 19, 1997 (Date of Event which Requires Filing this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. 1 SCHEDULE 13D CUSIP No. 253911101 1. NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Moore Capital Management, Inc. 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* Not Applicable a[ ] b[ ] 3. SEC USE ONLY 4. SOURCE OF FUNDS* OO 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] 6. CITIZENSHIP OR PLACE OF ORGANIZATION Connecticut 7. SOLE VOTING POWER None 8. SHARED VOTING POWER NUMBER OF SHARES 1,646,670 BENEFICIALLY OWNED BY EACH 9. SOLE DISPOSITIVE POWER REPORTING PERSON None WITH 10. SHARED DISPOSITIVE POWER 1,646,670 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,646,670 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 7.4% 14. TYPE OF REPORTING PERSON* CO, IA 2 SCHEDULE 13D CUSIP No. 253911101 1. NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Louis M. Bacon 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* Not Applicable a[ ] b[ ] 3. SEC USE ONLY 4. SOURCE OF FUNDS* OO 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] 6. CITIZENSHIP OR PLACE OF ORGANIZATION U.S. 7. SOLE VOTING POWER None 8. SHARED VOTING POWER NUMBER OF SHARES 2,008,130 BENEFICIALLY OWNED BY EACH 9. SOLE DISPOSITIVE POWER REPORTING PERSON None WITH 10. SHARED DISPOSITIVE POWER 2,008,130 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 2,008,130 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.9% 14. TYPE OF REPORTING PERSON* IN, IA 3 SCHEDULE 13D CUSIP No. 253911101 1. NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Moore Global Investments, Ltd. 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* Not Applicable a[ ] b[ ] 3. SEC USE ONLY 4. SOURCE OF FUNDS* WC 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] 6. CITIZENSHIP OR PLACE OF ORGANIZATION British Virgin Islands 7. SOLE VOTING POWER None 8. SHARED VOTING POWER NUMBER OF SHARES 1,646,670 BENEFICIALLY OWNED BY EACH 9. SOLE DISPOSITIVE POWER REPORTING PERSON None WITH 10. SHARED DISPOSITIVE POWER 1,646,670 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,646,670 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 7.4% 14. TYPE OF REPORTING PERSON* CO 4 Item 1. Security and Issuer This statement on Schedule 13D (the "Statement") relates to the Common Stock, no par value per share (the "Common Shares"), of Digital Sound Corporation, a California corporation (the "Company"). The registered office of the Company is located at 6307 Carpinteria Avenue, Carpenteria, CA 93013. Item 2. Identity and Background The Statement is being filed by (1) Moore Capital Management, Inc., a Connecticut corporation ("MCM"), (2) Louis M. Bacon ("Mr. Bacon"), a United States citizen, in his capacity as (a) Chairman and Chief Executive Officer, director and controlling shareholder of MCM and (b) Chairman and Chief Executive Officer, director and majority interest holder in Moore Capital Advisors, LLC ("MCA"), and (3) Moore Global Investments, Ltd., a British Virgin Islands corporation ("MGI"). MCM, Mr. Bacon and MGI are sometimes collectively referred to herein as the "Reporting Persons". MCM, a registered commodity trading advisor and member of the National Futures Association, serves as discretionary investment manager to MGI, a non-U.S. investment company, and other investment funds. MCA, a registered commodity trading advisor and commodity pool operator, serves as general partner and discretionary investment manager to a U.S. partnership, Remington Investment Strategies, L.P. ("RIS"). The principal 5 occupation of Mr. Bacon is the direction of the investment activities of MCM and MCA, carried out in his capacity of Chairman and Chief Executive Officer of such entities. In this capacity, Mr. Bacon may be deemed to be the beneficial owner of the Common Shares which would be acquired for the account of MGI and RIS, upon the conversion of shares of Series B Preferred Stock, no par value per share (the "Series B Preferred Shares"), of the Company held by MGI and RIS. The principal offices of MCM are located at 1251 Avenue of the Americas, New York, New York 10020, which is also the business address of Mr. Bacon. The principal offices of MGI are located at c/o Citco Fund Services (Bahamas) Ltd., The Bahamas Financial Centre, P.O. Box CB-13136, Nassau, Bahamas. Schedule I lists the name, business address, citizenship, position and present principal occupation of the directors and executive officers of each of MCM and MGI. During the last five years, none of the Reporting Persons or, to their knowledge, any of the persons listed on Schedule I has been: (a) convicted in a criminal proceeding, or (b) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. 6 Item 3. Sources and Amounts of Funds or Other Consideration MGI and RIS expended an aggregate of approximately $2,250,000 of working capital to purchase the 200,813 Series B Preferred Shares held by them. Each Series B Preferred Share is convertible into ten Common Shares, subject to certain adjustments. MGI and RIS may effect purchases of securities through margin accounts maintained for them with brokers who extend margin credit to MGI and RIS as and when required to open or carry positions in the margin accounts, subject to applicable Federal margin regulations, stock exchange rules and such firms' credit policies. The Common Shares that may be held in these margin accounts are pledged as collateral security for the repayment of debit balances in the accounts. Item 4. Purpose of Transaction The acquisition of the Series B Preferred Shares for the account of MGI and RIS was made in a private offering for investment purposes. While no further purchases of Series B Preferred Shares are contemplated, each of MCM and Mr. Bacon may direct further purchases of Common Shares. In addition, MGI and RIS hold Convertible Notes (as defined below) which, in certain circumstances, automatically convert into Series B Preferred Shares. None of the Reporting Persons nor, to the best of their knowledge, the persons listed in Schedule I have any present 7 plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D. MCM or Mr. Bacon may, at any time, review or reconsider its or his position with respect to the Company and, to the extent advisable in light of market conditions, trading policies or other considerations, formulate plans or proposals with respect to any of such matters, but has no present intention of doing so. Item 5. Interest in Securities of the Issuer (a)-(b) On the date of this Statement: (i) Mr. Bacon is deemed to have beneficial ownership for purposes of Section 13(d) of the Securities Exchange Act of 1934 ("Beneficial Ownership") of 2,008,130 Common Shares issuable upon conversion of 200,813 Series B Preferred Shares by virtue of his control of MCM and MCA. Such shares represent 8.9% of the issued and outstanding Common Shares. Also by virtue of his control of MCM and MCA, Mr. Bacon is deemed to share voting power and dispositive power over the Common Shares issuable upon conversion of the Series B Preferred Shares held by MGI and RIS. (ii) MCM is deemed to have Beneficial Ownership of 1,646,670 Common Shares issuable upon conversion of 164,667 Series B Preferred Shares by virtue of its position as discretionary investment manager of MGI. Such shares represent 7.4% of the issued and outstanding Common Shares. MCM is vested with the power to direct disposition of the Common Shares 8 issuable upon conversion of the Series B Preferred Shares held by MGI and shares with MGI and Mr. Bacon voting power over such Common Shares. (iii) MGI has Beneficial Ownership of 1,646,670 Common Shares issuable upon conversion of 164,667 Series B Preferred Shares held by it. Such shares represent 7.4% of the issued and outstanding Common Shares. MGI currently would not exercise dispositive power over such Common Shares but could obtain such power within 60 days if MGI exercised its right to terminate its trading advisory agreement with MCM. The percentages used herein are calculated based upon the 20,561,593 Common Shares represented by the Company in the Preferred Stock Purchase Agreement (as defined below) to be issued and outstanding as of December 15, 1997. To the best knowledge of the Reporting Persons, none of the persons named in Schedule I, other than Mr. Bacon, has or is deemed to have Beneficial Ownership of Common Shares. (c) On December 19, 1997, MGI and RIS purchased from the Company 164,667 and 40,163 Series B Preferred Shares, respectively, at a price per share of $7.50. Such purchases were the only transactions effected by the Reporting Persons with respect to Common Shares within the past 60 days. In connection with such purchase of Series B Preferred Shares, MGI and RIS also 9 purchased from the Company $609,997.50 and $133,905, respectively, in principal amount of Convertible Notes of the Company (the "Convertible Notes"). If shareholders of the Company approve an amendment to the Company's articles of incorporation, the Convertible Notes held by MGI will automatically convert into 81,333 Series B Preferred Shares and the Convertible Notes held by RIS will convert into 17,854 Series B Preferred Shares. (d) The shareholders of MGI and the partners of RIS have the right to participate in the receipt of dividends from, or proceeds from the sale of, the Common Shares acquired for the account of MGI and RIS, respectively. (e) Not applicable. Item 6. Contracts, Arrangements, Understandings, or Relationships with Respect to Securities of the Issuer. In connection with the acquisition of the Series B Preferred Shares held by them, MGI and RIS entered into a Preferred Stock Purchase Agreement (the "Preferred Stock Purchase Agreement") and a Registration Rights Agreement, each dated as of December 19, 1997 with the Company and certain other persons, which agreements are filed as Exhibit C and Exhibit D hereto, respectively, and are incorporated herein by reference. With respect to the Series B Preferred Shares to which it relates, the Preferred Stock Purchase Agreement sets forth the terms and conditions upon which the Series B Preferred Shares and 10 Convertible Notes were purchased, including restrictions on transfer of the Series B Preferred Shares. Also pursuant to the Preferred Stock Purchase Agreement, the Company has undertaken to call a meeting of shareholders, to be held not later than April 15, 1997, to submit to shareholders for approval a proposal to amend the Company's articles of incorporation to increase the number of authorized Common Shares. The increase will serve to allow the Company to reserve a sufficient number of Common Shares to accommodate the conversion of shares of Series B Preferred Shares issuable upon conversion of the Convertible Notes, which Convertible Notes shall convert automatically to Series B Preferred Shares upon such approval by the shareholders. The Registration Rights Agreement provides holders of the Series B Preferred Shares with respect to such shares certain demand and "piggyback" registration rights, subject to the conditions and indemnifications set forth therein. The foregoing description of the terms of the Preferred Stock Purchase Agreement and the Registration Rights Agreement are qualified in their entirety by reference to the specific provisions of each such agreement, which are filed as Exhibit C and Exhibit D hereto. From time to time each of the Reporting Persons, may lend portfolio securities to brokers, banks or other financial institutions. These loans typically obligate the borrower to return the securities, or an equal amount of securities of the 11 same class, to the lender and typically provide that the borrower is entitled to exercise voting rights and to retain dividends during the term of the loan. From time to time to the extent permitted by applicable law, each Reporting Person may borrow the Common Shares for the purpose of effecting, and may effect, short sale transactions, and may purchase securities for the purpose of closing out short positions in such securities. Except as set forth herein, the Reporting Persons and RIS do not have any contracts, arrangements, understandings or relationships with respect to any Common Shares. Item 7. Material to be Filed as Exhibits Exhibit A: Power of Attorney dated November 28, 1997, granted by Louis M. Bacon in favor of M. Elaine Crocker, Kevin F. Shannon and Stephen R. Nelson Exhibit B: Joint Filing Agreement among the Reporting Persons. Exhibit C: Preferred Stock Purchase Agreement dated as of December 19, 1997 among the Company, MGI, RIS and certain other persons. Exhibit D: Registration Rights Agreement dated as of December 19, 1997 among due Company, MGI, RIS and certain other persons. 