<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996
REGISTRATION NO. 33-80827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOUND SOURCE INTERACTIVE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 95-4264046
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
2985 E. HILLCREST DRIVE, SUITE A
WESTLAKE VILLAGE, CALIFORNIA 91362
(805) 494-9996
(Address and Telephone Number of
Principal Executive Offices)
VINCENT J. BITETTI
CHIEF EXECUTIVE OFFICER
2985 E. HILLCREST DRIVE, SUITE A
WESTLAKE VILLAGE, CALIFORNIA 91362
(805) 494-9996
(Name, Address and Telephone Number
of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Sean P. McGuinness, Esq. Catherine DeBono Holmes, Esq.
McDermott, Will & Emery Jeffer, Mangels, Butler & Marmaro LLP
1850 K Street, N.W. 2121 Avenue of the Stars
Suite 500 10th Floor
Washington, D.C. 20006 Los Angeles, California 90067
(202) 887-8000 (310) 203-8080
Fax: (202) 778-8087 Fax: (310) 203-0567
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
(Continued on next page)
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<PAGE>
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value ("Common Stock")
(2)............................................. 3,260,338(sh) $ 4.00 $13,041,352.00 $ 4,497.02
Common Stock Purchase Warrants (the "Redeemable
Warrants") (3).................................. 7,069,665(wt) .25 1,767,416.25 609.45
Common Stock issuable upon exercise of Redeemable
Warrants, ASSI Warrants and ASSI Loan Warrants
(4)............................................. 11,169,665(sh) 4.40 49,146,526.00 16,947.08
Representative's Warrants........................ 2(wt) 50.00 50.00 .02
Common Stock issuable upon exercise of
Representative's Warrants....................... 240,000(sh) 5.80 1,392,000.00 480.00
Total Registration Fee........................... $22,533.57(5)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes: (i) 2,400,000 shares of Common Stock registered for the account of
the Registrant, (ii) 340,000 shares of Common Stock registered for the
account of the Registrant and 20,000 shares of Common Stock registered for
the account of a selling stockholder which the Underwriters have the option
to purchase to cover over-allotments, if any, and (iii) 500,338 shares of
Common Stock registered for the account of certain Selling Security Holders.
(3) Includes: (i) 1,200,000 Redeemable Warrants registered for the account of
the Registrant, (ii) 5,689,665 Redeemable Warrants registered for the
account of certain Selling Security Holders, and (iii) 180,000 Redeemable
Warrants registered for the account of the Registrant which the Underwriters
have the option to purchase to cover over-allotments, if any.
(4) Includes: (i) 1,200,000 shares of Common Stock issuable by the Registrant
upon exercise of Redeemable Warrants which Redeemable Warrants are being
registered for the account of the Registrant, (ii) 180,000 shares of Common
Stock issuable by the Registrant upon exercise of Redeemable Warrants which
the Underwriters have the option to purchase to cover over-allotments, if
any, (iii) 5,689,665 shares of Common Stock issuable by the Registrant upon
exercise of Redeemable Warrants which Redeemable Warrants are being
registered for the account of certain Selling Security Holders, (iv)
2,000,000 shares of Common Stock issuable by the Registrant upon exercise of
warrants held by ASSI, Inc., and (v) up to 2,100,000 shares of Common Stock
issuable by the Registrant upon exercise of warrants issuable to ASSI, Inc.
pursuant to the ASSI Convertible Loan.
(5) A registration fee of $23,318.76 was paid with the initial filing of this
Registration Statement. Consequently, no registration fee is being paid with
this filing.
Pursuant to Rule 416, there are also being registered hereby such additional
indeterminate number of shares of such Common Stock as may become issuable by
reason of stock splits, stock dividends and similar adjustments as set forth in
the provisions of the Redeemable Warrants and the Representative's Warrant.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two Prospectuses.
The first Prospectus forming a part of this Registration Statement is to be
used in connection with the underwritten public offering of: 2,760,000 shares of
the Registrant's Common Stock (including 360,000 shares of Common Stock subject
to the Underwriters' over-allotment option); and 1,380,000 of the Registrant's
Redeemable Warrants (including 180,000 Redeemable Warrants subject to the
Underwriters' over-allotment option), and immediately follows the Cross
Reference Sheet.
The second Prospectus forming a part of this Registration Statement is to be
used in connection with the sale from time to time by the Company and certain
selling security holders of the Company of: 1,380,000 shares of Common Stock
underlying the Registrant's Redeemable Warrants issuable by the Company upon
exercise of such Redeemable Warrants; 500,338 shares of Common Stock being sold
by the selling security holders; 5,689,665 Redeemable Warrants being sold by the
selling security holders; 5,689,665 shares of Common Stock underlying the
selling security holders' Redeemable Warrants issuable by the Company upon
exercise of such Redeemable Warrants; 2,000,000 shares of Common Stock
underlying the ASSI Warrants issuable by the Company upon exercise of such ASSI
Warrants; and up to 2,100,000 shares of Common Stock underlying the ASSI Loan
Warrants issuable by the Company upon conversion of the ASSI Convertible Loan.
The second Prospectus will consist of (i) the cover page and inside cover page
of the second Prospectus, (ii) pages 3 through 69 of the first Prospectus (other
than the sections entitled "Resale of Outstanding Securities" and
"Underwriting") and pages F-1 through F-23 of the first prospectus, (iii) pages
SS-3 through SS-5 (which will appear in place of the section entitled "Resale of
Outstanding Securities"), (iv) page SS-6 (which will appear in place of the
section entitled "Underwriting") and (v) the back cover page, which is the last
page of the second Prospectus.
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN EACH PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUSES
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors; Business
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution............................................. Dilution
7. Selling Security-Holders............................. Selling Security Holders
8. Plan of Distribution................................. Outside Front Cover Page; Risk Factors; Underwriting
9. Legal Proceedings.................................... Business -- Legal Matters
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Business; Management -- Executive Officers and
Directors
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Stockholders
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Underwriting
15. Organization Within Last Five Years.................. Business
16. Description of Business.............................. Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related Transactions....... Management; Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. Risk Factors; Description of Securities;
Underwriting; Management -- Executive Compensation
21. Executive Compensation............................... Management -- Executive Compensation
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 26, 1996
PROSPECTUS
[SOUND SOURCE INTERACTIVE, INC. LOGO]
2,400,000 SHARES OF COMMON STOCK AND
1,200,000 REDEEMABLE WARRANTS
------------------
Sound Source Interactive, Inc. (the "Company") hereby offers 2,400,000
shares (the "Shares") of common stock, par value $.001 per share (the "Common
Stock"), and 1,200,000 redeemable warrants (the "Redeemable Warrants") (the
Shares and the Redeemable Warrants offered hereby by the Company are sometimes
collectively referred to herein as the "Securities"). The Shares and the
Redeemable Warrants may be purchased separately, and will be separately
tradeable immediately upon issuance. It is currently anticipated that the
initial public offering price will be $4.00 per share of Common Stock and $.25
per Redeemable Warrant. Each Redeemable Warrant entitles the holder thereof to
purchase one share of Common Stock at a purchase price equal to 110 percent of
the initial public offering price per share, subject to adjustment, at any time
during the 54-month period commencing one year after the date of this
Prospectus, and is redeemable by the Company at a redemption price of $.25 per
Redeemable Warrant, commencing one year after the date of this Prospectus,
provided that the average closing bid price of the Common Stock equals or
exceeds 140 percent of the initial public offering price per share for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption. See "Description of
Securities -- Redeemable Warrants."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION.
SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 9 AND 25, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $4.00 $.40 $3.60
Per Redeemable Warrant...................... $ .25 $.025 $ .225
Total (3)................................... $9,900,000.00 $990,000.00 $8,910,000.00
</TABLE>
(1) Does not include additional compensation to the Representatives in the form
of a non-accountable expense allowance. For indemnification arrangements
with, and additional compensation payable to, the Underwriters, see
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company, estimated
at approximately $732,000 in the aggregate, including the Representatives'
non-accountable expense allowance.
(3) For the purpose of covering over-allotments, if any, the Company and certain
affiliated selling stockholders have granted to the Underwriters an option,
exercisable within 45 days from the date of this Prospectus, to purchase up
to 360,000 additional shares of Common Stock and/or up to 180,000 additional
Redeemable Warrants. If such over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Proceeds to Company will
be $11,305,000 and $1,130,500 and $10,174,500, respectively.
The Securities are offered by the Underwriters, when, as and if delivered to
and accepted and subject to their right to withdraw, cancel or modify this
offering and to reject any orders in whole or in part. It is expected that
delivery of the Securities will be made on or about June , 1996.
------------------------
THE BOSTON GROUP, L.P. JOSEPH STEVENS & COMPANY, L.P.
The date of this Prospectus is June , 1996
<PAGE>
[INSERT COVER ART]
Prior to this offering, there has been no public market for the Securities
and there can be no assurance that a market for the Securities will develop or,
if a market develops, that it will be sustained. The Common Stock and Redeemable
Warrants have been approved for quotation on the Nasdaq SmallCap Market under
the symbols SSII and SSIIW for the Common Stock and Redeemable Warrants,
respectively. The initial public offering prices for the Common Stock and
Redeemable Warrants and the exercise price of the Redeemable Warrants have been
determined by negotiation between the Company and The Boston Group, L.P. and
Joseph Stevens & Company, L.P., as representatives (the "Representatives") of
the several Underwriters, and are not necessarily related to the Company's asset
value, net worth or other established criteria of value. See "Risk Factors" and
"Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR THE REDEEMABLE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements, with a report thereof by its
independent certified public accountant, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Sound Source Interactive, Inc. (the "Company") is engaged primarily in
developing, publishing and marketing educational, interactive computer software
for children. INTERACTIVE MOVIEBOOKS-TM-, which combine text, photos, sound
clips and actual film footage of well recognized family films and cartoon
series, are the Company's major software products. INTERACTIVE MOVIEBOOKS-TM-
are developed and published by the Company on compact disk-read only memory
("CD-ROM") for multimedia personal computers ("Multimedia PCs") as entertaining,
interactive reading tools for young children. The Company also produces a
variety of entertainment computer software utilities which incorporate screen
savers, sound clips known as AUDIOCLIPS-Registered Trademark- and other content
based on licensed entertainment properties. The new entertainment utilities are
marketed as limited edition serialized collector editions. The Company is
currently developing another line of products which it refers to as creativity
centers. This product line combines learning activities such as painting,
drawing, matching, puzzles and mazes within a framework of three distinct skill
levels.
The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM- and other popular titles. The
Company also holds licenses for new products currently being developed for
release in 1996 on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-,
DRAGONHEART-TM- and I LOVE LUCY-TM-. The Company is continuing the negotiation
of additional licenses for its INTERACTIVE MOVIEBOOKS-TM-, entertainment
utilities and creativity centers. Management believes the Company is capable of
continuing to obtain new licenses for major motion pictures and television shows
and developing new, high quality software products using content from these
entertainment properties.
The powerful capabilities and declining price of Multimedia PCs have enabled
them to draw acceptance as all purpose, functional educational and entertainment
products for home and school use. Industry sources state that the installed base
of Multimedia PCs exceeds 9,000,000 units. The technological capabilities of
Multimedia PCs have allowed the Company to produce interactive software that is
"user friendly" while maintaining what management believes are high standards in
design, sound quality, three-dimensional sound effects and quality duplication
of motion picture footage. Management believes that the Company is well
positioned to participate in this market, not only through expansion of its
existing software products, but through development opportunities in other media
formats, such as interactive television and the Internet.
On June 1, 1996 the Company entered into a Distribution Services Agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS"). SSIDS is the
consumer software distribution unit of Simon & Schuster, Inc., the publishing
operation of Viacom Inc. Pursuant to this new distribution agreement, SSIDS will
provide distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. The Company believes that, pursuant to its previous
distribution arrangements, its products are in distribution to approximately
6,000 retail outlets. Retailers currently selling the Company's products include
Target, Tower Records, Sears, Wal-Mart,
3
<PAGE>
Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead, Electronics
Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam Goody, Sam's
Club, QVC, Musicland, Circuit City, Blockbuster Video and others.
The Company's objective is to be a leading publisher of high quality, value
priced, family- oriented software. To achieve this objective, the Company
intends to (i) focus primarily on developing products with educational and
entertainment value which are based on popular movies, television series and
comic book characters and are easy to use and install, (ii) develop a broad line
of products, upgrade successful products and develop product line extensions and
complementary products, (iii) leverage studio relationships to develop
cross-marketing promotional programs, (iv) promote tradename recognition, (v)
leverage its licensed content to develop products intended for the game market,
and (vi) pursue strategic alliances and acquisitions.
The Company is located at 2985 East Hillcrest Drive, Suite A, Westlake
Village, California 91362. Its telephone number is (805) 494-9996. Its facsimile
number is (805) 379-3446.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the 2,400,000 shares of Common Stock and 1,200,000 Redeem-
Company.......................... able Warrants. Each Redeemable Warrant entitles the
holder thereof to purchase one share of Common Stock.
The Common Stock and Redeemable Warrants may be
purchased separately, and will be separately tradeable
commencing on the date of this Prospectus. See
"Description of Securities."
Terms of the Redeemable
Warrants......................... Each Redeemable Warrant will entitle the holder to
purchase one share of Common Stock at a price of 110
percent of the initial public offering price per share,
subject to adjustment, during the 54-month period
commencing one year after the date of this Prospectus.
In the event that the Redeemable Warrants are called for
redemption, they will be exercisable for 30 days
preceding the applicable redemption date.
Redemption of the Redeemable
Warrants......................... Commencing one year after the date of this Prospectus,
the Redeemable Warrants will be subject to redemption at
$.25 per Redeemable Warrant if the average closing bid
price of the Common Stock equals or exceeds 140 percent
of the initial public offering price per share for any
20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to
the date of the notice of redemption. See "Description
of Securities -- Redeemable Warrants."
Shares of Common Stock
Outstanding:
Prior to the offering........... 1,808,291 shares.
After the offering.............. 4,208,291 shares, or 4,548,291 shares if the
Underwriters' over-allotment option is exercised. Of the
360,000 shares subject to the Underwriters'
over-allotment option, 340,000 are being offered by the
Company and 20,000 are being offered by an affiliated
stockholder. See "Principal and Selling Stockholders."
Up to 12,220,183 additional shares may be issued in the
future under the Redeemable Warrants offered hereby and
options and warrants that are outstanding or agreed to
be issued.
Use of Proceeds................... The Company intends to use the net proceeds of this
offering to repay notes issued to investors in the
Company's 1995 Private Placement (as defined below) in
the aggregate principal amount of $4,987,500 (plus
accrued interest estimated at $242,500 as of March 31,
1996), to repay a temporary financing provided by ASSI,
Inc. in the principal amount of $500,000, to obtain
additional licenses, to pay sales and marketing costs,
to make capital expenditures and for working capital.
See "Use of Proceeds" and "Certain Transactions -- 1995
Private Placement."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Nasdaq Symbols:
Common Stock.................... SSII
Redeemable Warrants............. SSIIW
Risk Factors...................... An investment in the Common Stock and Redeemable War-
rants involves a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution."
Agreements with ASSI, Inc. ....... On April 30, 1996, the Company entered into a consulting
agreement with ASSI, Inc., which also is a creditor of
the Company. Pursuant to that agreement, ASSI, Inc. has
provided and agreed to provide certain financial and
personnel consulting services to the Company, in
consideration for which the Company has issued to ASSI,
Inc. warrants (the "ASSI Warrants") to purchase
2,000,000 shares of Common Stock. On April 30, 1996, the
Company, Vincent J. Bitetti and Eric H. Winston (who are
currently executive officers and the controlling
stockholders of the Company) also entered into a
Stockholder Voting Agreement with ASSI, Inc., pursuant
to which each agreed to vote all of their Common Stock
for certain director nominees.
On May 30, 1996, the Company entered into an agreement
with ASSI, Inc. whereby ASSI, Inc. loaned the Company
$500,000 (the "ASSI Convertible Loan"). The ASSI
Convertible Loan is due on the earlier of September 1,
1996 or the completion of the Company's initial public
offering made hereby. Upon the closing of the Company's
initial public offering, ASSI, Inc. may convert all or
part of the ASSI Convertible Loan into warrants to
purchase Common Stock at a conversion price of $.25 per
warrant (the "ASSI Loan Warrants").
The terms of the ASSI Warrants and the ASSI Loan
Warrants (if any) will be substantially the same as
those of the Redeemable Warrants, except that for as
long as they are held by ASSI, Inc. such warrants will
be exercisable commencing September 1, 1996, will not be
mandatorily redeemable by the Company and will be
subject to separate registration rights. See "Certain
Transactions -- Agreements With ASSI, Inc."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Resale of Outstanding Securities;
Issuance of Common Stock
Underlying Redeemable Warrants... A separate Prospectus is being filed with the
Registration Statement of which this Prospectus is a
part which relates to the registration by the Company,
at its expense, for the account of certain security
holders (the "Selling Security Holders") of 107,500
shares of Common Stock and 5,689,665 warrants (unless
otherwise indicated, such warrants and the Redeemable
Warrants offered hereby by the Company are collectively
referred to as "Redeemable Warrants") previously issued
by the Company to the Selling Security Holders and
392,338 shares of Common Stock purchasable by a Selling
Security Holder upon exercise of presently exercisable
options, and to the registration for the account of the
Company of (i) 7,069,665 shares of Common Stock issuable
by the Company upon the exercise of the Redeemable
Warrants, (ii) 2,000,000 shares of Common Stock issuable
by the Company upon the exercise of the ASSI Warrants,
and (iii) up to 2,100,000 shares of Common Stock
issuable by the Company upon exercise of the ASSI Loan
Warrants (if any) issuable upon conversion of the ASSI
Convertible Loan. The 500,338 shares of Common Stock and
5,689,665 Redeemable Warrants being so offered for sale
by the Selling Security Holders are sometimes collec-
tively referred to as the "Selling Security Holders'
Securities." The Selling Security Holders' Securities
are not being underwritten in this offering and the
Company will not receive any proceeds from the sale of
the Selling Security Holders' Securities. The Common
Stock and Redeemable Warrants being registered for the
account of the Selling Security Holders may be sold by
the Selling Security Holders or their transferees
commencing on the date of this Prospectus. See "Risk
Factors -- Sale of Certain Securities," "Certain Trans-
actions" and "Resale of Outstanding Securities."
</TABLE>
------------------------
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS GIVES EFFECT TO A 9.25-FOR-1 STOCK SPLIT EFFECTED IN MAY 1994 AND A
1-FOR-5.976 REVERSE STOCK SPLIT EFFECTED IN SEPTEMBER 1995. UNLESS OTHERWISE
INDICATED, SUCH SHARE AND PER SHARE INFORMATION DOES NOT GIVE EFFECT TO: (I) THE
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 340,000
SHARES OF COMMON STOCK AND 180,000 REDEEMABLE WARRANTS FROM THE COMPANY; (II)
THE ISSUANCE OF 1,200,000 SHARES OF COMMON STOCK UNDERLYING THE REDEEMABLE
WARRANTS BEING OFFERED BY THE COMPANY; (III) THE ISSUANCE OF 5,689,665 SHARES OF
COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS, 2,000,000 SHARES OF COMMON
STOCK UNDERLYING THE ASSI WARRANTS AND UP TO 2,100,000 SHARES OF COMMON STOCK
UNDERLYING THE ASSI LOAN WARRANTS (IF ANY) ISSUABLE UPON CONVERSION OF THE ASSI
CONVERTIBLE LOAN BEING OFFERED BY THE SELLING SECURITY HOLDERS; (IV) THE
ISSUANCE OF 180,000 SHARES OF COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS
INCLUDED IN THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (V) THE EXERCISE OF A
WARRANT GRANTED TO THE REPRESENTATIVE (THE "REPRESENTATIVE'S WARRANT") TO
PURCHASE UP TO 240,000 SHARES OF COMMON STOCK AND/OR 120,000 REDEEMABLE
WARRANTS; (VI) THE ISSUANCE UPON EXERCISE OF THE REPRESENTATIVES' WARRANT OF
240,000 SHARES OF COMMON STOCK; (VII) THE ISSUANCE OF 384,070 SHARES OF COMMON
STOCK UNDERLYING OPTIONS GRANTED PURSUANT TO THE COMPANY'S 1992 STOCK OPTION
PLAN; (VIII) 500,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO
THE COMPANY'S 1995 STOCK OPTION PLAN, AS TO WHICH THE COMPANY HAS GRANTED NO
OPTIONS AND HAS AGREED TO GRANT 13,610 OPTIONS; OR (IX) THE ISSUANCE OF 292,838
SHARES OF COMMON STOCK UNDERLYING OPTIONS HELD BY THE COMPANY'S PRESIDENT.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table of summary financial information is derived from and
should be read in conjunction with the Company's financial statements and the
footnotes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------ -----------------------------
STATEMENT OF OPERATIONS DATA 1994 1995 1995 1996
- ----------------------------------------------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Retail software sales................................ $ 1,313,890 $ 1,255,230 $ 1,170,451 $ 1,874,734
OEM sales............................................ 5,500 479,675 370,409 32,237
Development agreement revenues....................... 112,520 343,250 217,250 --
Royalties............................................ 253,961 76,771 76,253 21,678
-------------- -------------- ------------- --------------
Net sales from continuing operations............... 1,685,871 2,154,926 1,834,363 1,928,649
Gross profit......................................... 505,068 1,082,235 780,698 813,544
Noncash compensation expense recorded in connection
with Common Stock and Common Stock options issued
for services........................................ 2,992,862 733,165 289,998 --
Other expenses....................................... 1,374,052 1,940,124 1,384,285 4,049,126
Loss from continuing operations...................... (3,861,846) (1,591,054) (893,629) (3,235,582)
Loss from discontinued operations.................... (115,887) (143,106) (49,046) --
Net loss............................................. (3,977,733) (1,734,160) (942,631) (3,235,582)
Loss per common share from continuing operations..... $ (2.38) $ (0.85) $ (0.48) $ (1.76)
Loss per common share from discontinued operations... $ (0.07) $ (0.08) $ (0.03) --
Net loss per common share............................ $ (2.45) $ (0.93) $ (0.51) $ (1.76)
Weighted average number of common shares
outstanding......................................... 1,626,107 1,862,908 1,859,150 1,842,638
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------
BALANCE SHEET DATA ACTUAL AS ADJUSTED(1)
- ---------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Working capital................................................................... $ (4,140,420) $ 3,576,665
Total assets...................................................................... 3,050,240 5,390,400
Current liabilities............................................................... 6,988,664 1,611,754
Long term debt.................................................................... 20,000 20,000
Stockholders' equity (deficit).................................................... (3,958,424) 3,758,661
</TABLE>
- ------------------------
(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an assumed initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an assumed initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the UnderwriterD's discount and $732,000 for expenses,
including the Representatives' nonaccountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and all
of the Company's other funded indebtedness (estimated at $5,230,000 at March
31, 1996) with a portion of such proceeds. The as adjusted amounts do not
reflect the issuance of up to 340,000 shares of Common Stock and 180,000
Redeemable Warrants by the Company to cover over-allotments, if any, the
exercise of the Representatives' Warrant to purchase up to 240,000 shares of
Common Stock, or the exercise of any other outstanding (or agreed to be
issued) options or warrants to purchase up to an additional 12,220,183
shares of Common Stock.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THE PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE MAKING AN INVESTMENT.
PRODUCT DISTRIBUTION. In June 1995, the Company entered into a Sales and
Distribution Agreement with Acclaim Distribution, Inc., a subsidiary of Acclaim
Entertainment, Inc. (collectively, "Acclaim"), a distributor of entertainment
software and related products. The Company had no sales to or through Acclaim
during its fiscal year ended June 30, 1995. During the nine-month period ended
March 31, 1996, of the Company's total revenues from retail software sales of
$1,874,734, a total of $1,617,839 (84 percent) were generated by Acclaim. Under
the terms of this agreement, Acclaim was the exclusive distributor of the
Company's products on a worldwide basis, subject to certain limited exceptions.
The Company was not satisfied with the distribution of its products through
Acclaim, and determined to terminate the Acclaim distribution agreement in March
1996. The Company and Acclaim terminated the distribution agreement as of April
30, 1996. See "Business -- Product Distribution -- Relationship With Acclaim."
On June 1, 1996 the Company entered into a new Distribution Services
Agreement with SSIDS. Pursuant to this new distribution agreement, SSIDS will
provide distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. See "Business -- Product Distribution -- Relationship
With SSIDS."
The SSIDS distribution agreement is for a term of two years. The Company
will be substantially dependent upon SSIDS for the distribution of its products
throughout North America during the term of the agreement. SSIDS, however, will
not be obligated to sell any specified minimum quantity of the Company's
products. There can be no assurance as to the volume of product sales that may
be achieved by SSIDS. Because the Company's rights to market its products
through channels other than SSIDS are limited, the Company's ability to realize
the cash flow necessary to fund its ongoing operations and to achieve
profitability will be largely dependent upon the success of SSIDS in marketing
its products. In addition, the Company may experience a loss of sales momentum
as a result of the transition from utilizing Acclaim to SSIDS as its exclusive
distributor.
PRODUCT RETURNS; COLLECTION OF ACCOUNTS RECEIVABLE; CREDIT RISK. On or
before June 30, 1996, Acclaim will render a final accounting to the Company
together with payment of the balance of any amounts due to the Company under the
distribution agreement. Acclaim has notified its accounts that it will not
accept returns of any of the Company's software products after June 30, 1996.
The Company, however, will remain liable for all such returns regardless of when
received by Acclaim. As of March 31, 1996, the Company had established a reserve
equal to 50 percent of the amount of its account receivable from Acclaim. The
Company believes that such reserve is sufficient to cover any foreseeable
returns to Acclaim. There can be no assurance, however, as to the adequacy of
the reserve. See "Business -- Product Distribution -- Relationship with
Acclaim."
Under the new SSIDS distribution agreement, SSIDS will be responsible for
collection of accounts and the Company will be responsible for product returns.
The Company intends to maintain an appropriate reserve for product returns based
upon its prior experience and current market conditions, which will approximate
15 percent of gross revenues, against which credits for actual returns will be
applied. Although the Company believes that these reserves will be adequate,
there can be no assurance that its actual losses due to returns will not exceed
the reserved amount. See "Business -- Product Distribution -- Relationship with
SSIDS."
PAST OPERATING LOSSES; GOING CONCERN QUALIFICATION. The Company sustained
net losses of $3,977,733 and $1,734,160 for the fiscal years ended June 30, 1994
and 1995, respectively, and a net
9
<PAGE>
loss of $3,235,582 for the nine months ended March 31, 1996. The Company's
losses include noncash charges attributable to Common Stock and options for the
purchase of Common Stock issued for services rendered of $2,992,862 and $733,165
for the fiscal years ended June 30, 1994 and 1995, respectively. See generally
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will continue to sustain losses unless it can further
increase product sales.
In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. The Company believes that its auditors will
delete such going concern qualification upon the completion of this offering and
repayment of the Company's funded indebtedness out of the proceeds hereof and
the Company's demonstration of its ability to realize sufficient cash flow to
sustain its operations for the foreseeable future. The Company believes that the
net proceeds of this offering, together with its cash on hand and anticipated
net cash flow from operations, will be sufficient to fund the Company's cash
requirements for at least the next 12 months. However, there can be no assurance
that additional unanticipated expenses will not arise which would require
additional financing. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Independent Auditors' Report."
LIMITED HISTORY OF BUSINESS OPERATIONS. The Company has limited operating
history. The Company conducted substantially no business prior to its
acquisition of the Subsidiary (as hereinafter defined) in 1994. The Subsidiary
itself commenced operations originally as a nonincorporated entity in 1988. The
Subsidiary's revenues originally were derived from the sale of sound patches for
music synthesizers. Since 1993, revenues and income have been predominately
derived from entertainment utilities software for Macintosh and IBM-compatible
computers incorporating content licensed from major motion picture studios. See
"The Company" and "Business."