12 Signature After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. December 23, 1997 MOORE CAPITAL MANAGEMENT, INC. By: /s/ Stephen R. Nelson Name: Stephen R. Nelson Title: Vice President LOUIS M. BACON /s/ Stephen R. Nelson Attorney-in-Fact MOORE GLOBAL INVESTMENTS, LTD. By: By: /s/ Stephen R. Nelson Name: Stephen R. Nelson Title: Attorney-in-Fact 13 Schedule I (a) Set forth below is the name, position with Moore Capital Management, Inc. ("MCM") and present principal occupation of the directors and executive officers of MCM. The business address of each such person is 1251 Avenue of the Americas, New York, New York 10020. Each such person is a United States citizen. Name and Position with MCM Present Principal Occupation - -------------------------- ---------------------------- Louis M. Bacon, Director, Chief Executive Officer of Chairman & Chief Executive MCM and affiliates Officer M. Elaine Crocker, Director President of MCM and & President affiliates Stanley Shopkorn, Director Managing Director of Equities Trading for MCM and affiliates Chris Pia, Director Managing Director of Foreign Exchange, Futures and Fixed Income Execution for MCM and affiliates Richard Axilrod, Director Director of Fixed Income Trading for MCM and affiliates Kevin F. Shannon, Director, Chief Financial Officer of MCM CFO and Treasurer and affiliates Stephen R. Nelson, Director, General Counsel of MCM and General Counsel, Vice President affiliates and Secretary (b) Set forth below is the name, position with Moore Global Investments Ltd. ("MGI"), business address, citizenship or place of organization and present principal occupation or business of the directors of MGI. Name, Business Address and Citizenship or Place of Position Present Principal Organization with MGI Occupation - -------------------------- -------- ----------------- Anthony Stocks Director Director of the Citco Fund Services International Fund (Curacao) Services division N.V. of Citco Group Ltd. Kaya Flamboyan 9 P.O. Box 812 Willemstad, Curacao Netherlands Antilles 14 Citizen: United Kingdom Charles Hansard Director Managing Director BBV Latinvest Securities of Kingsfort Limited Limited 1 Angel Court London England EC2R 7HJ Citizenship: Irish Michael J.D. Dee Director Chairman of Europlan Financial Services Europlan Limited Continuation Lister House Limited 35 The Parade, St. Helier Jersey, JEZ 3QQ Channel Islands Citizenship: British Robert Voges Director Executive Director Curacao International Trust and Vice President Company N.V. of Citco Group De Ruyterkade 62 Limited P.O. Box 812 Willemstad, Curacao Netherlands, Antilles Citizen: Curacao *Inter Caribbean Services Director Member of Citco (Bahamas) Ltd. Group Ltd. The Bahamas Financial Centre providing director P.O. Box CB-13136 services to Nassau, Bahamas clients to Citco Organized: Bahamas 15 EXHIBIT INDEX Exhibit Description - ------- ----------- Exhibit A: Power of Attorney dated November 28, 1997, granted by Louis M. Bacon in favor of M. Elaine Crocker, Kevin F. Shannon and Stephen R. Nelson Exhibit B: Joint Filing Agreement among the Reporting Persons. Exhibit C: Preferred Stock Purchase Agreement dated as of December 19, 1997 among the Company, MGI, RIS and certain other persons. Exhibit D: Registration Rights Agreement dated as of December 19, 1997 among due Company, MGI, RIS and certain other persons. EX-24 2 POWER OF ATTORNEY Exhibit A POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Louis M. Bacon, hereby make constitute and appoint each of M. Elaine Crocker, Kevin F. Shannon and Stephen R. Nelson, acting individually, as my agent and attorney-in-fact for the purpose of executing in my name (a) in my personal capacity or (b) in my capacity as Chairman and Chief Executive Officer of each of Moore Capital Management, Inc. and Moore Capital Advisors, LLC and their respective affiliates all documents, certificates, instruments, statements, filing and agreements ("documents") to be filed with or delivered to any foreign or domestic governmental or regulatory body or required or requested by any other person or entity pursuant to any legal or regulatory requirement relating to the acquisition, ownership, management or disposition of securities or other investments, and any other documents relating or ancillary thereto, including but not limited to, all documents relating to filings with the United States Securities and Exchange Commission (the "SEC") pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934 (the "Act") and the rules and regulations promulgated thereunder, including: (1) all documents relating to the beneficial ownership of securities required to be filed with the SEC pursuant to Section 13(d) or Section 16(a) of the Act including, without limitation: (a) any acquisition statements on Schedule 13D or Schedule 13G and any amendments thereto, (b) any joint filing agreements pursuant to Rule 13d-1(f), and (c) any initial statements of, or states of changes in, beneficial ownership of securities on Form 3, From 4 or Form 5 and (2) any information statements on Form 13F required to be filed with the SEC pursuant to Section 13(f) of the Act. This power of attorney shall be valid from the date hereof until revoked by me. IN WITNESS WHEREOF, I have executed this instrument as of the 28th day of November, 1997. /s/ Louis M. Bacon Louis M. Bacon EX-99 3 JOINT FILING AGREEMENT Exhibit B JOINT FILING AGREEMENT The undersigned hereby agree that the statement on Schedule 13D dated December 29, 1997 with respect to the Common Stock of Digital Sound Corporation, is, and any amendments thereto signed by each of the undersigned shall be, filed on behalf of each of the undersigned pursuant to and in accordance with the provisions of Rule 13d-1(f) under the Securities Exchange Act of 1934. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute one and the same instrument. Dated: December 23, 1997 MOORE CAPITAL MANAGEMENT, INC. By: /s/ Stephen R. Nelson Name: Stephen R. Nelson Title: Vice President LOUIS M. BACON /s/ Stephen R. Nelson Attorney-in-Fact MOORE GLOBAL INVESTMENTS, LTD. By: By: /s/ Stephen R. Nelson Name: Stephen R. Nelson Title: Attorney-in-Fact EX-10.1 4 PREFERRED STOCK PURCHASE AGREEMENT Exhibit C ================================================================================ DIGITAL SOUND CORPORATION _____________________ PREFERRED STOCK PURCHASE AGREEMENT _____________________ 2,451,667 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK $6,612,502.50 AGGREGATE PRINCIPAL AMOUNT OF CONVERTIBLE PROMISSORY NOTES Dated as of December 19, 1997 =============================================================================== DIGITAL SOUND CORPORATION 6307 Carpinteria Avenue Carpinteria, California 93013 December 19, 1997 To Each of the Persons Named in Annex A to this Agreement Gentlemen and Ladies: The undersigned, Digital Sound Corporation, a California corporation (the "Company"), hereby agrees with you (sometimes referred to herein individually as the "Investor" and sometimes collectively as the "Investors") as follows: 1. Authorization of Securities. The Company has authorized the issue and --------------------------- sale or exchange of 2,451,667 shares of its Series B Convertible Preferred Stock (the "Preferred Stock"), having the rights, preferences, privileges and restrictions set forth in the Company's Certificate of Determination (the "Certificate") attached hereto as Annex B and $6,612,502.50 aggregate principal amount of its Convertible Promissory Notes in the form attached hereto as Annex C (the "Convertible Promissory Notes"). The Preferred Stock is convertible into the Company's common stock (the "Common Stock"); the Common Stock into which the Preferred Stock is convertible is sometimes referred to herein as the "Conversion Stock"; and the Preferred Stock, the Convertible Promissory Notes and the Conversion Stock are sometimes referred to herein collectively as the "Securities". The Convertible Promissory Notes are convertible into Preferred Stock. 2. Sale and Purchase of Preferred Stock. Upon the terms and subject to ------------------------------------ the conditions herein contained, the Company agrees to sell to each Investor, and each Investor severally agrees to purchase from the Company, at the Closing (as hereinafter defined) on the Closing Date (as hereinafter defined), the number of shares of Preferred Stock and the principal amount of Convertible Promissory Notes at the purchase price or for the other consideration set forth opposite its name on Annex A hereto. 3. Closing. The closing of the sale to and purchase by the Investors of ------- the Preferred Stock (the "Closing") shall occur by exchange of documents by mail or other courier to the respective parties to be held in escrow for delivery upon oral instruction of the parties by telephone conference call on the date hereof (the "Closing Date"). At the Closing, the Company shall deliver to each Investor a certificate evidencing the shares of Preferred Stock being purchased by it, which shall be registered in such Investor's name as stated on Annex A hereto, and a certificate evidencing the Convertible Promissory Notes being purchased by it, which shall be registered in such Investor's name as stated on Annex A hereto, against, as applicable (i) delivery to the Company of payment by 1 wire transfer in an amount equal to the purchase price of the shares of Preferred Stock and the Convertible Promissory Notes being purchased by it or (ii) surrender for cancellation of certificates evidencing the number of shares of Series A Convertible Preferred Stock of the Company (the "Series A Preferred Stock") set forth opposite its name on Annex A hereto. 4. Transfer Restrictions. --------------------- 4.1. Restrictions. ------------ (a) Each Investor understands and agrees that the Securities it will be acquiring have not been registered under the Securities Act, and that accordingly they will not be transferable except as permitted under various exemptions contained in the Securities Act, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act. Each Investor acknowledges that it must bear the economic risk of its investment in the Securities for an indefinite period of time since they have not been registered under the Securities Act and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. (b) Each Investor represents and warrants to the Company that it is acquiring the Securities it has agreed to purchase for investment purposes only, for its own account, and not as nominee or agent for any other Person, and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. (c) Each Investor agrees with the Company as follows: i) The certificates evidencing the Securities it has agreed to purchase, and each certificate issued in transfer thereof, will bear the following legend: "The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be sold or transferred unless there is an effective registration statement under such Act and any applicable state securities laws covering such securities or the Corporation receives an opinion of counsel (which counsel and opinion are reasonably satisfactory to the Corporation) stating that such sale or transfer is exempt from the registration and prospectus delivery requirements of such Act." ii) The certificates representing such Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. iii) Absent a registration statement under the Securities Act covering the disposition of the Securities which such Investor acquires, such Investor will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of 2 any or all of the Securities without first providing the Company with an opinion of counsel (which counsel and opinion are reasonably satisfactory to the Company) stating that such disposition is exempt from the registration and prospectus delivery requirements of the Securities Act and has been registered or qualified under (or is exempt from the registration and qualification requirements of) any applicable state securities laws. iv) Such Investor consents to the Company's making a notation on its records or giving instructions to any transfer agent of the Common Stock, Preferred Stock or Convertible Promissory Notes in order to implement the restrictions on transfer of the Securities set forth in this paragraph (c). 4.2. Removal of Restrictions. Any legend endorsed on a certificate ----------------------- evidencing a Security and any stop transfer instructions or notations on the Company's records with respect to such Security pursuant to Section 4.1(c)(i) hereof shall be removed or lifted and the Company shall issue a certificate without such legend to the holder of such Security upon request (a) if the transfer of such Security has been registered under the Securities Act, (b) if such Security may be sold under Rule 144(k) promulgated under the Securities Act or (c) if such holder provides the Company with an opinion of counsel (which counsel and opinion are reasonably satisfactory to the Company) stating that a public sale or transfer of such Security may be made without registration under the Securities Act. 5. Representations and Warranties by the Company. Except as set forth in --------------------------------------------- the disclosure schedule that has been prepared, executed and delivered by the Company to the Investors on the date of this Agreement (the "Company Disclosure Schedule"), the Company covenants with, and represents and warrants to, each Investor as follows: 5.1. Due Organization; Subsidiaries; Etc. ------------------------------------ (a) The Company owns no shares of capital stock of, or equity interest of any nature in, any Entity, other than Digital Sound International Corporation and DGSD Malaysia Corporation. (The Company and each of its Subsidiaries are sometimes referred to collectively in this Agreement as the "Company"). (b) Each of the Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all necessary power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; and (ii) to own and use its assets in the manner in which its assets are currently owned and used. (c) Except as set forth in the Company Disclosure Schedule, each of the Company and each Subsidiary is qualified to do business as a foreign corporation, and is in good standing, under the laws of all jurisdictions where the nature of its business requires such qualification and where the failure to so qualify would have a Material Adverse Effect. The Company shall become qualified or in good standing as soon as 3 reasonably practicable after the Closing under the laws of all jurisdictions where the nature of its business requires such qualification. 5.2. Certificate of Incorporation and Bylaws. The Company has made --------------------------------------- available to the Investors accurate and complete copies of the articles of incorporation and bylaws of the Company and each Subsidiary, including all amendments thereto. 