NEW BUSINESS RISKS FOR THE LICENSED SOFTWARE PRODUCTS. The business of
creating and marketing licensed software derived from motion pictures is a new
and evolving industry, which will be subject to a number of risks, including
trends in personal computer sales, changes in available technology and changes
in the competition for licenses to develop software derived from motion
pictures. Changes in these factors could have a material adverse effect on the
Company's revenues and potential profitability. In 1994, the Company entered the
multimedia interactive educational software market. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of its
future performance. See generally "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
COMPETITION. The market for the Company's consumer software products is
intensely and increasingly competitive. Existing consumer software companies may
broaden their product lines to compete with the Company's products, and
potential new competitors, including computer hardware or software
manufacturers, diversified media companies and book publishing companies, may
enter or increase their focus on the consumer software market, resulting in even
greater competition for the Company. Many of the companies with which the
Company currently competes or may compete in the future have greater financial,
technical, marketing, sales and customer support resources, as well as greater
name recognition and better access to consumers, than the Company. The
competition for retail shelf space is also likely to increase due to the
continued proliferation of consumer software products and companies. In
addition, to the extent that competitors achieve performance, price or other
selling advantages, the Company could be materially adversely affected. There
can be no assurance that the Company will have the resources required to respond
effectively to market or technological changes or to compete successfully in the
future. In addition, increasing competition in the consumer software market may
cause prices to fall, which may materially adversely affect the Company's
business, operating results and financial condition.
10
<PAGE>
The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), Lucasfilm Ltd., Warner Bros.
Consumer Products, CBS Entertainment, MCA/Universal Merchandising, Inc., Carolco
Pictures Inc., DC Comics, MGM/UA Merchandising, Inc. and others. Several of
these major motion picture studios now have captive software divisions. As these
types of software products become better known in the marketplace, these profit
centers may begin to vie for their studio's products. Management believes that
Disney, Lucasfilm and Paramount/ Viacom are currently the most active studios in
publishing their own product to create software packages. Fox, Universal
Pictures, Sony Pictures and Warner Bros. each have announced the formation of
their own interactive computer software divisions to publish software products
using their own licensed content, which could have a material adverse effect on
the Company's ability to renew existing licenses or obtain new licenses for
additional movie titles. The establishment of these divisions may limit the
Company's ability to obtain licenses from the studios involved, which in turn
could reduce the Company's potential product offerings. To date, the Company has
had ample product licensing opportunities, and management believes that even if
some sources are lost due to the establishment of interactive software divisions
by some motion picture studios, there will continue to be multiple sources of
licensing for the Company's new products. There can be no assurance, however,
that the Company will have sufficient product licensing opportunities in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality" and "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL; SUBSTANTIAL MANAGEMENT COMPENSATION. The
Company's success depends to a significant extent on the performance and
continued service of its senior management and certain key employees. In
particular, the loss of the services of Vincent J. Bitetti, Chairman of the
Board and Chief Executive Officer, could have a material adverse effect on the
Company. Mr. Bitetti has agreed to work full-time for the Company and has signed
an employment agreement for the period ending September 15, 1998. Competition
for highly skilled employees with technical, management, marketing, sales,
creative product development and other specialized training is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. In addition, there can be no assurance that employees
will not leave the Company or compete against the Company. The Company's failure
to attract additional qualified employees or to retain the services of key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. The Company is the beneficiary of a
$1,000,000 life insurance policy on Vincent J. Bitetti, Chairman of the Board
and Chief Executive Officer, a $2,000,000 life insurance policy on Eric H.
Winston, President and Chief Operating Officer, and a $500,000 life insurance
policy on Ulrich Gottschling, Chief Financial Officer, but does not currently
maintain life insurance on any of its other employees. See "Management --
Directors and Executive Officers" and "-- Employment Agreements." Following this
offering, the Company intends to obtain an additional $4,000,000 of life
insurance coverage on Vincent J. Bitetti.
The Company's Chairman of the Board and Chief Executive Officer currently
receives annual base compensation of $200,000, and its President and Chief
Operating Officer currently receives annual base compensation of $175,000. Such
base compensation, however, will be reduced by 20 percent on the date of this
Prospectus until such time as the Company generates net sales of $1,500,000 or
more for any three consecutive month period. In addition, each is entitled to
receive cash bonuses based upon the Company's performance. For fiscal 1995, each
received a salary of $150,000 and a bonus of $75,000. The Company's President
and Chief Operating Officer also has received options to purchase a total of
392,838 shares of Common Stock at nominal cost since April 1994 (including
options to purchase 292,838 shares granted by the Company and options to
purchase 100,000 shares granted by the Chairman of the Board and Chief Executive
Officer). See "Management -- Executive Compensation." Such compensation may be
considered excessive in view of the Company's size and history of operating
losses.
After the closing of this offering, the Company intends to hire a new Chief
Executive Officer upon terms to be negotiated. When the new Chief Executive
Officer is hired, Mr. Bitetti will resign as Chief
11
<PAGE>
Executive Officer and will continue to serve as Chairman of the Board and retain
his current salary, bonuses and benefits, provided that his salary will be
adjusted to an amount not less than that of the new Chief Executive Officer, up
to a maximum of $300,000.
NO OUTSIDE DIRECTORS. The Company currently has no independent directors.
Consequently, the Company's management is in a position to control the
operations of the Company and is not subject to independent review. Following
this offering, the Company intends to increase the size of its Board of
Directors from three to five, to include one director nominated by ASSI, Inc.
and two other independent directors. The Company has agreed to grant to each of
The Boston Group, L.P., Joseph Stevens & Company, L.P. and ASSI, Inc., the right
to nominate from time to time one director of the Company or to have an
individual designated thereby attend all meetings of the Board of Directors of
the Company as a nonvoting advisor. Upon such expansion, it is anticipated that
the Board will include three independent directors. See "Management -- Directors
and Executive Officers," "Underwriting" and "Certain Transactions -- Agreements
with ASSI, Inc."
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION. The Company's
Certificate of Incorporation provides that a director of the Company, to the
maximum extent now or hereafter permitted by Section 102(b)(7) of the Delaware
General Corporation Law (the "Delaware GCL"), will have no personal liability to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. The Company's Bylaws generally require the Company to
indemnify and advance expenses to its directors, officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company also has
entered into indemnification agreements with each of its directors whereby the
Company will indemnify each such person against certain claims arising out of
certain past, present or future acts, omissions or breaches of duty committed by
an indemnitee while serving as a Company director. See "Management -- Limitation
of Liability and Indemnification of Directors."
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer software
industry is undergoing rapid changes, including evolving industry standards,
frequent new product introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including operating systems
and media formats, could render the Company's existing products obsolete or
unmarketable. In 1993, for example, there was a significant shift in consumer
demand from DOS-based software to
Microsoft-Registered Trademark--Windows-Registered Trademark--based software.
More recently, consumer demand has been shifting from disk-based software to
software on CD-ROM. In addition, the recent introduction of the new Windows
'95-Registered Trademark- operating system may affect consumer preferences and
the demand for new consumer software in ways which cannot be foreseen. In the
future, there could be radical changes in software delivery systems, replacing
CD-ROM with on-line or other methods of distribution.
There can be no assurance that the current demand for the Company's
Windows-Registered Trademark- and CD-ROM products will continue or that the mix
of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences. The success of the Company
will be dependent upon its ability to develop, introduce and market products
which respond to such changes in a timely fashion. The Company intends to
maintain its products in accordance with industry standards. The development
cycle for products utilizing new operating systems or formats may be
significantly longer than the Company's current development cycle for products
on existing operating systems and formats and may require the Company to invest
resources in products that may not become profitable. Although the Company's
software is Windows '95-Registered Trademark- compatible, there can be no
assurance that the Company will be successful in developing and marketing
products for certain advanced and emerging operating systems and formats that
may arise in the future. Failure to develop and introduce new products and
product enhancements in a timely fashion could result in significant product
returns and inventory obsolescence and could impair the Company's business,
operating results and financial condition. See "Business -- Products" and "--
Development."
UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES. Consumer
preferences for software products are difficult to predict, and few consumer
software products achieve sustained
12
<PAGE>
market acceptance. The Company believes that the highest sales of each of its
products will occur during the six- to nine-month periods following their
introduction, and that thereafter sales will diminish and pricing will be
reduced. Therefore, the Company's success is dependent upon the market
acceptance of its existing products and the continued development and
introduction of new products which achieve market acceptance. There can be no
assurance that the Company's existing products will continue to realize market
acceptance, or that new products introduced by the Company will achieve any
significant degree of market acceptance or sustain any such acceptance for any
significant period of time. Failure of the Company's new and existing products
to achieve and sustain market acceptance will have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Products" and "-- Development."
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company has
experienced, and may continue to experience, fluctuations in operating results
due to a variety of factors, including the size and rate of growth of the
consumer software market, market acceptance of the Company's products and those
of its competitors, development and promotional expenses relating to the
introduction of new products or new versions of existing products, ability to
add new distribution channels, product returns, changes in pricing policies by
the Company and its competitors, the accuracy of retailers' forecasts of
consumer demand, the timing of the receipt of orders from major customers, and
account cancellations or delays in shipment. In response to competitive
pressures for new product introductions, the Company may take certain pricing or
marketing actions that could materially and adversely affect the Company's
business, operating results and financial condition. The Company's expense
levels are based, in part, on its expectations as to future sales. Therefore,
operating results could be disproportionately affected by a reduction in sales
or a failure to meet the Company's sales expectations. The Company may be
required to pay in advance or to guarantee royalties, which may be substantial,
to obtain licenses of intellectual properties from third parties before such
properties have been introduced or achieved market acceptance. Defective
products may result in higher customer support costs and product returns.
Additionally, the consumer software business traditionally has been
seasonal. Typically, net sales are highest during the fourth calendar quarter
and decline sequentially in the first and second calendar quarters. The seasonal
pattern is due primarily to the increased demand for consumer software during
the year-end holiday buying season. The Company expects its net sales and
operating results to continue to reflect seasonality. There can be no assurance
that the Company will achieve consistent profitability on a quarterly or annual
basis. Nevertheless, management believes that in the future its results may be
less subject to seasonal fluctuations because its products will be marketed in
conjunction with the releases of major motion pictures and home videos, which
occur throughout the year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" and "-- Seasonality."
DEPENDENCE ON RETAILERS. The Company's retail customers include computer
stores, office supply stores, warehouse clubs, consumer electronics stores,
bookstores, video stores and alternative channels. The Company's customers are
not contractually required to make future purchases of the Company's products
and therefore could discontinue carrying the Company's products in favor of a
competitor's product or for any other reason. Retailers compete in a volatile
industry that is subject to rapid change, consolidation, financial difficulty
and increasing competition from new distribution channels. Due to increased
competition for limited shelf space, retailers are increasingly in a better
position to negotiate favorable terms of sales, including price discounts and
product return policies. Retailers often require software publishers to pay fees
in exchange for preferred shelf space. Retailers may give higher priority to
products other than the Company's, thus reducing their efforts to sell the
Company's products. There can be no assurance that the Company will be able to
increase or sustain its current amount of retail shelf space or promotional
resources, and as a result, the Company's operating results could be materially
adversely affected. In addition, other types of retail outlets and
13
<PAGE>
methods of product distribution may become important in the future, such as
on-line services. It is critical to the success of the Company that as these
changes occur, the Company gains access to those channels of distribution. See
"Business -- Sales and Marketing."
DEPENDENCE ON OUTSIDE SUPPLIERS. The Company contracts with third party
suppliers to provide programming and manufacturing of its products, which the
Company believes allows it to control effectively its costs of production. The
Company relies upon the ability of such suppliers to provide products which are
free of defects. To the extent that any supplier produced defective product
which was not discovered until the product was shipped, it could result in
liability of the Company for returned merchandise and a loss of its reputation
for high quality products. Although the Company would attempt to recoup any
expenses caused to it for defective products, there can be no assurance that it
would be fully compensated for any losses that resulted. See "Business --
Development" and "-- Operations."
RISK OF INABILITY TO MANAGE RAPID GROWTH. The Company is currently
experiencing a period of rapid growth that has placed, and could continue to
place, a significant strain on the Company's financial, management and other
resources. The Company's ability to manage its growth effectively will require
it to continue to improve its operational, financial and management information
systems, and to attract, train, motivate, manage and retain key employees. The
Company may make additional investments in capital equipment to expand into new
product lines. No assurances can be given that these new systems will be
implemented successfully, and the failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition. If
the Company's management becomes unable to manage growth effectively, the
Company's business, operating results and financial condition could be
materially adversely affected. See "Business -- Operations" and "Management --
Directors and Executive Officers."
RISKS ASSOCIATED WITH ACQUISITIONS. As part of its strategy to enhance
revenue growth and market presence, the Company continually evaluates
acquisitions of entertainment software companies and selected titles within
existing or new product categories. In considering an acquisition, the Company
may compete with other potential acquirors, many of which may have greater
financial and operational resources. Further, the evaluation, negotiation and
integration of such acquisitions may divert significant time and resources of
the Company, particularly management. There can be no assurance that suitable
acquisition candidates will be identified, that any acquisitions can be
consummated, or that any acquired businesses or products can be successfully
integrated into the Company's operations. In addition, there can be no assurance
that future acquisitions will not have a material adverse effect upon the
Company's business, operating results and financial condition, particularly in
the fiscal quarters immediately following the consummation of such transactions
due to unexpected expenses which may be associated with integrating such
acquisitions. See "Business -- Business Strategy -- Acquisitions."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The
Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be materially adversely affected. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. See "Business -- Proprietary Rights
and Licenses."
The Company's licenses and other intellectual property may not be
transferred to third parties without the consent of the licensors. Transfer of
ownership of stated percentages of the Common Stock could constitute a
prohibited transfer of the Company's licenses for the LASSIE-TM-, SATURDAY NITE
14
<PAGE>
LIVE-TM- and STAR TREK-TM- titles. All of the Company's licenses with Warner
Bros. (including THE SECRET GARDEN-TM-, BLACK BEAUTY-TM-, FREE WILLY 2-TM- and
BABYLON 5-TM-) provide that a change in "management" will be deemed an
unauthorized assignment of the license. It is not clear under what circumstances
the Company might be deemed to have a change in management which could result in
the termination of these licenses, but the planned expansion of the Company's
Board of Directors to include three independent directors and/or its appointment
of a new Chief Executive Officer could be deemed to constitute such a change in
management. See "Management -- Directors and Executive Officers."
Any future change in ownership or control of the Company, including exercise
of the ASSI Warrants and/or the ASSI Loan Warrants (if any) (see "Certain
Transactions -- Agreements with ASSI, Inc."), could result in the termination of
the licenses referred to above. The potential terminability of such licenses
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may materially adversely affect the market
price of the Common Stock.
Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark and other intellectual property rights
involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
LIMITED TIME PERIOD OF LICENSES. The Company's products are based upon
licensed content of major motion pictures and television shows under license
and/or development agreements with major entertainment studios. See "Business --
General" and "-- Products." All of such license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under each agreement will
extend its terms, provided that the Company is in compliance with all
requirements of each license, including most significantly that the Company has
satisfied the applicable minimum royalty guarantees. In the event that any
licensor fails to renew its license agreement, then the subject license will
terminate and the Company will no longer be entitled to sell the licensed
product. The loss of one or more of the licenses could have a material adverse
effect on the Company's revenues and operating results. There can be no
assurance that the Company will satisfy its performance obligations under any
license or development agreement or that even if such requirements are
satisfied, all material licenses will be renewed. See "Business -- Proprietary
Rights and Licenses."
DEPENDENCE ON NET PROCEEDS OF THIS OFFERING; POSSIBLE NEED FOR ADDITIONAL
FINANCING. The Company is dependent on the net proceeds of this offering or
other financing to repay the aggregate principal amount of $4,987,500 in Private
Notes issued to investors in the Company's 1995 Private Placement, plus accrued
interest estimated at $242,500 as of March 31, 1996. As of the date of this
Prospectus, the Company has been dependent on the net proceeds of approximately
$3,994,000 from its 1995 Private Placement, the net proceeds of approximately
$237,000 from its 1995 Bridge Financing (which was repaid out of the net
proceeds of the Company's 1995 Private Placement), $263,300 of proceeds from the
Private Warrants and the net proceeds of approximately $1,251,000 from its 1994
Private Placement, to fund its working capital requirements. The Company
believes that the proceeds of this offering, together with its cash on hand, and
anticipated net cash flow from operations, will be sufficient to fund the
Company's contemplated cash requirements for at least the next 12 months.
15
<PAGE>
However, there can be no assurance that additional unanticipated expenses will
not arise which would require additional financing. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds to the Company from
the sale of the Securities offered hereby, after deducting underwriting
discounts and the estimated expenses of this offering of $732,000 (including the
Representatives' nonaccountable expense allowance), are estimated to be
approximately $8,178,000 (assuming the Underwriters' over-allotment option is
not exercised), assuming a public offering price of $4.00 per share and $.25 per
Redeemable Warrant. The Company estimates that of such net proceeds, $1,098,000
will be allocated to working capital. If the Underwriters exercise their
over-allotment in full, the Company will realize additional net proceeds of
approximately $1,183,200, all of which will be allocated to working capital. The
Company will have broad discretion in the use of funds allocated to working
capital. See "Use of Proceeds."
RISK OF LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS. As of June
30, 1995, the Company had net operating loss carryforwards of approximately
$2,513,000 for federal income tax purposes, which may be utilized from 1996 to
2011 (subject to certain limitations). It is possible that the consummation of
this offering, including the issuance of the Securities offered hereby and the
Representative's Warrant, and/or the exercise by ASSI, Inc. of the ASSI Warrants
or the ASSI Loan Warrants (if any) (see "Certain Transactions -- Agreements With
ASSI, Inc."), will result in an "ownership change" as defined in Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations promulgated thereunder, or that the issuance of warrants to
investors in the Company's 1995 Bridge Financing and 1995 Private Placement and
the reverse stock split effected by the Company in September 1995 may have
resulted in an ownership change under the Code and said Treasury Regulations. As
a result, the Company's use of its net operating loss carryforwards to offset
taxable income in any post-change period may be subject to certain specified
annual limitations. If there is any ownership change, there can be no assurance
as to the specific amount of net operating loss carryforwards available in any
post-change year since the calculation is based upon a fact-dependent formula.
CONTROL OF THE COMPANY BY OFFICERS AND DIRECTORS AND ASSI, INC. Upon the
consummation of this offering, the current officers and directors of the Company
including the current controlling stockholder, will, in the aggregate,
beneficially own approximately 40.2 percent of the Common Stock (16.1 percent
assuming exercise in full of the Redeemable Warrants and all other outstanding
warrants and options other than the ASSI Warrants and ASSI Loan Warrants, but
excluding issuance of any Common Stock and Redeemable Warrants pursuant to the
over-allotment option). As a result, it is anticipated that these individuals
will be in a position to influence materially, if not control, the outcome of
all matters requiring stockholder approval, including the election of directors.
See "Management," "Principal and Selling Stockholders," "Description of
Securities -- Common Stock" and "Underwriting." Such influence and control is
likely to continue for the foreseeable future.
ASSI, Inc. holds the ASSI Warrants to purchase 2,000,000 shares of Common
Stock, as well as 1,100,000 Redeemable Warrants and 40,000 shares of Common
Stock that it purchased in the 1995 Private Placement. In addition, ASSI, Inc.
may convert the $500,000 principal of and interest accrued as of the closing of
this offering on the ASSI Convertible Loan into ASSI Loan Warrants at the
conversion rate of $.25 per warrant, entitling it to purchase approximately
2,017,000 ASSI Loan Warrants assuming a closing of this offering on or about
June 30, 1996. All of the ASSI Warrants and ASSI Loan Warrants (if any) become
exercisable on September 1, 1996. Assuming ASSI, Inc. converts the principal of
and interest on the ASSI Convertible Loan into ASSI Loan Warrants on or about
June 30, 1996, it would hold warrants to purchase approximately 5,117,000 shares
of Common Stock. Commencing July 2, 1996 (60 days before September 1, 1996)
ASSI, Inc. therefore would beneficially own 5,157,000 shares of Common Stock.
Thereupon ASSI, Inc. will beneficially own approximately
16
<PAGE>
55.3 percent of the outstanding Common Stock (31.9 percent assuming exercise in
full of the Redeemable Warrants and all other outstanding warrants and options,
but excluding issuance of any Common Stock and Redeemable Warrants pursuant to
the over-allotment option). See "Certain Transactions -- Agreements With ASSI,
Inc."
If ASSI, Inc. were to exercise all of the warrants that may be beneficially
owned by it as described above, ASSI, Inc. would be in a position to influence
materially, if not control, the outcome of all matters requiring stockholder
approval, including the election of directors. In addition, the voting power of
the Company's current officers and directors including the controlling
stockholder would be reduced to 19.0 percent of the outstanding Common Stock
(12.0 percent assuming exercise in full of the Redeemable Warrants and all other
outstanding warrants and options, but excluding issuance of any Common Stock and
Redeemable Warrants pursuant to the over-allotment option). ASSI, Inc. has not
indicated to the Company whether it intends to convert the ASSI Convertible Loan
to ASSI Loan Warrants, in whole or in part, or whether it intends to exercise
the ASSI Warrants or ASSI Loan Warrants (if any), in whole or in part.
The Company is, and upon consummation of this offering will be, a
QUASI-California corporation subject to certain provisions of the California
General Corporation Law (the "California GCL"). See "Description of Securities
- -- Application of California GCL." Among other consequences of the Company's
status as a QUASI-California corporation, at the request of any stockholder, the
election of the Company's directors will be determined by cumulative voting
procedures. Consequently, following this offering the Company's stockholders
other than its current officers and directors will have sufficient votes, if
cumulative voting is exercised, to elect two of its three directors (or three of
its five directors, upon expansion of the Board following this offering as
planned) assuming no exercise of the Redeemable Warrants and two of its three
(or four of its five, as applicable) directors assuming exercise of the
Redeemable Warrants in full.
The Company has agreed to allow each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc. to nominate one director following this
offering. In addition, Vincent J. Bitetti, the Chairman of the Board and Chief
Executive Officer, and Eric H. Winston, the President and Chief Operating
Officer, have entered into voting agreements with each of The Boston Group,
L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. Pursuant to these
agreements, Messrs. Bitetti and Winston have agreed to vote all of their Common
Stock for the three director nominees of The Boston Group, L.P., Joseph Stevens
& Company, L.P. and ASSI, Inc. In addition, ASSI, Inc. has agreed to vote all of
its shares of Common Stock for two directors nominated by Mr. Bitetti for as
long as he holds 20 percent or more of the issued and outstanding Common Stock,
and for one director nominated by Mr. Bitetti for as long as he holds at least
ten percent but less than 20 percent of the issued and outstanding Common Stock.
The voting agreements with ASSI, Inc. will terminate when Messrs. Bitetti and
Winston together cease to own at least ten percent of the issued and outstanding
Common Stock. See "Management -- Directors and Executive Officers."
Upon the consummation of this offering, Messrs. Bitetti and Winston together
will beneficially own approximately 41.1 percent of the outstanding Common Stock
(including all Common Stock issuable pursuant to a presently exercisable option
held by Mr. Winston, but excluding issuance of any Common Stock and Redeemable
Warrants pursuant to the over-allotment option). Assuming ASSI, Inc. elects to
convert the ASSI Convertible Loan into ASSI Loan Warrants and to exercise all of
the ASSI Warrants and ASSI Loan Warrants, upon such exercise ASSI, Inc. will own
approximately 53.4 percent of the Common Stock, and the beneficial ownership of
Messrs. Bitetti and Winston will be reduced to approximately 19.2 percent
(including all Common Stock issuable pursuant to a presently exercisable option
held by Mr. Winston, but excluding issuance of any Common Stock and Redeemable
Warrants pursuant to the over-allotment option).
17
<PAGE>
IMMEDIATE SUBSTANTIAL DILUTION. This offering involves an immediate and
substantial dilution to investors in this offering of $3.17 per share of Common
Stock (79.25 percent) between the pro forma net tangible book value per share
after this offering and the initial public offering price of the shares of
Common Stock. See "Dilution."
RECENTLY FORMED REPRESENTATIVES. Both of the Representatives are recently
formed, and neither has extensive experience as an underwriter of securities.
The Boston Group, L.P., which was formed in March 1995, has acted as the
managing underwriter for three public offerings and has acted as a member of an
underwriting syndicate on three occasions. Joseph Stevens & Company, L.P., which
was formed in May 1994, has acted as the managing underwriter for four public
offerings and as a member of an underwriting syndicate on approximately seven
occasions.
The Representatives are relatively small firms. No assurance can be given
that either will be able to participate as a market maker in the Securities, or
that any other broker-dealer will do so. See "Underwriting."
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that
a significant amount of the shares of Common Stock and substantially all of the
Redeemable Warrants being offered hereby will be sold to customers of the
Representatives. Although the Representatives have advised the Company that they
intend to make a market in the Securities following this offering, they will
have no legal obligation to do so. The Representatives, if they become market
makers, could be a dominating influence in the market, if one develops. The
prices and the liquidity of the Common Stock and the Redeemable Warrants may be
significantly affected by the degree, if any, of the Representatives'
participation in the market. No assurance can be given that any market making
activities of the Representatives, if commenced, will be continued. See
"Underwriting."
CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE WARRANTS. The
Redeemable Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Redeemable Warrants and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
jurisdiction of residence of the exercising holder of the Redeemable Warrants.
In addition, in the event that any holder of the Redeemable Warrants attempts to
exercise any Redeemable Warrants at any time after nine months from the date of
this Prospectus, the Company may be required to file a post-effective amendment
and deliver a current prospectus before the Redeemable Warrants may be
exercised. Although the Company has undertaken to use its best efforts to have
all the shares of Common Stock issuable upon exercise of the Redeemable Warrants
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the Redeemable Warrants,
there is no assurance that it will be able to do so. The value of the Redeemable
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Redeemable Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Redeemable Warrants then
reside.
The Redeemable Warrants will be separately tradeable immediately upon
issuance and may be purchased separately from the Common Stock. Although the
Securities will not knowingly be sold to purchasers in jurisdictions in which
the Securities are not registered or otherwise qualified for sale, investors may
purchase the Redeemable Warrants in the secondary market or may move to
jurisdictions in which the shares underlying the Redeemable Warrants are not
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company would be unable to issue shares to those
persons desiring to exercise their Redeemable Warrants unless and until the
shares could be qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Redeemable Warrants would have no choice but to attempt to
sell the Redeemable Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised. See "Description of Securities -- Redeemable
Warrants."
18
<PAGE>
ADVERSE EFFECT TO HOLDERS OF POSSIBLE REDEMPTION OF REDEEMABLE
WARRANTS. The Redeemable Warrants are subject to redemption by the Company, at
any time, commencing one year after the date of this Prospectus, at a price of
$.25 per Redeemable Warrant if the average closing bid price for the Common
Stock equals or exceeds 140 percent of the initial public offering price per
share for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
If the Redeemable Warrants are redeemed prior to their exercise, the holders
thereof would lose their right to exercise Redeemable Warrants except during
such period of notice of redemption and the benefit of the difference between
the market price of the underlying Common Stock as of such date and the exercise
price of such Redeemable Warrants, as well as any possible future price
appreciation in the Common Stock. Upon the receipt of a notice of redemption of
the Redeemable Warrants, the holders thereof would be required to: (i) exercise
the Redeemable Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so; (ii) sell the Redeemable Warrants at the
market price, if any, when they might otherwise wish to hold the Redeemable
Warrants; or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Redeemable Warrants at the time
of redemption. See "Description of Securities -- Redeemable Warrants" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. A total of 4,208,291 shares of Common
Stock will be issued and outstanding upon the consummation of this offering,
assuming no exercise of the Underwriters' over-allotment option and assuming
that the Representative's Warrants and all other options and warrants then to be
outstanding are not exercised. Of such shares, the 2,400,000 shares offered by
the Company and 107,500 of the shares offered by the Selling Security Holders
will be freely tradeable without further registration under the Securities Act,
except for any such shares of Common Stock held by an "affiliate" of the
Company. Of the remaining 1,700,791 outstanding shares, 183,723 shares are
freely tradeable and the remainder are "restricted shares" as defined in Rule
144 under the Securities Act and may not be sold without registration under the
Securities Act unless pursuant to an applicable exemption therefrom. See
generally "Shares Eligible for Future Sale."