5.3. Capitalization, Etc. -------------------- (a) As of December 15, 1997, the authorized capital stock of the Company consists of: (i) 50,000,000 shares of Common Stock, of which 20,561,593 shares have been issued and are outstanding as of the date of this Agreement; and (ii) 15,000,000 shares of preferred stock, no par value, of which 2,631,579 shares have been designated Series A Preferred Stock, all of which have been issued and are outstanding, and of which 3,386,667 shares have been designated Series B Preferred Stock, of which no shares are outstanding as of the date of this Agreement. All of the outstanding shares of Common Stock and Series A Preferred Stock have been duly authorized and validly issued, and are fully paid and nonassessable. Except as set forth in the Company Disclosure Schedule: (i) none of the outstanding shares of Common Stock or Series A Preferred Stock is entitled or subject to any preemptive or similar right; (ii) none of the outstanding shares of Common Stock or Series A Preferred Stock is subject to any right of first refusal in favor of the Company; and (iii) there is no contract to which the Company is a party, or of which the Company is aware, relating to the voting or registration of, or restricting any person from purchasing, selling, pledging or otherwise disposing of (or granting any option or similar right with respect to), any shares of outstanding Common Stock or Series A Preferred Stock. The Company is under no obligation to repurchase, redeem or otherwise acquire any outstanding shares of Common Stock or Series A Preferred Stock. (b) Except as set forth in the Company Disclosure Schedule and as of December 15, 1997, there is no: (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of the Company; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of the Company; or (iii) stockholder rights plan (or similar plan commonly referred to as a "poison pill") or Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities. 5.4. SEC Filings; Financial Statements. --------------------------------- (a) The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act in addition to one or more registration statements and amendments thereto heretofore filed by the Company with the SEC (all of the foregoing including filings incorporated by reference therein being referred to herein as the 4 "Company SEC Documents"). As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the Company SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or its business, properties, prospects, operations or financial condition, which, under any applicable Legal Requirements, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. (b) The financial statements (including any related notes) contained in the Company SEC Documents: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act, and except that the unaudited financial statements may not contain footnotes and are subject to normal and recurring year-end adjustments which will not, individually or in the aggregate, be material in amount), and (iii) fairly present the consolidated financial position of the Company and its Subsidiaries as of the respective dates thereof and the consolidated results of operations of the Company and its Subsidiaries for the periods covered thereby. 5.5. Absence of Changes. Except as set forth in the Company Disclosure ------------------ Schedule, since September 30, 1997, there has not been any material adverse change in the business, condition, assets, liabilities, operations, financial performance or prospects of the Company, and no event has occurred that could reasonably be expected to have a Material Adverse Effect on the Company. 5.6. Proprietary Assets. ------------------ (a) The Company has taken reasonable measures and precautions to protect and maintain the confidentiality, secrecy and value of its Proprietary Assets. (b) Except as set forth in the Company SEC Documents and to the best knowledge of the Company: (i) all patents, trademarks, service marks and copyrights held by the Company are valid, enforceable and subsisting; (ii) no Company Proprietary Assets and no Proprietary Asset that is currently being developed by the Company (either by itself or with any other person) infringes, misappropriates or conflicts with any Proprietary Asset owned or used by any other Person; (iii) none of the products that are or have been designed, created, developed, assembled, manufactured or sold by the Company is infringing, misappropriating or making any lawful or unauthorized use of 5 any Proprietary Asset owned or used by any other Person, and none of such products has at any time infringed, misappropriated or made any unlawful or unauthorized use of, and the Company has not received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful or unauthorized use of any Proprietary Asset owned or used by any other Person; (iv) no other Person is infringing, misappropriating or making any unlawful or unauthorized use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Company Proprietary Assets. (c) The Company's Proprietary Assets constitute all the Proprietary Assets necessary to enable the Company to conduct its business in the manner in which such business has been and is being conducted. The Company has not (i) licensed any of the Company Proprietary Assets to any person on an exclusive basis, or (ii) entered into any covenant not to compete or Contract limiting its ability to exploit fully any of its Proprietary Assets or to transact business in any market or geographical area or with any person. 5.7. Contracts. --------- (a) For purposes of this Agreement, any Contract that is or would be material to the Company, to the business, condition, capitalization or operations of the Company or to any of the transactions contemplated by this Agreement shall be deemed to constitute a "Material Contract." (b) Except as set forth in the Company Disclosure Schedule, each Material Contract is valid and in full force and effect, and is enforceable by the Company in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. (c) Except as set forth in the Company Disclosure Schedule, the Company has not violated or breached, or committed any default under, any Material Contract, and, to the best knowledge of the Company, no other person has violated or breached, or committed any default under, any Material Contract; (ii) no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (A) result in a violation or breach of any of the provisions of any Material Contract, (B) give any person the right to declare a default or exercise any remedy under any Material Contract, (C) give any person the right to accelerate the maturity or performance of any Material Contract, or (D) give any person the right to cancel, terminate or modify any Material Contract; and (iii) the Company has not received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Material Contract. 5.8. Liabilities. Except as set forth in the Company Disclosure Schedule, ----------- the Company does not have any accrued, contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements in 6 accordance with generally accepted accounting principles, and whether due or to become due), except for: (a) liabilities identified as such in the "liabilities" column of the unaudited balance sheet contained in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; and (b) normal and recurring liabilities that have been incurred by the Company since September 30, 1997 in the ordinary course of business and consistent with past practices. 5.9. Compliance with Legal Requirements. The Company is in compliance ---------------------------------- with all applicable Legal Requirements, except where the failure to comply with such Legal Requirements has not had and will not have a Material Adverse Effect on the Company. The Company has not received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. 5.10. Transactions with Affiliates. Except as set forth in the Company ---------------------------- SEC Documents or except as contemplated by this Agreement, since the date of the Company's last proxy statement filed with the SEC, no event has occurred that would be required to be reported by the Company pursuant to Item 404 of Regulation S-K promulgated by the SEC. 5.11. Legal Proceedings; Orders. Except as set forth in the Company ------------------------- Disclosure Schedule or the Company SEC Documents, there is no pending Legal Proceeding, and, to the best knowledge of the Company, no Person has threatened to commence any Legal Proceeding: (i) that involves the Company or any of the assets owned or used by the Company; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the transactions contemplated by this Agreement. To the best knowledge of the Company, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will, or that could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding. There is no order, writ, injunction, judgment or decree to which the Company, or any of the assets owned or used by the Company, is subject. 5.12. Authority; Binding Nature of Agreement. The Company has the -------------------------------------- absolute and unrestricted right, power and authority to enter into and to perform its obligations under this Agreement, the Registration Rights Agreement referred to in Section 9.1(e), and the Convertible Promissory Notes. The Board of Directors of the Company (at a meeting duly called and held) has (a) determined that this Agreement, the Registration Rights Agreement referred to in Section 9.1(e), the Convertible Promissory Notes and the Certificate and the transactions contemplated hereby and thereby are fair and in the best interests of the Company and its shareholders, (b) approved the execution, delivery and performance of this Agreement, the Registration Rights Agreement referred to in Section 9.1(e), the Convertible Promissory Notes and the Certificate by the Company and has approved the transactions contemplated hereby and thereby and no further consent or authorization of the Company or the Board of Directors or shareholders is required except as contemplated by this Agreement, including, without limitation, by Section 8 hereof. 7 This Agreement, the Registration Rights Agreement referred to in Section 9.1(e), and the Convertible Promissory Notes constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 5.13. Vote Required. Except as contemplated by this Agreement (including, ------------- without limitation, Section 8 hereof), no vote of the holders of any class or series of the Company's capital stock is necessary to adopt and approve this Agreement, the Certificate or the transactions contemplated by this Agreement. 5.14. Issuance of Shares; Offering Valid. The issuance of the Preferred ---------------------------------- Stock has been duly authorized and, when issued in accordance with the terms hereof, the Preferred Stock shall be validly issued, fully paid and non- assessable and not subject to any Encumbrances arising by virtue of actions or omissions by the Company and entitled to the rights, preferences and privileges set forth in the Certificate. The Conversion Stock has been or will be duly authorized and reserved for issuance and, upon conversion in accordance with the Certificate, will be duly issued, fully paid and non-assessable and not subject to any Encumbrances. Assuming the accuracy of the representations and warranties of the Investors contained in Section 6, the offer, issuance and sale of the Securities are and will be exempt from the registration requirements of the Securities Act and are exempt from registration and qualification under the registration, permit or qualification requirements of all applicable state securities laws. 5.15. Non-Contravention; Consents. Neither (1) the execution, delivery or --------------------------- performance of this Agreement or any of the other agreements referred to in this Agreement, nor (2) the consummation of the transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of (i) any of the provisions of the articles of incorporation, bylaws or other charter or organizational documents of the Company, or (ii) any resolution adopted by the shareholders, the Board or any committee of the Board; (b) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge the transactions contemplated by this Agreement or to exercise any remedy or obtain any relief under, any Legal Requirement or any order, writ, injunction, judgment or decree to which the Company, or any of the assets owned or used by the Company are subject; (c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by the Company or that otherwise relates to the business of the Company or to any of the assets owned or used by the Company; 8 (d) except as set forth in the Company Disclosure Schedule, contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Contract that is or would constitute a Material Contract, or give any Person the right to (i) declare a default or exercise any remedy under any such Material Contract, (ii) accelerate the maturity or performance of any such Material Contract, or (iii) cancel, terminate or modify any term of such Material Contract; or (e) result in the imposition or creation of any Encumbrance upon or with respect to any asset owned or used by the Company (except for minor liens that will not, in any case or in the aggregate, materially detract from the value of the assets subject thereto or materially impair the operations of the Company). Except as set forth in the Company Disclosure Schedule, the Company will not be required to make any filing (other than the filing of the Certificate with the California Secretary of State or any SEC, NASD or state security law filings which may be required to be made by the Company and any registration statement which may be filed pursuant to the Registration Rights Agreement referred to in Section 9.1(e)) with or give any notice to, or to obtain any consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, or (y) the consummation of the transactions contemplated by this Agreement. 5.16. Fairness Opinion. The Company's Board of Directors has received the ---------------- written opinion of Houlihan Lokey Howard & Zukin, dated November 21, 1997, to the effect that the transactions contemplated by this Agreement are fair to the existing holders of the Common Stock from a financial point of view. 5.17. Full Disclosure. This Agreement (including the Company Disclosure --------------- Schedule) does not (i) contain any representation, warranty or information that is false or misleading with respect to any material fact, or (ii) omit to state any material fact necessary in order to make the representations, warranties and information contained herein and therein (in the light of the circumstances under which such representations, warranties and information were made or provided) not false or misleading. 