SALE OF CERTAIN SECURITIES. A separate Prospectus is being filed with the
Registration Statement of which this Prospectus is a part which relates to the
registration for the account of the Selling Security Holders of 107,500 shares
of Common Stock and 5,689,665 Redeemable Warrants previously issued by the
Company to the Selling Security Holders and 392,838 shares of Common Stock
purchasable by Eric H. Winston, the Company's President and Chief Executive
Officer, upon exercise of presently exercisable options (collectively, the
"Selling Security Holders' Securities," as previously defined) and to the
registration for the account of the Company of 11,169,665 shares of Common Stock
issuable upon exercise of the Redeemable Warrants, ASSI Warrants and ASSI Loan
Warrants (if any). The Selling Security Holders' Securities may be sold by the
Selling Security Holders or their transferees commencing on the date of this
Prospectus (provided that Mr. Winston has agreed not to sell more than 10,000
shares of Common Stock during the 18-month period following the date of this
Prospectus without the prior written consent of the Representatives). Sales by
the Selling Security Holders or their transferees of the Selling Security
Holders' Securities may depress the price of the Common Stock or the Redeemable
Warrants in any market therefor that may develop. See "Certain Transactions,"
"Resale of Outstanding Securities" and "Shares Eligible for Future Sale."
NO PRIOR MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE
VOLATILITY OF TRADING PRICES FOR SECURITIES. Prior to this offering, there has
been no public market for the Common Stock or the Redeemable Warrants, and there
can be no assurance that a public market for the Securities will develop or, if
developed, that it will be sustained after the offering. The initial public
offering prices of the Common Stock and Redeemable Warrants and the terms of the
Redeemable Warrants were determined arbitrarily by, among other things,
negotiations between the Company and the Representatives and bear no
relationship to the Company's assets, net worth, results of operations or other
established criteria of value. See "Underwriting."
Pursuant to a separate Prospectus filed as a part of the Registration
Statement of which this Prospectus is a part, 107,500 shares of Common Stock and
5,689,665 Redeemable Warrants previously
19
<PAGE>
issued by the Company are being registered for the account of the Selling
Security Holders. See "Certain Transactions -- 1995 Bridge Financing" and "--
1995 Private Placement" and "Principal and Selling Stockholders." All of such
Common Stock and Redeemable Warrants are expected to become freely tradeable on
the date of this Prospectus. An additional 292,338 shares of Common Stock
issuable by the Company to Eric H. Winston, the Company's President and Chief
Operating Officer, pursuant to a presently exercisable option, and 100,000
shares of outstanding Common Stock saleable by Vincent J. Bitetti, the Company's
Chairman of the Board and Chief Executive Officer, to Mr. Winston pursuant to a
presently exercisable option, also are being registered pursuant to the separate
Prospecuts filed as a part of the Registration Statement of which this
Prospectus is a part. Following exercise of such options by Mr. Winston such
shares may be freely resold (provided that Mr. Winston has agreed not to sell
more than 10,000 shares during the 18-month period following the date of this
Prospectus without the prior written consent of the Representatives). Pursuant
to the separate Prospectus filed as a part of the Registration Statement of
which this Prospectus is a part, the 11,169,665 shares of Common Stock issuable
upon exercise of the 5,689,665 Redeemable Warrants being registered for the
account of the Selling Security Holders, the 2,000,000 ASSI Warrants, up to
2,100,000 ASSI Loan Warrants and the 1,380,000 Redeemable Warrants being issued
by the Company pursuant to this offering (assuming exercise of the Underwriters'
over-allotment option) all are being registered and will become freely tradeable
on the date of their issuance pursuant to the exercise of such warrants.
Sales of the Common Stock and Redeemable Warrants being registered for the
account of the Selling Security Holders will likely have an adverse effect on
the market price of the shares of Common Stock and the Redeemable Warrants being
issued by the Company pursuant to this offering, and such adverse effect may be
material. In addition, the Common Stock underlying the Redeemable Warrants being
issued by the Company pursuant to this offering and being separately registered
for the account of the Selling Security Holders and the ASSI Warrants and ASSI
Loan Warrants (if any) also are expected to become freely tradeable on the
issuance thereof pursuant to conversion of the related warrants. Sales of such
Common Stock also will likely have an adverse effect on the market price of the
Common Stock and such adverse effect may be material. See "Resale of Outstanding
Securities" and "Shares Eligible for Future Sale."
The trading prices of the Securities could be subject to wide fluctuations
in respect to the Company's operating results announcements by the Company or
others of developments affecting the Company or its competitors or customers and
other events or factors. In addition, the stock market has experienced extreme
price and volume fluctuations in recent years, particularly in the securities of
small development companies. The fluctuations have had a substantial effect on
the market prices of many companies, often unrelated to the operating
performances of the specific companies, and similar events in the future may
materially adversely affect the market prices of the Securities.
ADVERSE EFFECT ON COMMON STOCK FROM EXERCISE OF WARRANTS AND OPTIONS. The
Company's Certificate of Incorporation authorizes the issuance of 20,000,000
shares of Common Stock. A total of 4,208,291 shares of Common Stock will be
outstanding after the completion of this offering, assuming no exercise of the
Underwriters' over-allotment option and assuming that the Representative's
Warrant and all other stock options and warrants then to be outstanding are not
exercised. A total of 8,889,665 shares of Common Stock are reserved for issuance
pursuant to the Redeemable Warrants being issued by the Company pursuant to this
offering (1,200,000 shares, assuming no exercise of the Underwriters'
over-allotment option) and being registered for the account of the Selling
Security Holders (5,689,665 shares) and for issuance under the ASSI Warrants
(2,000,000 shares). An additional 1,536,908 shares of Common Stock are reserved
for issuance pursuant to the Representative's Warrant (360,000 shares, including
Common Stock issuable pursuant to the Redeemable Warrants issuable pursuant to
the Representative's Warrant), options previously granted by the Company to the
President and Chief Operating Officer (292,838 shares) and under the 1992 Stock
Option Plan (384,070 shares) and options that may be granted under the 1995
Stock Option Plan (500,000). An additional 2,100,000 shares of Common Stock are
reserved for issuance upon exercise of the ASSI
20
<PAGE>
Loan Warrants (if any). Thus, an additional 3,265,136 shares of Common Stock
remain available for issuance at the discretion of the Board of Directors. The
potential issuance of such authorized and unissued Common Stock may have the
effect of delaying, deferring or preventing a change in control of the Company,
may discourage bids for the Common Stock at a premium over the market price of
the Common Stock and may materially adversely affect the market price of, and
the voting and other rights of the holders of the Common Stock. Although the
Company has no present intention to issue any such shares of its authorized and
unissued Common Stock there can be no assurance the Company will not do so in
the future. See "Description of Securities -- Common Stock."
NO PREEMPTIVE RIGHTS; POSSIBLE DILUTIVE EVENT. The holders of Common Stock
do not have any subscription, redemption or conversion rights, nor do they have
any preemptive or other rights to acquire or subscribe for additional, unissued
or treasury shares. Accordingly, if the Company were to elect to sell additional
shares of Common Stock, or securities convertible into or exercisable to
purchase shares of Common Stock, following this offering, persons acquiring
Common Stock in this offering would have no right to purchase additional shares,
and as a result, their percentage equity interest in the Company would be
diluted. See "Description of Securities -- Common Stock."
NO DIVIDENDS. As of the date of this Prospectus, the Company has not paid
any cash dividends on its Common Stock and does not intend to declare any such
dividends in the foreseeable future. The Company's ability to pay dividends is
subject to limitations imposed by Delaware law and, as a QUASI-California
corporation, to the more restrictive provisions of California law. The sole
source of funds available to the Company for the payment of dividends is
dividends or loans advanced to it by the Subsidiary which is itself a California
corporation and therefore subject to the dividend payment provisions of the
California GCL.
Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if (i) the assets of the corporation exceed 1 1/4 times its
liabilities; and (ii) the current assets of the corporation equal or exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities. Under the foregoing requirements, the Company will not be able to
pay dividends for the foreseeable future. See "Dividend Policy" and "Description
of Securities."
QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISK OF LOW PRICED
SECURITIES. Certain qualification requirements are established for the initial
and continued listing of securities on Nasdaq. The Common Stock and the
Redeemable Warrants will be eligible for initial listing on the Nasdaq SmallCap
Market under these rules upon consummation of this offering. Under the rules for
initial listing, a company must, among other things, have at least $4,000,000 in
total assets, at least $2,000,000 in total capital and surplus, and a minimum
bid price of $3.00 per share. For continued listing, a company must, among other
things, maintain at least $2,000,000 in total assets, at least $1,000,000 in
total capital and surplus, and a minimum bid price of $1.00 per share. The
Company has qualified for initial listing on the Nasdaq SmallCap Market and
expects to maintain its listing on Nasdaq; however, if the Company experiences
losses from operations or material adverse trading conditions, it may be unable
to maintain the standards for continued listing and the Securities could be
subject to delisting from Nasdaq. It is anticipated that if the Securities are
delisted from Nasdaq, trading, if any, in the Securities would be conducted in
the over-the-counter market on the NASD OTC Electronic Bulletin Board
established for securities that do not meet the Nasdaq listing requirements or
quoted in what are commonly referred to as the "pink sheets." In such event, an
investor may find it more difficult to dispose of, or to obtain accurate price
quotations and volume information concerning, the Securities.
21
<PAGE>
In addition, if the Securities are delisted from Nasdaq, they might be
subject to the low priced security or so-called "penny stock" rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally defined as investors with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with a spouse). For any
transaction involving a penny stock, unless exempt, the rules require, among
other things, the delivery, prior to the transaction, of a disclosure schedule
required by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
Although the Company believes that the Securities will not be defined as a
penny stock due to their anticipated continued listing on Nasdaq, in the event
the Securities subsequently become characterized as a penny stock, the market
liquidity for the Securities could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Securities and, thus, the ability of purchasers in this offering to
sell their Securities in the secondary market.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts of $990,000 and estimated
expenses of $732,000 (including the Representatives' nonaccountable expense
allowance), are estimated to be approximately $8,178,000 ($9,400,350 if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $4.00 per share and $.25 per Redeemable Warrant. The Company
anticipates that the estimated net proceeds of this offering initially will be
allocated substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- -------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Repayment of Notes (1).................................................... $ 5,230,000 64.0%
Repayment of ASSI Loan (2)................................................ 500,000 6.1
Marketing Expenses (3).................................................... 800,000 9.8
Licenses and Royalties (4)................................................ 450,000 5.5
Capital Expenditures (5).................................................. 100,000 1.2
Working capital (6)....................................................... 1,098,000 13.4
-------------- -----
Total..................................................................... $ 8,178,000 100.0%
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Represents repayment of all of the Company's outstanding Private Notes in
the aggregate principal amount of $4,987,500, plus accrued interest
estimated at $242,500 as of March 31, 1996. The Private Notes were issued in
connection with the Company's 1995 Private Placement (as defined below),
bear interest at the rate of ten percent per annum and are due on the
earlier of (i) September 1, 1996 or (ii) the completion of any initial
public offering by either the Company or the Subsidiary. See "Certain
Transactions -- 1995 Private Placement."
(2) Represents repayment of the ASSI Convertible Loan in the principal amount of
$500,000. The ASSI Convertible Loan was entered into on May 30, 1996, bears
interest at the rate of eight percent per annum and is due on the earlier of
(i) September 1, 1996 and (ii) the closing date of the Company's initial
public offering made hereby. Upon the closing of this offering, ASSI, Inc.
may convert the ASSI Convertible Loan into warrants to purchase Common Stock
at a purchase price of $.25 per warrant. Although ASSI, Inc. has not advised
the Company whether it intends to convert the ASSI Convertible Loan to
warrants, for purposes of this section it is assumed that the ASSI
Convertible Loan will be repaid in full out of the proceeds of this
offering. If ASSI, Inc. elects to convert the ASSI Convertible Loan to the
ASSI Convertible Warrants, the $500,000 allocated above to repayment of this
loan instead will be utilized for working capital purposes. See "Certain
Transactions -- Agreements with ASSI, Inc."
(3) Represents amounts expected to be expended in connection with product
marketing activities, including print and co-operative advertising,
promotions and contests, coupon inserts and in-store displays.
(4) Represents amounts expected to be paid to licensors in connection with the
obtaining of new licenses, and to licensors under the terms of existing
licenses.
(5) Represents amounts expected to be expended for purchases of equipment for
use in the Company's business.
(6) Working capital will be used, among other things, to fund operating
expenses, including rent and salaries.
If the Underwriters exercise their over-allotment option in full, the
Company will realize additional net proceeds of approximately $1,222,350 which
will be added to the Company's working capital. In addition, all net proceeds
received by the Company upon the exercise, if any, of the Redeemable Warrants
and the Representative's Warrant will be added to working capital.
23
<PAGE>
The Company anticipates that the net proceeds of this offering, together
with its cash on hand and anticipated net cash flow from operations, will be
sufficient to fund the Company's contemplated cash requirements for at least the
next 12 months. See "Risk Factors -- Dependence on Net Proceeds of this
Offering; Possible Need for Additional Financing." While the initial allocation
of the net proceeds of this offering, as set forth above, represents the
Company's best estimates of its future financing needs, the amounts actually
expended for each purpose may vary significantly from the specific allocation of
the net proceeds set forth above, depending on numerous factors. The Company,
therefore, reserves the right to reallocate the net proceeds of this offering
among the various categories set forth above as it, in its sole discretion,
deems necessary or advisable.
Part of the Company's strategy is to expand through acquisitions. After this
offering, the Company intends to seek to make such acquisitions, but it is not
currently a party to any discussion, agreement, arrangement or understanding in
connection with any such acquisition. See "Business -- Business Strategy --
Acquisitions."
Pending application, the net proceeds of this offering will be invested
principally in U.S. government securities, short-term certificates of deposit,
money market funds or other similar short-term interest-bearing investments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since its inception. It is the current policy of the Company that it will retain
its earnings, if any, for expansion of its operations and other corporate
purposes, and that it will not pay any dividends in respect of the Common Stock
in the foreseeable future. The payment of dividends, if any, is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, if any, its capital requirements and financial condition and such
other factors as the Board of Directors may consider.