6. Representations and Warranties by the Investors. Each Investor ----------------------------------------------- covenants with, and represents and warrants to, the Company as follows: 6.1. Sophistication, etc. The Investor has experience as an investor in -------------------- securities of companies similar to the Company and has the knowledge, sophistication and experience in business and financial matters necessary to evaluate the merits and risks of an investment in the Securities and is able to bear the risks of its investment in the Securities and to afford the complete loss of such investment. 6.2. Accredited Investor. The Investor is an "accredited investor" as ------------------- such term is defined in Rule 501(a) of Regulation D under the Securities Act. 9 6.3. Access to Information. The Investor has been afforded access to --------------------- information about the Company and the Company's financial condition, results of operations, business, properties, technology, management and prospects. The Investor has been afforded the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning such matters as the Investor has deemed relevant to an evaluation of the merits and risks of investing in the Securities. 6.4. Corporate Acts and Proceedings. All corporate (or, as appropriate, ------------------------------ partnership, limited liability company or other organizational) acts and proceedings required for the authorization, execution and delivery of this Agreement and the Registration Rights Agreement referred to in Section 9.1(e) hereof and the performance of this Agreement have been lawfully and validly taken or will have been so taken by the Investor prior to the Closing. 6.5. Binding Obligations. This Agreement and the Registration Rights ------------------- Agreement referred to in Section 9.1(e) hereof constitute the legal, valid and binding obligations of the Investor and are enforceable against the Investor in accordance with their respective terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' right generally or by equitable principles of general application (whether considered in an action at law or in equity). 7. Additional Representation and Warranty by Certain Investors. Each of ----------------------------------------------------------- Oak Investment Partners V, Limited Partnership and Oak V Affiliates Fund, Limited Partnership covenants with, and represents and warrants to, the Company that it has good and valid title to the number of shares of Series A Preferred Stock set forth opposite its name on Annex A hereto to be surrendered for cancellation hereunder, free and clear of all encumbrances, liens, pledges, charges or adverse claims. 8. Shareholders' Meeting. (a) As expeditiously as reasonably practicable --------------------- following the Closing, the Company shall file with the SEC its preliminary proxy statement (the "Proxy") pursuant to Section 14 of the Exchange Act and in no event shall such Proxy be filed later than February 27, 1998 and (b) as expeditiously as reasonably practicable following the Closing, the Company shall hold its regular annual meeting and in no event shall such meeting be held later than April 15, 1998 (as extended, the "Meeting Date"); provided, however, if the period of time by which the Proxy is subject to SEC review exceeds 30 days, the Meeting Date shall be extended by such number of days that exceeds 30 days; provided that the Company is using its best efforts to cause the Proxy to be approved by the SEC within such 30 day period. Such meeting shall include for submission for shareholder approval an amendment to the Company's articles of incorporation increasing the Company's authorized Common Stock in an amount sufficient to cause the automatic conversion of the Convertible Promissory Notes. 10 9. Conditions of Parties' Obligations. ---------------------------------- 9.1. Conditions of Investors' Obligations. The obligation of each ------------------------------------ Investor to purchase and pay for the Preferred Stock and the Convertible Promissory Notes which it has agreed to purchase on the Closing Date is subject to the fulfillment prior to or on the Closing Date of the following conditions, any of which may be waived in whole or in part by an Investor with respect to such investor: (a) No Misrepresentation. The representations and warranties of the -------------------- Company under this Agreement shall be deemed to have been made at and as of the Closing Date and shall, without regard to any Material Adverse Effect qualification contained therein, be true and correct in all material respects. (b) Compliance with Agreement. The Company shall have performed and ------------------------- complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. (c) Certificate. The Certificate shall have been filed with the ----------- Secretary of State of the State of California, and the Investors shall have received confirmation reasonably satisfactory to them that such filing has occurred. (d) Supporting Documents. Each Investor shall have received the -------------------- following: i) A copy of the Certificate and copies of resolutions of the Board and each committee of the Board authorizing and approving the Certificate and the execution, delivery and performance of this Agreement and the Registration Rights Agreement referred to in Section 9.1(e) hereof and the transactions contemplated hereby and thereby, each certified by the secretary of the Company; ii) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officer(s) executing the documents referred to in subparagraph (i). (e) Registration Rights Agreement. The Company and the Investors ----------------------------- shall have entered into a Registration Rights Agreement in the form attached hereto as Annex D. (f) The Company shall have received a letter from the Nasdaq Stock Market, Inc., granting an exception from the shareholder approval requirement under Marketplace Rules, 4460(i)(1)(B) and (D)(ii), 4460(i)(2) and 4460(j) with respect to the transactions contemplated by this Agreement. (g) The Investors shall purchase (including the exchange of 2,631,579 shares of the Series A Preferred Stock) at least $25,000,000 of Preferred Stock and 11 Convertible Promissory Notes at the Closing. Microsoft Corporation shall purchase at least $5,000,000 of Preferred Stock and Convertible Promissory Notes. (h) The Investors shall have received from Latham & Watkins, counsel for the Company, an opinion, dated the Closing Date, in the form attached hereto as Annex E. (i) The Board of Directors of the Company shall have received an opinion from Houlihan Lokey Howard & Zukin to the effect that the transactions contemplated by this Agreement are fair to the public shareholders of the Company from a financial point of view. 9.2. Condition of Company's Obligations. The Company's obligation to ---------------------------------- issue and sell the Preferred Stock to the Investors on the Closing Date is subject to the fulfillment prior to or on the Closing Date of the following conditions, any of which may be waived in whole or in part by the Company. (a) No Misrepresentation. The representations and warranties of each -------------------- of the Investors under this Agreement shall be deemed to have been made at and as of the Closing Date and shall be true and correct in all material respects. (b) Compliance with Agreement. Each of the Investors shall have ------------------------- performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. (c) Certificate. The Certificate shall have been filed with the ----------- Secretary of State of the State of California, and the Company shall have received confirmation reasonably satisfactory to it that such filing has occurred. (d) The Company shall not be required to sell and exchange less than 2,451,667 shares of the Preferred Stock to the Investors as a whole. 10. Definitions. Unless the context otherwise requires, the terms defined ----------- in this Section 9 shall have the meanings specified for all purposes of this Agreement. "Affiliate" shall mean any Person that directly or indirectly --------- controls, is controlled by, or is under common control with, the indicated Person. "Agreement" shall mean this Agreement. --------- "Board" shall mean the Board of Directors of the Company. ----- "Certificate" shall have the meaning assigned to it in Section 1 ----------- hereof. "Common Stock" shall have the meaning assigned to it in Section 1 ------------ hereof. 12 "Company Proprietary Asset" shall mean any Proprietary Asset owned by ------------------------- or licensed to the Company or otherwise used by the Company. "Consent" shall mean any approval, consent, ratification, permission, ------- waiver or authorization (including any Governmental Authorization). "Contract" shall have mean any written, oral or other agreement, -------- contract, subcontract, lease, understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan or legally binding commitment or undertaking of any nature: (a) to which the Company is a party; (b) by which the Company or any asset of the Company is or may become bound or under which the Company has, or may become subject to, any obligation; or (c) under which the Company has or may acquire any right or interest. "Conversion Stock" shall mean the unissued Common Stock into which the ---------------- Preferred Stock is convertible and the Common Stock issued upon such conversion. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, ----------- mortgage, security interest, encumbrance, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset). "Entity" shall mean any corporation (including any non-profit ------ corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. "Governmental Authorization" shall mean any: (a) permit, license, -------------------------- certificate, franchise, permission, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. "Governmental Body" shall mean any (a) nation, state, commonwealth, ----------------- province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal). "Holder" of any Security shall mean the record or beneficial owner of ------ such Security. A Holder of Preferred Stock shall be deemed to be also the Holder of the Conversion Stock underlying the Preferred Stock. 13 "Holders of Majority of the Conversion Stock" shall mean the Holders ------------------------------------------- of more than 50% of the then-outstanding shares of the Conversion Stock issued or issuable upon conversion of the Preferred Stock. "Investor" shall have the meaning assigned to it in the introductory -------- paragraph of this Agreement. "Legal Proceeding" shall mean any action, suit, litigation, ---------------- arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel that could reasonably be expected to have a Material Adverse Effect on the Company. "Legal Requirement" shall mean any federal, state, local, municipal, ----------------- foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body. "Material Adverse Effect" shall mean an event, violation, inaccuracy, ----------------------- circumstance or other matter if such event, violation, inaccuracy, circumstance or other matter would have a material adverse effect on the business, condition, assets, liabilities, operations or financial performance of the Company and its subsidiaries taken as a whole. "Person" shall include all natural persons, corporations, business ------ trusts, associations, companies, partnerships, joint ventures and other Entities and Government Bodies. "Preferred Stock" shall have the meaning assigned to it in Section 1 --------------- hereof. "Proprietary Asset" shall mean any (a) patent, patent application, ----------------- trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, source code, algorithm, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; or (b) right to use or exploit any of the foregoing. "Representatives" shall mean officers, directors, employees, agents, --------------- attorneys, accountants, advisors and representatives. "SEC" shall mean the Securities and Exchange Commission. --- "Securities" shall have the meaning assigned to it in Section 1 ---------- hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- 14 "Subsidiary" shall mean any corporation, association or other business ---------- entity at least 50% of the outstanding voting stock of which is at the time owned or controlled directly or indirectly by the Company or by one or more of such subsidiary entities or both. 11. Fees and Costs. In the event a Holder of any Security brings an -------------- action against the Company or the Company brings an action against a Holder arising under this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement or the Certificate, including without limitation such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 12. Miscellaneous. ------------- 12.1. Waivers and Amendments. With the written consent of the Holders of ---------------------- a Majority of the Conversion Stock (a) the obligations of the Company and the rights of the Holders of the Securities under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely), and (b) the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of any supplemental agreement or modifying in any manner the rights and obligations hereunder of the Holders of the Securities and the Company. The foregoing notwithstanding, no such waiver or supplemental agreement shall affect any of the rights of any Holder of a Security created by the Certificate or by the California Corporations Code without compliance with all applicable provisions of the California Corporations Code. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally or by course of dealing, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 12.2. Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery or registered first-class mail, facsimile, or air courier guaranteeing overnight delivery: (a) If to a Holder of any of the Securities, addressed to such Holder at its address shown on the signature pages hereof, or at such other address as such Holder may specify by written notice to the Company, or 15 (b) If to the Company initially at the following address: Digital Sound Corporation 6307 Carpinteria Avenue Carpinteria, California 93013 Attention: B. Robert Suh Facsimile: (805) 566-2004 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt is electronically acknowledged, if by facsimile; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. 12.3. Severability. Should any one or more of the provisions of this ------------ Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 12.4. Successors, Assignees and Transferees. All the terms and provisions ------------------------------------- of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall be binding upon and inure to the benefit of any immediate or remote transferee of any Investor that is a Holder at the time of any of the Securities; provided, however, that a -------- -------- transferee who acquires Securities in a public offering registered under the Securities Act or in a transaction that qualifies for exemption pursuant to Rule 144 under the Securities Act shall take such Securities free of the benefits and burdens of this Agreement. This Agreement shall not run to the benefit of or be enforceable by any Person other than a party to this Agreement and such successors, assigns and transferees. 12.5. Headings. The headings of the Sections and paragraphs of this -------- Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 12.6. Choice of Law. It is the intention of the parties that the internal ------------- laws, and not the laws of conflicts, of California should govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties. 12.7. Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties hereto with respect to the transactions contemplated by this Agreement and supersedes all prior arrangements or understandings with respect thereto. 16 12.8. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. 12.9. Expenses. Except as specifically provided herein, all reasonable -------- legal costs and expenses of Cooley Godward LLP incurred in connection with this Agreement and the transactions contemplated hereby on behalf of the Investors shall be paid by the Company. If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned, whereupon this letter shall become a binding contract between you and the undersigned. (Signature pages follow) 17 [Preferred Stock Purchase Agreement] DIGITAL SOUND CORPORATION By /s/ Mark C. Ozur ------------------------ Mark C. Ozur, President and /s/ B. Robert Suh ------------------------ B. Robert Suh, Secretary S-1 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. SCOT B. JARVIS, AN INDIVIDUAL By: /s/ Scott B. Jarvis ----------------------------- Scot B. Jarvis, an Individual Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Scot B. Jarvis -------------- Address for notices: Cedar Grove Partners, LLC 4153 Issaquah Pine Lake Road S.E. Issaquah, WA 98029 Attention: Scot B. Jarvis Telephone: (888) 222-7268 Facsimile: (425) 392-9944 Investor is organized under the laws of the State of N/A --- S-2 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. MICHAEL J. WILLNER, AN INDIVIDUAL By: /s/ Michael J. Willner --------------------------------- Michael J. Willner, an Individual Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Michael J. Willner ------------------ Address for notices: c/o Willner Properties 150 Allendale Road King of Prussia, PA 19406 Attention: Michael J. Willner Telephone: (610) 265-8121 Facsimile: (610) 265-8325 Investor is organized under the laws of the State of N/A --- S-3 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. SPRING POINT PARTNERS, L.P. By: /s/ John D. Botti ------------------------------- John D. Botti, Managing Partner Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Spring Point Partners, L.P. --------------------------- Address for notices: 655 Montgomery Street, Suite 600 San Francisco, CA 94111 Attention: John D. Botti Telephone: (415) 263-1890 Facsimile: (415) 399-9828 Investor is organized under the laws of the State of California ---------- S-4 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. NEWBERG FAMILY TRUST UTA DTD 12/18/90 By: /s/ Bruce Newberg ---------------------- Bruce Newberg, Trustee Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Newberg Family Trust UTA DTD 12/18/90 ------------------------------------- Address for notices: 11601 Wilshire Blvd., Suite 1940 Los Angeles, CA 90025 Attention: Bruce Newberg Telephone: (310) 914-9293 Facsimile: (310) 914-9242 Investor is organized under the laws of the State of California ---------- S-5 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. FREDERICK J. AND ROBIN GRACE WARREN, AS JOINT TENANTS By: /s/ Frederick J. Warren By: /s/ Robin Grace Warren ---------------------------- --------------------------- Frederick J. Warren Robin Grace Warren Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Frederick J. Warren and Robin Grace Warren, as ---------------------------------------------- Joint Tenants - ------------- Address for notices: 11150 Santa Monica Blvd., Suite 1200 Los Angeles, CA 90025 Attention: Frederick J. Warren and Robin Grace Warren Telephone: (310) 477-6611 Facsimile: (310) 477-1011 Investor is organized under the laws of the State of N/A --- S-6 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. STROME SUSSKIND HEDGECAP FUND, L.P. By: Strome Susskind Investment Management, L.P. a Delaware limited partnership Its: General Partner By: SSCO, Inc. a Delaware corporation Its: General Partner By: /s/ Jeffrey Susskind --------------------------------------------- Jeffrey Susskind, Director and Vice President Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Strome-Susskind Hedgecap Fund, L.P. ----------------------------------- Address for notices: 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Attention: Jeffrey Susskind Telephone: (310) 917-6600 Facsimile: (310) 917-6613 Investor is organized under the laws of the State of Delaware -------- S-7 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. STROME HEDGECAP LIMITED By: Strome Susskind Investment Management, L.P. a Delaware limited partnership Its: General Partner By: SSCO, Inc. a Delaware corporation Its: General Partner By: /s/ Jeffrey Susskind --------------------------------------------- Jeffrey Susskind, Director and Vice President Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Strome Hedgecap Limited ----------------------- Address for notices: 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Attention: Jeffrey Susskind Telephone: (310) 917-6600 Facsimile: (310) 917-6613 Investor is organized under the laws of the State of Delaware -------- S-8 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. STROME OFFSHORE, LIMITED By: Strome Susskind Investment Management, L.P. a Delaware limited partnership Its: Investment Advisor By: SSCO, Inc. a Delaware corporation Its: General Partner By: /s/ Jeffrey Susskind --------------------------------------------- Jeffrey Susskind, Director and Vice President Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Strome Offshore, Limited ------------------------ Address for notices: 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Attention: Jeffrey Susskind Telephone: (310) 917-6600 Facsimile: (310) 917-6613 Investor is organized under the laws of the Cayman Islands -------------- S-9 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. STROME PARTNERS, L.P. By: Strome Susskind Investment Management, L.P. a Delaware limited partnership Its: General Partner By: SSCO, Inc. a Delaware corporation Its: General Partner By: /s/ Jeffrey Susskind --------------------------------------------- Jeffrey Susskind, Director and Vice President Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Strome Partners, L.P. --------------------- Address for notices: 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Attention: Jeffrey Susskind Telephone: (310) 917-6600 Facsimile: (310) 917-6613 Investor is organized under the laws of the State of Delaware -------- S-10 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Sarvas Savvinidis ----------------------------------------- Sarvas Savvinidis, Director of Operations Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Moore Global Investments, Ltd. ------------------------------ Address for notices: c/o Moore Capital Management, Inc. 1251 Avenue of the Americas New York, New York 10020 Attention: Michael Heffernan Telephone: (212) 782-7033 Facsimile: (212) 575-6832 Investor is organized under the laws of the British Virgin Islands ---------------------- S-11 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. REMINGTON INVESTMENT STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Sarvas Savvinidis ----------------------------------------- Sarvas Savvinidis, Director of Operations Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Remington Investment Strategies, L.P. ------------------------------------- Address for notices: Moore Capital Advisors, L.L.C. 1251 Avenue of the Americas New York, New York 10020 Attention: Michael Heffernan Telephone: (212) 782-7033 Facsimile: (212) 575-6832 Investor is organized under the laws of the State of Delaware -------- S-12 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. CITIVENTURE 96 PARTNERSHIP FUND, L.P. By: Chancellor LGT Asset Management, Inc. Its: Investment Advisor By: /s/ Allesandro Piol ---------------------------------- Allesandro Piol, Managing Director Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Citiventure 96 Partnership Fund, L.P. ------------------------------------- Address for notices: c/o Chancellor LGT Asset Management, Inc. 1166 Avenue of the Americas New York, NY 10038 Attention: Mark Radovanovich Telephone: (212) 278-9683 Facsimile: (212) 278-9883 Investor is organized under the laws of the Cayman Islands -------------- S-13 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS II, L.P. By: CPCO Associates, L.P. Its: Investment General Partner By: Chancellor LGT Venture Partners, Inc., Its: General Partner By: /s/ Allesandro Piol ---------------------------------- Allesandro Piol, Managing Director Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Chancellor LGT Private Capital Offshore Partners ------------------------------------------------ II, L.P. - -------- Address for notices: c/o Chancellor LGT Asset Management, Inc. 1166 Avenue of the Americas New York, NY 10036 Attention: Mark Radovanovich Telephone: (212) 278-9683 Facsimile: (212) 278-9883 Investor is organized under the laws of the Cayman Islands -------------- S-14 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS I, C.V. By: Chancellor LGT KME IV Partner, L.P. Its: Investment General Partner By: Chancellor LGT Venture Partners, Inc. Its: General Partner By: /s/ Allesandro Piol ---------------------------------- Allesandro Piol, Managing Director Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Chancellor LGT Private Capital Offshore Partners ------------------------------------------------ I, C.V. - ------- Address for notices: c/o Chancellor LGT Asset Management, Inc. 1166 Avenue of the Americas New York, NY 10036 Attention: Mark Radovanovich Telephone: (212) 278-9683 Facsimile: (212) 278-9883 Investor is organized under the laws of the Netherlands Antilles -------------------- S-15 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS III, L.P. By: CPCP Associates, L.P. Its: General Partner By: Chancellor LGT Venture Partners, Inc. Its: General Partner By: /s/ Allesandro Piol ---------------------------------- Allesandro Piol, Managing Director Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Chancellor LGT Private Capital Offshore Partners ------------------------------------------------ III, L.P. - --------- Address for notices: c/o Chancellor LGT Asset Management, Inc. 1166 Avenue of the Americas New York, NY 10036 Attention: Mark Radovanovich Telephone: (212) 278-9683 Facsimile: (212) 278-9883 Investor is organized under the laws of the Delaware -------- S-16 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP By: Oak Associates VII, L.L.C. Its: General Partner By: /s/ Bandel Carano ---------------------------------------------------- Bandel Carano, Managing Member Exact name of Investor or nominee as it should appear on stock certificate: Oak Investment Partners VII, Limited Partnership ------------------------------------------------ Address for notices: 525 University Avenue Suite 1300 Palo Alto, CA 94301 Attention: Bandel Carano Telephone: (650) 614-3700 Facsimile: (650) 328-6345 Investor is organized under the laws of the State of Delaware -------- S-17 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. OAK VII AFFILIATES FUND, LIMITED PARTNERSHIP By: Oak VII Affiates, L.L.C. Its: General Partner By: /s/ Bandel Carano ------------------------------ Bandel Carano, Managing Member Exact name of Investor or nominee as it should appear on stock certificate: Oak VII Affiliates Fund, Limited Partnership -------------------------------------------- Address for notices: 525 University Avenue Suite 1300 Palo Alto, CA 94301 Attention: Bandel Carano Telephone: (650) 614-3700 Facsimile: (650) 328-6345 Investor is organized under the laws of the State of Delaware -------- S-18 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. OAK INVESTMENT PARTNERS V, LIMITED PARTNERSHIP By: Oak Associates V, L.L.C. Its: General Partner By: /s/ Bandel Carano ------------------------------- Bandel Carano, Managing Member Exact name of Investor or nominee as it should appear on stock certificate: Oak Investment Partners V, Limited Partnership ---------------------------------------------- Address for notices: 525 University Avenue Suite 1300 Palo Alto, CA 94301 Attention: Bandel Carano Telephone: (650) 614-3700 Facsimile: (650) 328-6345 Investor is organized under the laws of the State of Delaware -------- S-19 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. OAK V AFFILIATES FUND, LIMITED PARTNERSHIP By: Oak V Affiliates a Connecticut partnership Its: General Partner By: /s/ Bandel Carano ------------------------------ Bandel Carano, General Partner Exact name of Investor or nominee as it should appear on stock certificate: Oak V Affiliates Fund, Limited Partnership ------------------------------------------ Address for notices: 525 University Avenue Suite 1300 Palo Alto, CA 94301 Attention: Bandel Carano Telephone: (650) 614-3700 Facsimile: (650) 328-6345 Investor is organized under the laws of the State of Delaware -------- S-20 [Preferred Stock Purchase Agreement] The foregoing Agreement is hereby accepted as of the date first above written. MICROSOFT CORPORATION By: /s/ Gregory B. Maffei ----------------------------- Title: Chief Financial Officer --------------------------- Exact name of Investor or nominee as it should appear on stock and convertible promissory note certificates: Microsoft Corporation --------------------- Address for notices: One Microsoft Way 9N/1266 Redmond, WA 98052-6399 Attention: Robert A. Eshelman Telephone: (425) 882-8080 Facsimile: (425) 936-7329 Investor is organized under the laws of the State of Washington ---------- S-21 SCHEDULES TO PREFERRED STOCK PURCHASE AGREEMENT Section 5.1 Due Organization; Subsidiaries; etc. Section 5.3 Capitalization rights of certain persons to purchase the Company's capital stock or require the registration of such capital stock under the Securities Act. Section 5.5 Absence of Changes: A list of certain changes or events since September 30, 1997. Section 5.7 Contracts: A list of the material contracts of the Company whereby the Company is, or may deemed to be, in default. Section 5.8 Certain Liabilities of the Company. Section 5.11 Legal Proceedings: A list of material litigation of the Company and its Subsidiaries. Section 5.15 Non-Contravention; Consents: A list of agreements, obligations, encumbrances, and plans of the Company that the execution and performance of the Preferred Stock Purchase Agreement would cause a breach or default thereof. S-1 ANNEX A ------- SCHEDULE OF INVESTORS