The Company's ability to pay dividends is subject to the applicable
provisions of the General Corporation Law of Delaware, which is the Company's
jurisdiction of incorporation. As a QUASI-California corporation, the Company
also is subject to the relatively more restrictive provisions of the California
GCL. The sole source of funds available to the Company for the payment of
dividends is dividends and loans advanced to it by the Subsidiary, which is
itself a California corporation and therefore subject to the dividend payment
provisions of the California GCL.
Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if the assets of the corporation exceed 1 1/4 times its liabilities;
and (ii) the current assets of the corporation equal or exceed its current
liabilities, but if the average pre-tax earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1 1/4 times its current liabilities. Under the
foregoing requirements, the Company will not be able to pay dividends until it
achieves positive retained earnings, which management does not anticipate will
occur for the foreseeable future. See "Risk Factors -- No Dividends."
24
<PAGE>
DILUTION
At March 31, 1996, the Company had 1,808,291 shares of Common Stock
outstanding and at such date the net tangible book value of the Company was
$(3,958,424) or approximately ($2.19) per share of Common Stock. "Net tangible
book value per share" represents the total tangible assets of the Company, less
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt of the net proceeds (estimated to be
approximately $7,917,000 after deducting the Underwriters' discount and
estimated expenses, including the Representatives' nonaccountable expense
allowance) from the sale of the 2,400,000 shares of Common Stock offered by the
Company at an assumed public offering price of $4.00 per share (without giving
any effect to the net proceeds from the sale of the Redeemable Warrants), the
pro forma net tangible book value of the Company at March 31, 1996 would have
been $3,497,661 or approximately $0.83 per share of Common Stock. This
represents an immediate increase in net tangible book value of $3.02 per share
of Common Stock to existing stockholders and an immediate dilution to new
investors of approximately $3.17 (79.25%) per share of Common Stock. Dilution
per share represents the difference between the offering price per share of
Common Stock and the net tangible book value per share after giving effect to
this offering.
The following table illustrates the per share dilution to be incurred by the
purchasers of Common Stock of this offering from the assumed initial public
offering price of $4.00 per share:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT AMOUNT
- ----------------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Assumed initial public offering price per share of Common Stock................................ $ 4.00
Net tangible book value per share of Common stock before offering............................ $ (2.19)
Increase in net tangible book value per share of Common Stock attributable to the sale of the
Common Stock offered by the Company......................................................... 3.02
---------
Pro forma net tangible book value per share of Common Stock after offering..................... 0.83
-----
Dilution per share of Common Stock to public investors (1)(2).................................. $ 3.17
-----
-----
</TABLE>
- ------------------------
(1) If the net proceeds of $261,000 from the sale of the Redeemable Warrants
offered by the Company (after deducting the Underwriters' discount and the
Representative's nonaccountable expense allowance, but attributing no other
costs of this offering to the Redeemable Warrants) had been attributed to
the net tangible book value of the shares of Common Stock after this
offering, it would increase the pro forma net tangible book value after this
offering by $0.06 per share of Common Stock and decrease the dilution to new
public investors by approximately $0.06 per share of Common Stock.
(2) In the event that the Underwriters exercise their over-allotment option to
purchase 340,000 shares of Common Stock from the Company, the pro forma net
tangible book value of the Company after this offering (after deducting the
underwriters' discount and the Representative's nonaccountable expense
allowance but no other costs of this offering) would be approximately
$4,941,861 (including the net proceeds of $261,000 from the sale of the
Redeemable Warrants) or $1.09 per share of Common Stock, which would result
in immediate dilution in net tangible book value to the public investors of
approximately $2.91 per share of Common Stock. In the event of the further
exercise of all 484,037 presently exercisable Common Stock purchase options
at the average exercise price of $.75 per share, and the sale and exercise
in full of the Representative's Warrant including the sale and exercise in
full of the Redeemable Warrants and the ASSI Warrants, and after giving
effect to all of the aforementioned transactions, the pro forma net tangible
book value of the Company would be approximately $5,304,903 or $1.05 per
share, which would result in immediate dilution in net tangible book value
to the public investors of approximately $2.95 per share of Common Stock.
25
<PAGE>
The exercise of the Redeemable Warrants and ASSI Warrants will be
antidilutive to the purchasers of Common Stock in this Offering. The following
table illustrates the effective net per share dilution to be incurred by the
purchasers of Common Stock in this offering upon the subsequent exercise of the
Redeemable Warrants and ASSI Warrants from the assumed offering price of $4.00
per share:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT AMOUNT
- ------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Assumed initial public offering price per share of Common Stock...................... $ 4.00
Pro forma net tangible book value per share of Common Stock before exercise of
Redeemable Warrants and ASSI Warrants (1)......................................... $ 1.05
Increase in net tangible book value per share of Common Stock attributable to the
sale of the Common Stock upon exercise of all Redeemable Warrants and ASSI
Warrants.......................................................................... 2.31
---------
Pro forma net tangible book value per share of Common Stock after exercise of all
Redeemable Warrants and ASSI Warrants............................................... 3.36
-----
Dilution per share of Common Stock to investors in this offering upon exercise of
Redeemable Warrants and ASSI Warrants............................................... $ .64
-----
-----
</TABLE>
- ------------------------
(1) Assumes the sale of 340,000 shares of Common Stock pursuant to the
over-allotment option, and the sale of 484,037 shares of Common Stock
pursuant to presently exercisable employee stock options.
The following table sets forth, as of March 31, 1996, the number and
percentage of shares of Common Stock purchased by, and the amount and percentage
of consideration paid by, the existing stockholders, by public investors in this
offering and the average price per share of Common Stock.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED -------------------------------------------
------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current stockholders (1)....................... 1,808,291 43.0% $ 6,128,007 39.0% $ 3.39
Public investors (2)........................... 2,400,000 57.0 9,600,000 61.0 4.00
----------- ----- -------------- -----
Total...................................... 4,208,291 100.0% $ 15,728,007 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes: (i) $263,300 paid by the investors in the Company's 1995 Private
Placement and 1995 Bridge Financing for warrants to purchase 5,268,747
shares of Common Stock issued by the Company in such private placements; and
(ii) the nominal consideration of $50 paid by Financial West Group, Inc. for
the warrants to purchase up to 420,918 shares of Common Stock issued to it
in connection with such private placements as part of the total
consideration paid by existing stockholders. See "Certain Transactions."
(2) Does not include the $300,000 to be paid by public investors for the
1,200,000 Redeemable Warrants being offered by the Company. To the extent
that any of the Redeemable Warrants are exercised, there will be no further
dilution to the public investors.
The foregoing computations assume the exercise of no stock options after
March 31, 1996. As of March 31, 1996, 292,838 shares of Common Stock were
subject to presently exercisable options granted to the Company's President and
Chief Operating Officer at an exercise price of $.06 per share. As of March 31,
1996, additional options to purchase a total of 384,070 shares of Common Stock
were issued pursuant to the 1992 Stock Option Plan. All of such options are
non-qualified stock options having an exercise price of from $.06 to $4.00 per
share. Of the 384,070 options that have been granted pursuant to the 1992 Stock
Option Plan, 191,199 are presently exercisable, 45,840 will become exercisable
in fiscal 1997 and the balance will become exercisable in fiscal 1998. No
further options may be granted pursuant to the Company's 1992 Stock Option Plan.
An additional 500,000 shares of Common Stock are available for issuance under
the Company's 1995 Stock Option Plan, of which the Company has agreed to issue
13,610 options to its nonexecutive employees. See "Management -- Executive
Compensation," "-- 1995 Stock Option Plan" and "-- 1992 Stock Option Plan." The
Representative's Warrant entitles the Representative to purchase 240,000 shares
of Common Stock at 145 percent of the offering price of the Common Stock, in
this offering, and will become exercisable one year after the date of this
Prospectus. See "Underwriting."
26
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, the short-term debt
and capitalization of the Company on an actual basis and as adjusted to reflect
the issuance and sale of the 2,400,000 shares of Common Stock and the 1,200,000
Redeemable Warrants offered by the Company and the initial application of the
estimated net proceeds therefrom. The table should be read in conjunction with
the financial statements and the notes to the financial statements which are
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
<S> <C> <C>
Notes payable..................................................................... $ 4,987,500 $ --
-------------- --------------
Stockholders' equity (deficit)
Common Stock, $.001 par value; 20,000,000 shares authorized; 1,808,291 shares
issued and outstanding (actual); 4,208,291 shares issued and outstanding (as
adjusted)...................................................................... 1,808 4,208
Warrants........................................................................ 263,350 524,350
Additional paid-in capital........................................................ 5,124,576 13,039,176
Accumulated deficit............................................................... (9,348,158) (9,809,073)
-------------- --------------
Total stockholders' equity (deficiency)........................................... (3,958,424) 3,758,661
-------------- --------------
Total capitalization.......................................................... $ 1,029,076 $ 3,758,661
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an assumed initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an assumed initial public offering price of $.25 per
Redeemable Warrant, net of anticipated expenses of the offering (estimated
at $990,000 for the Underwriters' discount and $732,000 for expenses,
including the Representatives' nonaccountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and all
of the Company's other funded indebtedness (estimated at $5,230,000 at March
31, 1996) with a portion of such proceeds. The as adjusted amounts do not
reflect the issuance of up to 340,000 shares of Common Stock and 180,000
Redeemable Warrants by the Company to cover over-allotments, if any, or the
exercise of the Representative's Warrant to purchase up to 240,000 shares of
Common Stock, or the exercise of any other outstanding (or agreed to be
issued) options or warrants to purchase up to an additional 12,220,183
shares of Common Stock.
27
<PAGE>
SELECTED FINANCIAL DATA
The following table of summary financial information is derived from and
should be read in conjunction with the Company's financial statements and the
footnotes thereto included elsewhere in this Prospectus. The financial data for
the fiscal years ended June 30, 1994 and 1995 has been derived from audited
financial statements prepared by Corbin & Wertz, certified public accountants,
who are the Company's independent auditors. The Company's losses for fiscal 1994
and 1995 include noncash charges of $2,992,862 and $733,165, respectively,
associated with the granting of certain compensatory stock options. The
financial data for the nine-month periods ended March 31, 1995 and 1996 are
derived from unaudited financial statements of the Company. The unaudited
financial statements include all adjustments consisting of normal recurring
accruals which the Company considers necessary for a fair presentation of the
financial position and the results of operations. Operating results for the
nine-month period are not necessarily indicative of the results that may be
expected for the entire year ending June 30, 1996. See "Risk Factors --
Fluctuations in Operating Results; Seasonality" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------ ----------------------
STATEMENT OF OPERATIONS DATA 1994 1995 1995 1996
- ------------------------------------------------------------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Retail software sales............................................. $ 1,313,890 $ 1,255,230 $1,170,451 $1,874,734
OEM sales......................................................... 5,500 479,675 370,409 32,237
Development agreement revenues.................................... 112,520 343,250 217,250 --
Royalties......................................................... 253,961 76,771 76,253 21,678
----------- ----------- ---------- ----------
Net sales from continuing operations............................ 1,685,871 2,154,926 1,834,363 1,928,649
Gross profit...................................................... 505,068 1,082,235 780,698 813,544
Noncash compensation expense recorded in connection with Common
Stock and Common Stock options issued for services............... 2,992,862 733,165 289,998 --
Other expenses.................................................... 1,374,052 1,940,124 1,384,285 4,049,126
Loss from continuing operations................................... (3,861,846) (1,591,054) (893,629) (3,235,582)
Loss from discontinued operations................................. (115,887) (143,106) (49,046) --
Net loss.......................................................... (3,977,733) (1,734,160) (942,631) (3,235,582)
Loss per common share from continuing operations.................. $ (2.38) $ (0.85) $ (0.48) $ (1.76)
Loss per common share from discontinued operations................ $ (0.07) $ (0.08) $ (0.03) --
Net loss per common share......................................... $ (2.45) $ (0.93) $ (0.51) $ (1.76)
Weighted average number of common shares.......................... 1,626,107 1,862,908 1,859,150 1,842,638
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------
BALANCE SHEET DATA ACTUAL AS ADJUSTED(1)
- ------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
Working capital...................................................................... $(4,140,420) $ 3,576,665
Total assets......................................................................... 3,050,240 5,390,415
Current liabilities.................................................................. 6,988,664 1,611,754
Long term debt....................................................................... 20,000 20,000
Stockholders' equity (deficit)....................................................... (3,958,424) 3,758,661
</TABLE>
- ------------------------------
(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an assumed initial public offering price of $4.00 per share and
1,200,000 Redeemable Warrants at an assumed initial public offering price
of $.25 per Redeemable Warrant, net of the expenses of the offering
(estimated at $990,000 for the Underwriters' discount and $732,000 for
expenses, including the Representatives' nonaccountable expense allowance);
(ii) the borrowing by the Company pursuant to the ASSI Convertible Loan;
and (iii) the repayment of the ASSI Convertible Loan in the amount of
$500,000 and all of the Company's other funded indebtedness (estimated at
$5,230,000 at March 31, 1996) with a portion of such proceeds. The as
adjusted amounts do not reflect the issuance of up to 340,000 shares of
Common Stock and 180,000 Redeemable Warrants by the Company to cover
over-allotments, if any, or the exercise of the Representative's Warrant to
purchase up to 240,000 shares of Common Stock, or the exercise of any other
outstanding (or agreed to be issued) options or warrants to purchase up to
an additional 12,220,183 shares of Common Stock.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenues from sales of its
retail consumer software and original equipment manufacturer ("OEM") versions of
its retail consumer software. The Company designs, develops, markets and
supports a broad line of consumer software products. The Company focuses
primarily on family-oriented products with educational and entertainment value,
which are easy to use and install, using popular movies, television series and
comic book characters. See generally "Business."
In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software and related products. The Company had no sales to or through Acclaim
during its fiscal year ended June 30, 1995. During the nine-month period ended
March 31, 1996, of the Company's net sales of $1,928,649, a total of $1,617,839
(84 percent) were generated by Acclaim. Under the terms of this agreement,
Acclaim was the exclusive distributor of the Company's products on a worldwide
basis, subject to certain limited exceptions. The Company was not satisfied with
the distribution of its products through Acclaim, and determined to terminate
the Acclaim distribution agreement in March 1996. The Company and Acclaim have
terminated the distribution agreement as of April 30, 1996. On or before June
30, 1996, Acclaim will render a final accounting to the Company together with
payment of the balance of any amounts due to the Company under the distribution
agreement. Acclaim has notified its accounts that it will not accept returns of
any of the Company's software products after June 30, 1996. The Company,
however, will remain liable for all such returns regardless of when received by
Acclaim. As of March 31, 1996, the Company had established a reserve equal to 50
percent ($674,978) of the amount of its account receivable from Acclaim. See
"Business -- Product Distribution -- Relationship With Acclaim."
On June 1, 1996 the Company entered into a Distribution Services Agreement
with SSIDS. Pursuant to this new distribution agreement, SSIDS will provide
distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. See "Business -- Product Distribution -- Relationship
With SSIDS."
Net sales consist of gross sales net of allowances for returns, credit
losses and other adjustments. The Company adjusts its allowance for returns as
it deems appropriate. The Company could be forced to accept substantial product
returns or other concessions to maintain its relationships with retailers and
distributors and its access to distributor channels. The Company is also exposed
to the risk of returns of defective, shelf-worn and damaged products from
retailers and distributors.
Costs of sales consist primarily of product cost, freight charges, royalties
to outside programmers and content providers, and an inventory provision for
damaged and obsolete products. Product costs consist of the costs to purchase
the underlying materials and print both boxes and manuals, media costs (disks
and CD-ROMs) and fulfillment (assembly and shipping).
From the Company's inception through October 24, 1995, the Company sold
synthesizer sound libraries. In July 1995, the Company's Board of Directors
approved a formal plan to license the proprietary assets related to such
revenues in exchange for royalties. The Results of Operations discussion and
analysis which follows includes only the continuing operations of the Company,
which is primarily comprised of software sales. The Company sustained losses
from these discontinued synthesizer operations of $143,106 in fiscal 1995 and
$115,887 in fiscal 1994.
29
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995 COMPARED TO NINE MONTHS ENDED MARCH 31,
1996
NET SALES. Net Sales from continuing operations increased by 5 percent from
$1,834,363 for the nine months ended March 31, 1995 to $1,928,649 for the nine
months ended March 31, 1996. In 1995, the Company determined to concentrate its
focus on development of its educational and entertainment utility interactive
CD-ROM software and to reduce its development work for third parties.
Consequently, total retail sales of the Company's software products increased
from $1,170,451 during the nine months ended March 31, 1995 to $1,874,734 during
the nine months ended March 31, 1996. However, the Company had no development
revenues during the period, as compared with $217,250 for the prior period.
Revenues from OEM sales declined from $370,409 to $32,237, reflecting a one-time
agreement with Acer in calendar 1994 that did not produce significant revenues
in calendar 1995. In addition, the Company's royalty fees declined from $76,253
to $21,678 during the corresponding periods. The higher royalty revenues for the
nine months ended March 31, 1995 resulted primarily from product introductions
incorporating content sublicensed by the Company that were not repeated in the
nine months ended March 31, 1996. This decline in royalty revenues also
reflected the Company's current strategy of focusing on developing all product
licenses itself rather than sublicensing them to third parties.
During the nine months ended March 31, 1996, of the Company's net sales of
$1,928,649, a total of $1,617,839 (84 percent) were generated by Acclaim. None
of the Company's net sales of $1,834,363 during the nine months ended March 31,
1995 were generated by Acclaim. As noted above, because of its disappointment
with the level of sales generated by Acclaim, the Company terminated its
distribution agreement with Acclaim effective April 30, 1996 and entered into a
new distribution agreement with SSIDS, effective June 1, 1996. See "Business --
Product Distribution -- Relationship With Acclaim" and "-- Relationship With
SSIDS."
COST OF SALES. Cost of Sales increased by 6 percent from $1,053,665 for the
nine months ended March 31, 1995 to $1,115,105 for the nine months ended March
31, 1996, representing 57 percent and 58 percent of net sales, respectively.
This increase is attributable to the above noted 60 percent increase in software
product sales partially offset by decreased production costs resulting from the
Company's switch from floppy disk to CD-ROM media for a majority of its products
, decreased royalty costs, and diminishing inventory writedowns and writeoffs.
MARKETING AND SALES. Marketing and sales expenses increased by 130 percent
from $400,149 for the nine months ended March 31, 1995 to $922,215 for the nine
months ended March 31, 1996, and increased as a percentage of net sales from 22
percent to 48 percent, respectively. These increases were primarily due to
increased marketing activities to promote the Company's products and brand name
among retail purchasers, and increased personnel costs. The Company intends to
continue to launch new and innovative marketing promotions and to hire
additional personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 63 percent from $1,101,027 for the nine months ended March 31, 1995 to
$1,816,610 for the nine months ended March 31, 1996, and as a percentage of net
sales from 60 percent to 94 percent, respectively. The increase is primarily
attributable to costs incurred by the Company during the nine month period ended
March 31, 1996 related to the 1996 Bridge Financing and 1995 Private Placement
and increases in executive salaries related to the addition of a Chief Financial
Officer, partially offset by decreased noncash compensation incurred in
connection with issuance of Common Stock and Common Stock options. A total of
$289,998 of the general and administrative expenses for the nine months ended
March 31, 1995 relates to a noncash charge to earnings in connection with the
vesting of stock options granted to employees, determined as the difference
between the fair market value of the date of grant and the exercise price. No
such charge was incurred during the nine months ended March 31, 1996.
30
<PAGE>
An allowance for doubtful accounts receivable from Acclaim of $674,978 was
recorded during the nine months ended March 31, 1996. No such allowance was
recorded during the nine months ended March 31, 1995.
DEVELOPMENT. Development expenses increased by 202 percent from $161,875
for the nine months ended March 31, 1995 to $489,053 for the nine months ended
March 31, 1996, and increased as a percentage of net sales from 9 percent to 25
percent, respectively. These increases were primarily attributable to costs
related to product upgrades and new product development activities. The Company
believes that development expenses will increase in dollar amount in the future
as the Company continues to expand its development activities.
TAX PROVISION. The current period income tax provision is comprised of
minimum state franchise taxes for the states of Delaware and California of
$1,200. There is no provision for Federal income taxes as the Company has a loss
in the nine month periods ended March 31, 1995 and 1996, respectively.
OTHER. Other expense increased from $10,032 for the nine months ended March
31, 1995 to $820,048 for the nine months ended March 31, 1996, and increased as
a percentage of net sales from 1 percent to 43 percent, respectively. This
increase is primarily comprised of amortization of deferred loan costs of
$574,285 and interest expense of $244,679, both of which relate to the Company's
1995 Bridge Financing and 1995 Private Placement.
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
NET SALES. Net sales from continuing operations increased by 28 percent
from $1,685,871 for fiscal 1994 to $2,154,296 for fiscal 1995. Retail software
sales decreased by 5 percent from $1,313,890 for 1994 to $1,255,230 for 1995 due
principally to discounting and pricing declines for the Company's software
products. Development revenues increased by 205 percent from $112,520 for 1994
to $343,250 for 1995, primarily as a result of an agreement to develop
INTERACTIVE MOVIEBOOKS-TM- under a contract with a motion picture studio. OEM
sales increased from $5,500 for 1994 to $479,675 for 1995. This increase in OEM
sales resulted principally from sales pursuant to a software bundling agreement
with a PC manufacturer. Royalty fees decreased by 70 percent from $253,961 for
1994 to $76,771 for 1995. The decline in royalty revenues reflected the
Company's strategy of focusing on developing all product licenses itself rather
than sublicensing them to third parties.
The Company established a reserve for returns that it believes to be
adequate based upon historical return data and its analysis of current customer
inventory levels and sell through rates.
COST OF SALES. Costs of sales decreased by 9 percent from $1,180,803 for
fiscal 1994 to $1,072,691 for fiscal 1995, and decreased as a percentage of net
sales from 70 percent to 50 percent, respectively. This percentage decrease was
principally attributable to the substantially lower costs associated with the
sale of the single "golden master" for certain of the Company's products sold to
a PC manufacturer to install under an OEM bundling agreement in the first six
months of fiscal 1995, partially offset by a change in the product mix to higher
priced items and a decrease in OEM costs.
MARKETING AND SALES. Marketing and sales expenses increased by 45 percent
from $356,381 for fiscal 1994 to $516,886 for fiscal 1995, and increased as a
percentage of net sales from 21 percent to 24 percent, respectively. These
increases were primarily due to increased marketing activities to promote the
Company's product and brand name, and an increase in personnel. The Company
intends to continue to launch new and innovative marketing promotions and to
hire additional personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by 53 percent from $3,821,728 for fiscal 1994 to $1,783,023 for fiscal 1995, and
decreased as a percentage of net sales from 227 percent to 83 percent,
respectively. The decrease was primarily due to a decrease in noncash
compensation in connection with Common Stock issued for services provided,
partially offset by increased staffing and associated overhead expenses
necessary to manage and support the Company's growth. A total of $2,992,862 of
the 1994 general and administrative expenses and $733,165 of the
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<PAGE>
1995 general and administrative expenses relates to noncash charges to earnings
in connection with the vesting of stock options granted to employees, determined
as the difference between the fair market value on the date of grant and the
exercise price.
DEVELOPMENT. Development expenses increased by 225 percent from $116,559
for fiscal 1994 to $378,471 for fiscal 1995, and increased as a percentage of
net sales from 7 percent to 18 percent, respectively. These increases were
primarily attributable to costs relating to product upgrade and new product
development activities. The Company developed its first four INTERACTIVE
MOVIEBOOKS-TM- in fiscal 1995, and to date has developed four INTERACTIVE
MOVIEBOOKS-TM- in fiscal 1996. The Company believes that development expenses
will increase in dollar amount and as a percentage of net sales in the future as
the Company expands its development activities.
TAX PROVISION. The income tax provision for 1994 and 1995 is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision for
Federal income taxes as the Company has a current year loss and has a $2,513,000
net operating loss carryforward. Depending upon future changes in ownership of
the Company, the use of this carryforward may be limited in the future.
QUARTERLY RESULTS OF OPERATIONS
The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including the size and rate of
growth of the consumer software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
products, product returns, changes in pricing policies by the Company and its
competitors, the accuracy of retailers' forecasts of consumer demand, the timing
of the receipt of orders from major customers, and account cancellations or
delays in shipment. The Company's expense levels are based, in part, on its
expectations as to future sales and, as a result, operating results could be
disproportionately affected by a reduction in sales or a failure to meet the
Company's sales expectations.
SEASONALITY
The consumer software business traditionally has been seasonal. Typically,
net sales are the highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern is
due primarily to the increased demand for consumer software during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect seasonality. Nevertheless, management believes that in
the future its results may be less subject to seasonal fluctuations because its
products will be marketed in connection with the releases of major motion
pictures and home videos, which occur throughout the year. See "Risk Factors --
Fluctuations in Operating Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operations and capital
expenditures primarily with cash provided by operating activities, securities
issuances and financing arrangements. As of March 31, 1996, the Company had
negative working capital of $4,140,420 and cash of $213,730. The Company is
dependent on the net proceeds of this offering or other financing to repay the
aggregate principal amount of $4,987,500 in Private Notes issued to investors in
the Company's 1995 Private Placement, plus accrued interest estimated at
$242,500 as of March 31, 1996. In the event that ASSI, Inc. requires that the
ASSI Convertible Loan be repaid in cash, the Company also will be dependent on
the net proceeds of this offering to repay the $500,000 aggregate principal
amount of such loan, plus interest from May 30, 1996. The Private Notes and ASSI
Convertible Loan both are due in full on the earlier of (i) September 1, 1996 or
(ii) the completion of any initial public offering by either the Company or the
Subsidiary. See "Certain Transactions -- 1995 Private Placement" and "--
Agreements With ASSI, Inc."
The Company invested approximately $46,000 during fiscal year 1995 and
currently anticipates investing approximately $100,000 during fiscal 1996 for
capital equipment to expand into new product lines and to address potential
capacity constraints created by the Company's growing unit sales
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<PAGE>
volumes. From time to time, the Company evaluates acquisitions of products,
businesses and technologies that are complementary to the Company's business.
Presently, however, the Company does not have any understandings, commitments or
agreements with respect to any such acquisitions. See "Business -- Business
Strategy -- Acquisitions."
In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. Upon completion of this offering, on a pro forma
basis as of March 31, 1996 the Company's current assets will exceed its current
liabilities and it will have stockholders' equity of $3,758,661. The Company
therefore believes that its auditors will delete such going concern
qualification upon the completion of this offering and repayment of the
Company's funded indebtedness out of the proceeds hereof and the Company's
demonstration of its ability to realize sufficient cash flow to sustain its
operations for the foreseeable future.
The Company believes that the net proceeds from the offering, together with
its cash on hand, and anticipated net cash flow from operations, will be
sufficient to fund the Company's contemplated cash requirements for at least the
next 12 months. The Company currently plans to develop four to five INTERACTIVE
MOVIEBOOKS-TM- and at least one activity center per year, which management
estimates will cost approximately $150,000 per title, plus a licensing fee of
approximately $25,000 to $150,000 per title. If the Company can generate sales
of at least 40,000 units per title, management believes the Company will be able
to finance its business operations from net sales revenue. If the Company is
unable to generate the necessary volume of sales on its existing products
through March 31, 1997, the Company will be required to seek additional
financing to continue the development of new products for the next fiscal year.
There can be no assurance that the Company will achieve the necessary sales to
fund its future operations or that, if additional financing is necessary, such
financing will be available. See "Risk Factors -- Dependence on Net Proceeds of
this Offering; Possible Need for Additional Financing."