Principal Amount Number of Shares of Convertible Purchase Price of Preferred Stock Promissory Notes or Other Name/Nominee Being Purchased Being Purchased Consideration - ------------ --------------- --------------- ------------- Scot B. Jarvis 4,463 $16,522.50 $49,995.00 Michael J. Willner 13,387 $49,597.50 $150,000.00 Spring Point Partners, 22,312 $82,657.50 $249,997.50 L.P. Newberg Family Trust UTA 26,775 $99,187.50 $300,000.00 DTD 12/18/90 Frederick J. Warren and 44,625 $165,315.00 $500,002.50 Robin Grace Warren Strome Susskind, 75,863 $281,032.50 $850,005.00 Hedgecap Fund, L.P. Strome Hedgecap Limited 13,387 $49,597.50 $150,000.00 Strome Offshore, Limited 49,087 $181,845.00 $549,997.50 Strome Partners, L.P. 40,163 $148,777.50 $450,000.00 Moore Global 164,667 $609,997.50 $1,845,000.00 Investments, Ltd. Remington Investment 36,146 $133,905.00 $405,000.00 Strategies, L.P. Citiventure 96 232,586 $861,607.50 $2,606,002.50 Partnership Fund, L.P.
Chancellor LGT Private 103,441 $383,190.00 $1,158,997.50 Capital Offshore Partners II, L.P. Chancellor LGT Private 8,121 $30,090.00 $90,997.50 Capital Offshore Partners I, C.V. Chancellor LGT Private 57,477 $212,925.00 $644,002.50 Capital Partners III, Limited Partnership Oak Investment Partners 435,317 $1,612,627.50 $4,877,505.00 VII, Limited Partnership Oak VII Affiliates Fund, 10,933 $40,500.00 $122,497.50 Limited Partnership Oak Investment Partners 652,000 Surrender for V, Limited Partnership cancellation Certificate No. 1 evidencing 2,573,684 shares of Series A Preferred Stock Oak V Affiliates Fund, 14,667 Surrender for Limited Partnership cancellation Certificate No. 2 evidencing 57,895 shares of Series A Preferred Stock Microsoft Corporation 446,250 $1,653,127.50 $5,000,002.50
ANNEX B [Certificate of Determination] ANNEX C [Convertible Promissory Note] ANNEX D [Registration Rights Agreement] ANNEX E 1. The Corporation has been duly incorporated and is validly existing and in good standing under the laws of the State of California with full corporate power and authority to own or lease its properties and conduct its business as presently being conducted. 2. The Corporation has corporate power and authority to enter into and perform its obligations under the Documents. 3. Each of the Documents has been duly authorized, executed and delivered by the Corporation and is the legally valid and binding obligation of the Corporation enforceable against the Corporation in accordance with its terms. 4. The execution and delivery by the Corporation of the Documents (A) does not conflict with or violate any provision of (i) the Governing Documents or (ii) any presently existing law, rule or regulation or, to the best of our knowledge, any order, writ, injunction or decree applicable to the Corporation and (B) does not require the consent or approval of, or registration, declaration or filing with, any California or federal court, or California or federal governmental agency or body except for such consent, approval, registration, declaration or filing, as have been made or secured on or prior to the date hereof. 5. Based solely, as to factual matters, upon the representations and warranties of the Investors contained in Sections 4.1 and 6 of the Purchase Agreement and on a certificate from an officer of the Corporation, and without any independent investigation of the accuracy of such representations, it is not necessary to register the initial issuance and sale of the shares of Preferred Stock to you and the Convertible Promissory Notes by the Corporation under the circumstances contemplated by the Purchase Agreement, under the Securities Act of 1933, as amended (the "Securities Act"). 6. Except as set forth in the Company Disclosure Schedule, the execution, delivery and performance by the Corporation of each of the Documents does not conflict with or constitute a breach of or default under (with due notice or passage of time or otherwise) any Material Agreement of the Corporation, which conflict, breach, or default could reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole, or on the ability of the Corporation to perform its material obligations under the Documents. 7. To the best of our knowledge and except as set forth in the Company Disclosure Schedule or the Company SEC Documents, there is no material action, suit, proceeding or investigation pending or threatened against or affecting the Corporation or any of its properties or assets that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge any of the Documents or the issuance, sale and delivery of the shares of Preferred Stock and the Convertible Promissory Notes pursuant thereto, or that seeks material damages in 1 connection therewith. We expressly advise you that with respect to this paragraph 7, we have not undertaken any search of court dockets or other public records in any jurisdiction with respect to the claims or other matters referred to herein. 2 EX-10.2 5 REGISTRATION RIGHTS AGREEMENT Exhibit D - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DIGITAL SOUND CORPORATION ---------------- REGISTRATION RIGHTS AGREEMENT Dated as of December 19, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DIGITAL SOUND CORPORATION 6307 Carpinteria Avenue Carpinteria, California 93013 This Registration Rights Agreement ("Agreement") is made and entered into as of December 19, 1997, by and among Digital Sound Corporation, a California corporation (the "Company"), and the investors (herein referred to collectively as the "Investors" and individually as an "Investor") whose names are listed in Annex A to the Preferred Stock Purchase Agreement dated the date hereof among the Company and the Investors (the "Purchase Agreement"). In order to induce the Investors to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized terms shall have the following meanings: Board: The Board of Directors of the Company. ----- Claim: Any loss, claim, damages, liability (joint or several) or ----- expense (including the reasonable costs of investigation and legal fees and expenses). Common Stock: The common stock of the Company. ------------ Convertible Promissory Notes: The convertible promissory notes in the ---------------------------- aggregate principal amount of $6,612,502.50 being issued and sold to the Investors pursuant to the Purchase Agreement. Equity Security: Any capital stock of the Company or any security --------------- convertible, with or without consideration, into any such stock, or any security carrying any warrant or right to subscribe to or purchase any such stock, or any such warrant or right. Exchange Act: The Securities Exchange Act of 1934, as from time to ------------ time amended. Holder: The beneficial owner of a security. For all purposes of this ------ Agreement, the Company shall be entitled to treat the record owner of a security as the beneficial owner of such security unless the Company has been given written notice of the existence and identity of a different beneficial owner. Securities held by a Holder shall be deemed to include any securities held by affiliates of such Holder. A Holder of Preferred Stock shall be deemed to be the Holder of the Common Stock into which such Preferred Stock could be converted. 2 Indemnified Holder: Any Holder of Restricted Stock, any partner, ------------------ officer, director, employee or agent of any such Holder and any Person who controls any such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Misstatement: An untrue statement of a material fact or an omission ------------ to state a material fact required to be stated in a Registration Statement or Prospectus or necessary to make the statements in a Registration Statement, Prospectus or preliminary prospectus not misleading. Person: A natural person, partnership, corporation, business trust, ------ association, joint venture or other entity or a government or agency or political subdivision thereof. Preferred Stock: The Series B Convertible Preferred Stock being --------------- issued and sold pursuant to the Purchase Agreement and the Series B Convertible Preferred Stock issuable upon conversion of the Convertible Promissory Notes being sold pursuant to the Purchase Agreement. Prospectus: The prospectus included in any Registration Statement, as ---------- supplemented by any and all prospectus supplements and as amended by any and all pre-effective and post-effective amendments and including all material incorporated by reference in such prospectus. Registration: A registration pursuant to Section 2 or 3 hereof. ------------ Registration Expenses: The out-of-pocket expenses of a Registration, --------------------- including: (1) all registration and filing fees (including fees with respect to filings required to be made with the National Association of Securities Dealers); (2) fees and expenses of compliance with state securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Restricted Stock and determinations of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Restricted Stock being sold may designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company, counsel for the underwriters and reasonable fees and expenses of counsel (one firm only) for the sellers of the Restricted Stock; (5) fees and disbursements of all independent certified public accountants of the Company incurred in connection with such Registration (including the expenses of any special audit and "cold comfort" letters incident to such registration); and 3 (6) fees and disbursements of underwriters. Registration Statement: Any registration statement which covers ---------------------- Restricted Stock pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all material incorporated by reference in such registration statement. Restricted Stock: The shares of Common Stock issued or issuable (i) ---------------- upon conversion of the Preferred Stock or (ii) pursuant to a stock dividend, stock split or other distribution with respect to Common Stock issued upon conversion of the Preferred Stock. Securities Act: The Securities Act of 1933, as from time to time -------------- amended. SEC: The Securities and Exchange Commission. --- Series B Convertible Preferred Stock: The Series B Convertible ------------------------------------ Preferred Stock of the Company. Transfer Restricted Security: Restricted Stock that has not been sold ---------------------------- to or through a broker, dealer or underwriter in a public distribution or other public securities transaction or sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Rule 144 promulgated thereunder (or any successor rule) and which, together with all other shares of Restricted Stock held by a given Holder, is not eligible for sale under such Rule 144 within a three-month period. underwritten registration or underwritten offering: A registration in ------------------------- --------------------- which securities of the Company are sold to an underwriter for distribution to the public. 2. Demand Registration ------------------- a. Timing of Demand Registration ----------------------------- The Holders of no fewer than 35% of the shares (as adjusted for any stock split, reverse stock split, stock dividend or similar transaction) of Restricted Stock may request in writing that the Company file a registration statement under the Securities Act covering shares of Restricted Stock having an anticipated aggregate offering price of at least $2,500,000 that are then Transfer Restricted Securities at any time before the seventh anniversary of the date of this Agreement. If the Company is requested to effect a Registration and the Company furnishes to the Holders of Restricted Stock requesting such Registration a copy of a resolution of the Board certified by the Secretary of the Company stating that in the good faith judgment of the Board it would be seriously detrimental to the Company or its shareholders for such Registration Statement to be filed on or before the date such filing would otherwise be required hereunder, the 4 Company shall have the right to defer such filing for a period of not more than 135 days after receipt of the request for such Registration from the Holder or Holders of Restricted Stock requesting such Registration; provided that during such time the Company may not file a registration statement other than on Form S-8 for securities to be issued and sold for its own account or that of anyone other than the Holder or Holders of Restricted Stock requesting such Registration; provided, further, that the Company may not exercise such right more than once in any twelve-month period. Notwithstanding the foregoing, if the reasons for deferring such filing should expire within such 135-day period, the Company shall promptly notify the requesting Holders of such fact and shall file such Registration Statement as expeditiously as possible, but in no event later than 135 days after the receipt of request for such Registration. b. Maximum Number of Demand Registrations -------------------------------------- The Company shall be obligated to prepare, file and cause to become effective no more than two registrations pursuant to this Section 2. c. Participation ------------- The Company shall promptly give written notice to all Holders of Restricted Stock upon receipt of a request for a Registration pursuant to Section 2(a) above. The Company shall include in such Registration such shares of Restricted Stock for which it has received written requests to register such shares within 10 days after such written notice has been given. d. Underwriter's Cutback --------------------- If the public offering of Restricted Stock is to be underwritten and, in the good faith judgment of the managing underwriter, the inclusion of all the Restricted Stock requested to be registered hereunder would interfere with the successful marketing of a smaller number of such shares of Restricted Stock, at a price per share that is acceptable to a majority in interest of the Holders requesting such Registration, the number of shares of Restricted Stock to be included shall be reduced to such smaller number with the participation in such offering to be pro rata among the Holders of Restricted Stock requesting such Registration, based upon the number of shares of Restricted Stock owned by such Holders. The Company and other Holders of securities of the Company may include such securities in such Registration if, but only if, the managing underwriter concludes that such inclusion will not interfere with the successful marketing of all the Restricted Stock requested to be included in such Registration at a price per share that is acceptable to a majority in interest of the Holders requesting such Registration. e. Managing Underwriter -------------------- The managing underwriter or underwriters of any underwritten public offering covered by a Registration shall be selected by the Board, subject to the approval of the Holders of a majority of the shares of Restricted Stock that initiate such Registration, which shall not be unreasonably withheld. 5 f. Registration Expenses --------------------- All Registration Expenses (excluding underwriters' and brokers' discounts and commissions) incurred in connection with a registration pursuant to this Section 2 will be borne by the Company. 3. Piggyback Registrations ----------------------- a. Timing of Piggyback Registration and Participation -------------------------------------------------- The Company shall notify all Holders of Transfer Restricted Securities in writing at least fifteen (15) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to any registration under Section 2 - --------- of this Agreement or to any employee or similar benefit plan or a corporate reorganization on Forms S-4 or S-8 or any successor forms thereto) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Transfer Restricted Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Transfer Restricted Securities held by such Holder shall, within ten (10) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice shall inform the Company of the number of Transfer Restricted Securities such Holder wishes to include in such registration statement. b. Unlimited Number of Piggyback Registrations ------------------------------------------- Each Holder of Transfer Restricted Securities is entitled to an unlimited number of piggyback registrations pursuant to this Section 3. If a Holder decides not to include all of its Transfer Restricted Securities in any registration statement filed by the Company with respect to which it has piggyback registration rights, such Holder shall nevertheless continue to have the right to include any Transfer Restricted Securities in any subsequent registration statement or registration statements, as the case may be, filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. c. Underwriter's Cutback --------------------- If the public offering of Restricted Stock is to be underwritten and, in the good faith judgment of the managing underwriter, the inclusion of all the Transfer Restricted Securities requested to be registered hereunder would interfere with the successful marketing of a smaller number of such shares in the offering at a price per share that is acceptable to the Company, in the case of a Company-initiated registration, or, in the case of a registration by the holders of securities other than the Holders of Transfer Restricted Securities, to such holders, the number of shares that may be included in the registration shall be allocated, first, in the case of a Company-initiated registration, to ----- the Company or, in the case of a registration by the holders of securities other than the Holders of Transfer Restricted Securities, to such other holders, and second, to each of the Holders requesting inclusion pursuant to this Section 3 - ------ of their Transfer 6 Restricted Securities in such registration and any other Holders of "piggyback" registration rights on a pro rata basis among such Holders, based upon the number of shares of registrable securities owned by such Holders. The Company and other Holders of securities of the Company may include such securities in such Registration if, but only if, the managing underwriter concludes that such inclusion will not interfere with the successful marketing of all the Transfer Restricted Securities requested to be included in such Registration at a price per share that is acceptable to the Company, in the case of a Company-initiated registration, or, in the case of a registration by the holders of securities other than the Holders of Transfer Restricted Securities, to such holders. d. Managing Underwriter -------------------- The managing underwriter or underwriters of any underwritten public offering covered by a registration pursuant to this Section 3 shall be selected by the Board. e. Registration Expenses --------------------- All Registration Expenses incurred in connection with a registration pursuant to this Section 3 (excluding underwriters' and brokers' discounts and commissions) will be borne by the Company. 4. Hold-Back Agreements -------------------- a. By Holders of Restricted Stock ------------------------------ Upon the written request of the managing underwriter of an underwritten offering to the Holders of the Company's securities pursuant to Section 2 or 3 above, a Holder of Restricted Stock shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Restricted Stock (other than those included in such Registration) without the prior written consent of such managing underwriter for a period (not to exceed 90 days after the effective date of such Registration) that such managing underwriter reasonably determines is necessary in order to effect the underwritten public offering; provided that no Holder of Restricted Stock shall be bound by this Section 4(a) unless such Holder is permitted to include any of such Holders' Restricted Stock then held by such Holder in such Registration equal to the number of shares of Restricted Stock that such Holder could sell during such 90-day period under Rule 144 of the Securities Act. b. By the Company -------------- The Company agrees not to effect any public or private sale or distribution of its Equity Securities during the 60-day period prior to, and during the 135-day period after, the effective date of each underwritten offering made pursuant to a registration under Section 2 above, if so requested in writing by the managing underwriter (except as part of such underwritten offering or pursuant to registrations on Forms S-4 or S-8). 7 5. Rule 144. -------- The Company covenants that it will timely file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder, all to the extent required from time to time to enable such Holder to sell Registrable Securities without Registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar successor rule or regulation hereafter adopted by the SEC. 6. Registration Procedures ----------------------- If and whenever the Company is required to register Restricted Stock in a Registration, the Company will use its best efforts to effect such Registration to permit the sale of such Restricted Stock in accordance with the intended plan of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: a. prepare and file with the SEC a Registration Statement within 30 days of such request with respect to such Restricted Stock and use its best efforts to cause such Registration Statement to become effective within 90 days of such request and remain effective until the Restricted Stock covered by such Registration Statement has been sold; provided that the Company shall not be required to maintain the effectiveness of any Registration Statement for more than 90 days after such Registration Statement becomes effective; b. prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be required by the rules, regulations or instructions applicable to the registration form used by the Company or by the Securities Act or rules and regulations thereunder to keep the Registration Statement effective until all Restricted Stock covered by such Registration Statement is sold in accordance with the intended plan of distribution set forth in such Registration Statement or supplement to the Prospectus or for such shorter period of time during which such Registration Statement must be kept effective by the terms of this Agreement; c. promptly notify the selling Holders of Restricted Stock and the managing underwriter, if any, in writing, (1) when the Prospectus or any supplement or pre- or post-effective amendment has been fined, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective. (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information. (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. 8 (4) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Restricted Stock for sale in any jurisdiction or the initiation of any proceeding for such purpose, and (5) of the existence of any fact which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing a Misstatement; d. make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible time; e. if requested by the managing underwriter of Restricted Stock being sold in connection with an underwritten offering, immediately incorporate in a supplement or post-effective amendment such information as the managing underwriter requests to be included therein relating to the sale of the Restricted Stock, including, without limitation, information with respect to the number of shares of Restricted Stock being sold to underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten offering of the Restricted Stock to be sold in such offering; and make all required filings of such supplement or post-effective amendment as soon as notified of the matters to be incorporated in such supplement or post-effective amendment; f. promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement) provide copies of such document to counsel to the selling Holders of Restricted Stock and to the managing underwriter, if any; g. furnish to each selling Holder of Restricted Stock and the managing underwriter, at least one signed copy of the Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference) promptly after such documents become available to the Company; h. promptly deliver to each selling Holder of Restricted Stock and the underwriters, if any, as many copies of each Prospectus (and each preliminary prospectus) as such Persons may reasonably request (the Company hereby consenting to the use of each such Prospectus (or preliminary prospectus) by each of the selling Holders of Restricted Stock and the underwriters, if any, in connection with the offering and sale of the Restricted Stock covered by such Prospectus (or preliminary prospectus)); i. prior to any public offering of Restricted Stock, use all reasonable efforts to register and qualify such Restricted Stock for offer and sale under the securities or blue sky laws of such jurisdictions as such selling Holders or underwriters may designate in writing to enable the disposition in such jurisdictions of the Restricted Stock covered by the Registration Statement; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; 9 j. timely prepare and deliver certificates not bearing any restrictive legends representing the Restricted Stock to be sold and cause such Restricted Stock to be in such denominations and registered in such names as the managing underwriter may request at least three business days prior to any sale of Restricted Stock to the underwriters; k. if the Registration Statement or the Prospectus contains a Misstatement, promptly, but in no event more than five (5) days after the Company becomes aware of such Misstatement, prepare a supplement or post- effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Restricted Stock the Prospectus will not contain a Misstatement; l. cause all Restricted Stock covered by the Registration Statement to be listed on any national securities exchange or authorized for quotation on Nasdaq or on the National Market System, if the Common Stock of the Company is so listed or authorized at the time; m. enter into an underwriting agreement if the registration is an underwritten registration; and (1) make such representations and warranties to the underwriters, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriter), addressed to the underwriters, covering the matters customarily covered in opinions delivered to underwriters in underwritten offerings; (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with underwritten offerings; (4) cause such underwriting agreement to include such indemnification and contribution provisions as such underwriters shall customarily require; and (5) deliver such documents and certificates as may be requested by the managing underwriter, to evidence compliance with clause (1) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement; and n. otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of any 10 12-month period (or 90 days, if such period is a fiscal year) commencing at the end of any fiscal quarter in which Restricted Stock is sold to underwriters in an underwritten offering. 7. Indemnification --------------- a. Indemnification by Company -------------------------- The Company agrees to indemnify and hold harmless each Indemnified Holder from and against all Claims arising out of or based upon any Misstatement or alleged Misstatement, except insofar as such Misstatement or alleged Misstatement was made strictly in conformance with information furnished in writing to the Company by such Indemnified Holder expressly for use in the document containing such Misstatement or alleged Misstatement. This indemnity shall not be exclusive and shall be in addition to any liability which the Company may otherwise have. The foregoing notwithstanding, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement made in any preliminary prospectus if (i) having previously been furnished by or on behalf of the Company with copies of the Prospectus, such Indemnified Holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Restricted Stock giving rise to such Claim and (ii) the Prospectus would have corrected such untrue statement or omission. In addition, the Company shall not be liable to the extent that any such Claim arises out of or is based upon a Misstatement or alleged Misstatement in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected in an amendment or supplement to such Prospectus and (y) having previously been furnished by or on behalf of the Company with copies of the Prospectus as so amended or supplemented, such Indemnified Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale to the person who purchased Restricted Stock from such Indemnified Holder and who is asserting such Claim. The Company shall also indemnify underwriters participating in a distribution covered by a Registration Statement, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Indemnified Holders of Restricted Stock. b. Indemnification Procedures -------------------------- If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company, such Indemnified Holder shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all reasonable expenses (including expenses of such counsel). 11 Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such separate counsel shall be the expense of such Indemnified Holder unless (i) the Company has agreed to pay such fees and expenses, (ii) the Company shall have failed to diligently defend such action or proceeding or has failed to employ counsel reasonably satisfactory to such Indemnified Holder in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Holder and the Company, and such Indemnified Holder shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Holder that are different from or additional to those available to the Company. If such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company as permitted by the provisions of the preceding paragraph, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder. The foregoing notwithstanding, the Company shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders (which firm shall be designated in writing by such Indemnified Holders) in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. The Company shall not be liable for any settlement of any such action or proceeding effected without its written consent, which shall not be unreasonably withheld or delayed, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company agrees to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. c. Indemnification by Holder of Restricted Stock --------------------------------------------- Each Holder of Restricted Stock agrees to indemnify and hold harmless the Company, its directors, officers, employees and agents and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (a "Company Indemnitee") to the same extent as the foregoing indemnity from the Company to such Holder, but only with respect to Misstatements made strictly in conformance with information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement, Prospectus or preliminary prospectus. In no event, however, shall the liability hereunder of any selling Holder of Restricted Stock be greater than the dollar amount of the proceeds (net of underwriters' and brokers' discounts and commissions) received by such Holder upon the sale of the Restricted Stock giving rise to such indemnification obligation. In case any action or proceeding shall be brought against the Company or a Company Indemnitee, in respect of which indemnity may be sought against a Holder of Restricted Stock, such Holder shall have the rights and duties given the Company and the 12 Company or Company Indemnitee shall have the rights and duties given to each Holder by Sections 6(a) and 6(b) above. d. Contribution ------------ If the indemnification provided for this Section 6 is unavailable to an indemnified party under Section 6(a) or Section 6(c) above (other than by reason of exceptions provided in those Sections) in respect of any Claims referred to in such Sections, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claims in such proportion as is appropriate to reflect the relative fault of the Company or Company Indemnitee on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such Claims as well as any other relevant equitable considerations. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in Section 7(b), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The relative fault of the Company or Company Indemnitee on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the Misstatement or alleged Misstatement relates to information supplied by the Company or Company Indemnitee or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such Misstatement or alleged Misstatement. The Company and each Holder of Restricted Stock agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 6(d), an Indemnified Holder shall not be required to contribute any amount in excess of the amount by which (i) the net proceeds to the Indemnified Holder from the sale of the securities that were sold by such Indemnified Holder and distributed to the public exceeds (ii) the amount of any damages which such Indemnified Holder has otherwise been required to pay by reason of such Misstatement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Requirements for Participation in Underwritten Offerings -------------------------------------------------------- No Person may participate in any underwritten offering pursuant to a Registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all customary questionnaires, powers of attorney, 13 indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Suspension of Sales ------------------- Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, each Holder of Restricted Stock shall forthwith discontinue disposition of Restricted Stock until such Holder has received copies of the supplemented or amended Prospectus required by Section 4(k) hereof, or until such Holder is advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Restricted Stock current at the time of receipt of such notice. 10. Miscellaneous ------------- a. Amendments and Waivers ---------------------- The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of the Holders of at least a majority of the outstanding shares of Restricted Stock. The foregoing notwithstanding, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of shares of Restricted Stock whose shares are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of shares of Restricted Stock may be given by the Holders of a majority of the shares of Restricted Stock being sold. b. Notices ------- All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, facsimile, or air courier guaranteeing overnight delivery: i) if to a Holder of Restricted Stock, at the most current address given by such Holder to the Company in accordance with the provisions hereof, which address initially is, with respect to each Investor, the address set forth on such Investor's signature page of the Purchase Agreement; and ii) if to the Company, initially at its address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions hereof. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt is electronically acknowledged, if by facsimile; 14 and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. c. Successors and Assigns ---------------------- This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. The foregoing notwithstanding, the registration rights granted the Holders of Restricted Stock under this Agreement may not be transferred without the prior written consent of the Company which shall not be unreasonably withheld or delayed; provided, that such registration rights shall not be transferable except in connection with the simultaneous transfer to the same transferee of no less than the lesser of 200,000 shares of Restricted Stock or all of the shares of Restricted Stock then held by such Holder; provided, further, that such registration rights may be transferred without such prior written consent upon written notice to the Company in connection with the transfer of shares of Restricted Stock to an Investor or to any affiliate of an investor. d. Counterparts ------------ This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. e. Headings -------- The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. f. Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California. g. Severability ------------ In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. h. Forms ----- All references in this Agreement to particular forms of registration statements are intended to include all successor forms which are intended to replace, or to apply to similar transactions as, the forms herein referenced. 15 i. Entire Agreement ---------------- This Agreement and the Purchase Agreement are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement and the Purchase Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. (Signature pages follow) 16 [Registration Rights Agreement] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DIGITAL SOUND CORPORATION By: /s/ MARK C. OZUR ----------------------- Mark C. Ozur, President S-1 [Registration Rights Agreement] SCOT B. JARVIS, an Individual By: /s/ SCOT B. JARVIS ----------------------------- Scot B. Jarvis, an Individual S-2 [Registration Rights Agreement] MICHAEL J. WILLNER, an Individual By: /s/ MICHAEL J. WILLNER --------------------------------- Michael J. Willner, an Individual S-3 [Registration Rights Agreement] SPRING POINT PARTNERS, L.P. By: /s/ JOHN D. BOTTI ------------------------------- John D. Botti, Managing Partner S-4 [Registration Rights Agreement] NEWBERG FAMILY TRUST UTA DTD 12/18/90 By: /s/ BRUCE NEWBERG ---------------------- Bruce Newberg, Trustee S-5 [Registration Rights Agreement] FREDERICK J. AND ROBIN GRACE WARREN, as Joint Tenants By: /s/ FREDERICK J. WARREN ----------------------- Frederick J. Warren By: /s/ ROBIN GRACE WARREN ---------------------- Robin Grace Warren S-6 [Registration Rights Agreement] STROME SUSSKIND HEDGECAP FUND, L.P. By: Strome Susskind Investment Management, L.P. Its: General Partner By: SSCO, Inc. Its: General Partner By: /s/ JEFFREY SUSSKIND -------------------------- Jeffrey Susskind, Director and Vice President STROME HEDGECAP LIMITED By: Strome Susskind Investment Management, L.P. Its: General Partner By: SSCO, Inc. Its: General Partner By: /s/ JEFFREY SUSSKIND -------------------------- Jeffrey Susskind, Director and Vice President STROME OFFSHORE, LIMITED By: Strome Susskind Investment Management, L.P. Its: Investment Advisor By: SSCO, Inc. Its: General Partner By: /s/ JEFFREY SUSSKIND -------------------------- Jeffrey Susskind, Director and Vice President S-7 [Registration Rights Agreement] STROME PARTNERS, L.P. By: Strome Susskind Investment Management, L.P. Its: General Partner By: SSCO, Inc. Its: General Partner By: /s/ JEFFREY SUSSKIND -------------------------- Jeffrey Susskind, Director and Vice President S-8 [Registration Rights Agreement] MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ SARVAS SAVVINIDIS ---------------------- Sarvas Savvinidis, Director of Operations REMINGTON INVESTMENT STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its :General Partner By: /s/ SARVAS SAVVINIDIS ---------------------- Sarvas Savvinidis, Director of Operations S-9 [Registration Rights Agreement] CITIVENTURE 96 PARTNERSHIP FUND, L.P. By: Chancellor LGT Asset Management, Inc., Its: Investment Advisor By: /s/ ALLESANDRO PIOL ------------------------- Allesandro Piol, Managing Director CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS II, L.P. By: CPCO Associates, L.P. Its: Investment General Partner By: Chancellor LGT Venture Partners, Inc., Its: General Partner By: /s/ ALLESANDRO PIOL ------------------------- Allesandro Piol, Managing Director CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS I, C.V. By: Chancellor LGT KME IV Partners, L.P. Its: Investment General Partner By: Chancellor LGT Venture Partners, Inc. Its: General Partner By: /s/ ALLESANDRO PIOL ------------------------- Allesandro Piol, Managing Director S-10 [Registration Rights Agreement] CHANCELLOR LGT PRIVATE CAPITAL OFFSHORE PARTNERS III, L.P. By: CPCP Associates, L.P. Its: General Partner By: Chancellor LGT Venture Partners, Inc. Its: General Partner By: /s/ ALLESANDRO PIOL ------------------------- Allesandro Piol, Managing Director S-11 [Registration Rights Agreement] OAK INVESTMENT PARTNERS VII, LIMITED PARTNERSHIP By: Oak Associates VII, LLC Its: General Partner By: /s/ BANDEL CARANO ------------------------------ Bandel Carano, Managing Member OAK VII AFFILIATES FUND, LIMITEDPARTNERSHIP By: Oak VII Affiates, L.L.C. Its: General Partner By: /s/ BANDEL CARANO ------------------------------ Bandel Carano, Managing Member OAK INVESTMENT PARTNERS V, LIMITED PARTNERSHIP By: Oak Associates V, L.L.C. Its: General Partner By: /s/ BANDEL CARANO ----------------- Bandel Carano, Managing Member OAK V AFFILIATES FUND, LIMITED PARTNERSHIP By: Oak V Affiliates, a Connecticut partnership Its: General Partner By: /s/ BANDEL CARANO ----------------- Bandel Carano, General Partner S-12 [Registration Rights Agreement] MICROSOFT CORPORATION By: /s/ GREGORY B. MAFFEI --------------------- Title: Chief Financial Officer ----------------------- S-13 -----END PRIVACY-ENHANCED MESSAGE-----