Management expects that in the future, cash in excess of current
requirements will be invested in investment-grade, interest-bearing securities.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high degree of complexity or risk, and
management does not intend to invest in these types of securities or financial
instruments in the future.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a method of accounting
for stock compensation plans based on fair value of grants made under such plans
on the date of grant using certain option-pricing models. SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance with
APB opinion 25 "Accounting for Stock Issued to Employees," which provides for an
intrinsic valuation model that recognizes only the difference between the fair
market value of a company's stock and the price paid to acquire the stock under
the stock compensation plan. However, SFAS No. 123 encourages the adoption of
the fair value accounting method. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. The Company plans to use the intrinsic
valuation model and provide footnote disclosure with respect to the fair value
of options for fiscal years beginning after January 1, 1996.
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<PAGE>
BUSINESS
GENERAL
The Company is engaged primarily in developing, publishing and marketing
educational, interactive computer software products for children. INTERACTIVE
MOVIEBOOKS-TM-, which combine text, photos, soundclips and actual film footage
of well recognized family films and cartoon series, are the Company's major
software products. INTERACTIVE MOVIEBOOKS-TM- are developed and published by the
Company on CD-ROM for Multimedia PCs as entertaining, interactive reading tools
for young children. The Company also produces a variety of entertainment
computer software utilities such as screen savers and sound clips known as
AUDIOCLIPS-Registered Trademark-. The Company is currently developing another
line of products which it refers to as creativity centers. This product line
combines learning activities such as painting, drawing, matching, puzzles and
mazes within a framework of three distinct skill levels.
The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM-, and other popular titles. The
Company also holds licenses for new products being developed for release in 1996
on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-, DRAGON HEART-TM-, and
I LOVE LUCY-TM-. The Company is continuing the negotiation of additional
licenses for its product line offerings. Management believes the Company is
capable of continuing to obtain new licenses for major motion pictures and
television shows and developing new, high quality software products using
content from these entertainment properties.
The Company believes that as of March 31, 1996, its products were in
distribution to approximately 6,000 retail outlets. Retailers currently selling
the Company's products include Target, Tower Records, Sears, Wal-Mart,
Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead, Electronics
Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam Goody, Sam's
Club, QVC, Musicland, Circuit City and others.
On June 1, 1996 the Company entered into a Distribution Services Agreement
with SSIDS. Pursuant to this new distribution agreement, SSIDS will provide
distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. See "Business -- Product Distribution -- Relationship
With SSIDS."
INDUSTRY BACKGROUND
In recent years, the installed base of Multimedia PCs in households has
grown substantially as prices have declined significantly and as improvements in
computing power and capability have been achieved. There are a number of factors
driving the increased demand and use of Multimedia PCs in U.S. and foreign
households beyond the general impact of falling prices and increased
performance. Enabling technologies and standards, such as graphical user
interfaces and the Microsoft-Registered Trademark- Windows-Registered Trademark-
operating system, and the recent release of the Windows
'95-Registered Trademark- operating system, have made Multimedia PCs easier to
use for a broad range of applications, resulting in the transformation of
Multimedia PCs into general-purpose tools. In addition, today's Multimedia PCs
feature high-speed microprocessors, large amounts of memory, high-resolution
monitors and enhanced sound, speaker and graphics capabilities. These advanced
capabilities, along with the introduction of CD-ROM multimedia technology, have
allowed software developers to produce more engaging software with advanced
three-dimensional graphics, realistic sound and full-motion video. The Company
believes
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<PAGE>
that CD-ROM multimedia technology will continue to impact the growth of the
consumer software market as software developers take advantage of the multimedia
capabilities of this more advanced hardware technology.
The resulting increased penetration of Multimedia PCs into domestic
households has created a large and growing mass market for consumer software as
many consumers wish to maximize the utility of their Multimedia PCs. The
distribution of consumer software has also expanded beyond traditional software
retailers and computer stores to include general mass merchandisers.
In response to these developments, increasing numbers of consumer software
products are being developed to address a broad range of consumer interests and
everyday tasks. The Company believes that consumers are more frequently
purchasing software on impulse in the same way that they often buy books, music
compact discs ("CDs") and motion picture videos. With the increasing
consumerization of the software market, the Company believes that the prices for
consumer software products may fall. If this occurs, the distribution channels
for consumer software could continue to expand to include book and music stores,
video outlets and supermarkets.
As consumer software becomes more of a mass market product, the Company
believes it will become increasingly important for consumer software companies
to have direct relationships with retailers to effectively market their products
to consumers. Competition for retail shelf space is also likely to increase due
to the proliferation of consumer software products and companies. As a result,
the Company believes that in order to be successful, consumer software companies
must have a consumer-driven focus, a broad offering of category-leading
products, close relationships with retailers, a recognized brand name and a
cost-efficient business model.
BUSINESS STRATEGY
The Company's objective is to be a leading publisher of high quality,
value-priced family-oriented consumer software. The Company seeks to develop a
broad line of products in categories in which a substantial market share can be
attained. The Company also seeks to expand product franchises by upgrading
successful products and developing product line extensions and complementary
products. The Company believes that it may achieve its objectives utilizing the
following strategies:
- MAINTAIN CONSUMER-DRIVEN FOCUS. The Company develops what it believes are
creative and innovative products with mass market appeal, targeting
families who are familiar with the Company's licensed movie titles,
television series and comic book characters. The Company believes that
these consumers base their software purchasing decisions largely on
quality, value, ease of use, recognition and personal affinity for
recognizable motion picture and television productions upon which the
Company's products are based. As a result, the Company is committed to
providing products that are high quality, value-priced and which require
minimal computer experience to operate. The Company's consumer-oriented
marketing strategy combines attractive and informative shrink-wrap
packaging with high-impact promotional campaigns to encourage impulse
purchases. To enhance customer satisfaction, the Company also provides
technical support for all of its products. In addition, the Company
revises products in response to consumer feedback and upgrades products to
utilize new technologies as those technologies gain broader acceptance in
the consumer market. The Company receives consumer feedback primarily from
comments on product registration cards submitted to it by customers.
- DEVELOP DIVERSIFIED TITLES WITH STRONG FRANCHISE VALUE. The Company seeks
to develop a broad line of products in sustainable categories in which a
substantial market share can be achieved. The Company currently has 21
software products available for sale in stores in the education and
entertainment categories. Hollywood content such as motion pictures and
television shows will continue to be the foundation on which the products
are based. The Company seeks to build franchise value through its
merchandising programs and seeks to create franchises by upgrading
products and developing product line extensions and complementary
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<PAGE>
products. Several of the Company's licenses permit it to produce multiple
software titles using the same proprietary subject matter. The Company
also seeks to create titles with extended lifecycles by upgrading
successful products to incorporate new features and to adapt to new
technologies.
- LEVERAGE DISTRIBUTION STRENGTHS. Pursuant to the new Distribution
Services Agreement between SSIDS and the Company, SSIDS will provide
distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United
States and Canada. The Company's relationship with SSIDS is exclusive
except as regards the rights to distribute the Company's products in
direct-to-the-customer programs including direct mail, telemarketing and
in-box coupon fulfillment, which are nonexclusive. See "Business --
Product Distribution -- Relationship With SSIDS." The Company's sales and
marketing department will work closely with SSIDS' sales force. The
Company believes that its broad product line and consumer-oriented
marketing programs enable it effectively to market its products. Through
co-operative marketing efforts, the Company intends to support marketing
efforts, promotions and merchandising displays at the market level.
- LEVERAGE STUDIO RELATIONSHIPS. The Company is developing a variety of
cross-marketing promotional programs with its movie studio licensors and
other licensees of movie titles licensed by the Company for its software
products. For example, the Company has worked with the MCA Home Video
Division to include discount coupons for the Company's BABE-TM-
INTERACTIVE MOVIEBOOK-TM- in video cassettes of BABE-TM-. The Company is
further working with MCA Home Video Division to include trailers for MCA
movie titles in the Company's software products. In addition, the Company
is working with the manufacturers of toy action figures to include rebate
coupons for the Company's products with the related action figures. The
Company has also developed a screen saver for Universal Studios Florida in
return for trip packages to be used for promotional contests. The
Company's goal is to run one special promotion, such as a contest, every
two to three months. Based on currently pending negotiations with its
movie studio licensors, management believes the Company will have the
opportunity to develop a variety of new cross-promotional programs that
may significantly enhance the Company's marketing efforts.
- PROMOTE TRADENAME RECOGNITION. The Company promotes its licensed
properties in conjunction with its brand name "Sound Source Interactive"
in order to encourage customer loyalty and repeat purchases. The Company
believes that its brand name products are recognized by consumers as high
quality, full-featured software. Drawing upon established consumer
marketing techniques, the Company uses its brand name and consistent
packaging style which emphasize high-impact design and recognizable motion
picture and television titles. The Company includes a mail-in order form
with each product it sells, which includes a list of the Company's other
available products to encourage repeat purchases. The Company believes
that by promoting a recognizable brand name and consistent packaging,
satisfied consumers are more likely to purchase additional
Company-produced products when faced with multiple options in a software
category. As the consumer software industry becomes more of a mass market,
the Company believes that tradename recognition will become an
increasingly important means of product differentiation among retailers
and consumers.
- DEVELOP GAME PRODUCTS. The Company intends to develop products intended
for the game market in the future. The Company believes that its access to
motion picture and related content will enable it to produce games that
can be successfully marketed. The Company intends to market its game
products in concert with studio releases and events.
- ACQUISITIONS. The Company intends to pursue acquisitions of entertainment
software companies and selected titles within existing or new product
categories. The Company believes that
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acquisitions may provide diversification of revenues and enhanced revenues
growth. The Company is not currently a party to any discussion, agreement,
arrangement or understanding in connection with any such acquisition.
PRODUCTS
INTERACTIVE CD-ROM
The Company has created INTERACTIVE MOVIEBOOKS-TM- for children, which are
electronic storybooks with full-motion video based on the licensed property.
INTERACTIVE MOVIEBOOKS-TM- are marketed as reading aids for young children.
Research studies involving literacy have shown that children learn to read by
repetitive reading -- usually with the aid of a parent or teacher. This learning
process begins at about 18 months of age and continues through the first and
second grades for many children. The targeted ages for INTERACTIVE
MOVIEBOOKS-TM- are three through ten. The Company has released eight of its
INTERACTIVE MOVIEBOOKS-TM- on CD-ROM. This product provides options for
automatic reading by the computer, user reading, a dictionary invoked by
"clicking" on a dictionary book icon, actual full-motion video taken from the
motion picture that coincides with the text pages, high-quality sound, art and
animation as well as a quiz consisting of multiple choice questions on a related
topic to the story, reinforcement through a "jigsaw" puzzle which can be
printed, and a "bookmark" so the adventure can be stopped, put away and
restarted at the same point at a later date. More elaborate activities in the
INTERACTIVE MOVIEBOOK-TM- have been included in BABE-TM-, THE LITTLE
RASCALS-TM-, FREE WILLY 2-TM-, EXOSQUAD-TM- and THE ADVENTURES OF BATMAN AND
ROBIN-TM-, and will be further incorporated in the next generation of products.
The Company first introduced its INTERACTIVE MOVIEBOOK-TM- product line into
the marketplace in August 1994 with the release of THE SECRET GARDEN-TM- (Warner
Bros.). The Company released BLACK BEAUTY-TM- (Warner Bros.) in November 1994,
LASSIE-TM-" (Broadway Video, a Paramount Pictures release), in December 1994 and
LITTLE RASCALS-TM- (Universal Pictures) in June 1995. The Company released FREE
WILLY 2-TM- (Warner Bros.) in July 1995. During November 1995, three new
INTERACTIVE MOVIEBOOKS-TM- were completed and released: BABE-TM- (Universal
Pictures), EXOSQUAD-TM- (Universal Pictures) and THE ADVENTURES OF BATMAN &
ROBIN-TM- (DC Comics). These three products, however, did not receive widespread
distribution until the first calendar quarter of 1996. All products are Windows
'95-Registered Trademark- compatible. Currently, the products are sold at a
suggested retail price of up to $30 each, a price point intended to generate
impulse purchases among consumers at the retail level.
The Company intends to introduce four to five new INTERACTIVE MOVIEBOOKS-TM-
annually in the future. Each is expected to experience its highest sales prices
and volumes within the 12 months following its introduction. Although the
products may continue to be sold after 12 months, they typically will be sold on
a discounted basis.
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The following is a listing of the Company's INTERACTIVE MOVIEBOOK-TM-
products which are currently existing or planned for release, all of which are
on CD-ROM:
<TABLE>
<CAPTION>
INTERACTIVE MOVIEBOOK-TM- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- -------------------------------- ---------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
THE SECRET GARDEN-TM- Warner Bros. August 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BLACK BEAUTY-TM- Warner Bros. November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
LASSIE-TM- Broadway Video December 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
THE LITTLE RASCALS-TM- Universal Pictures June 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
FREE WILLY 2-TM- Warner Bros. July 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BABE-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
EXOSQUAD-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
THE ADVENTURES OF DC Comics November 1995 Windows-Registered Trademark- and
BATMAN AND ROBIN-TM- Windows '95-Registered Trademark-
LAND BEFORE TIME-TM- Universal Pictures July 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
ALL DOGS GO TO HEAVEN II-TM- MGM October 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BATMAN AND ROBIN II-TM- DC Comics March 1997 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>
The Company is currently developing another line of interactive CD-ROM based
products which it refers to as creativity centers. This product line combines
learning activities such as painting, drawing, matching, puzzles and images
within a framework of three distinct skill levels. The Company intends to
introduce its first creativity center product in June 1996, and to introduce one
or two new creativity centers annually thereafter.
The following creativity center products which are planned for release in
1996.
<TABLE>
<CAPTION>
CREATIVITY CENTER TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ------------------------ ---------------------- ---------------- ---------------------------
<S> <C> <C> <C>
DRAGONHEART-TM- Universal Pictures June 1996 Macintosh-Registered Trademark-,
Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
LAND BEFORE TIME-TM- Universal Pictures October 1996 Macintosh-Registered Trademark-,
Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
</TABLE>
ENTERTAINMENT UTILITIES
The Company was one of the first to license motion picture studio properties
to create entertainment utility software. The first product was Star Trek
AUDIOCLIPS-Registered Trademark- and the second was a sub-license for a STAR
TREK-TM- Screen Saver. The Company followed its STAR TREK-TM- products with STAR
WARS-TM-, THE WIZARD OF OZ-TM-, TERMINATOR 2: JUDGMENT DAY-TM- and others. The
Company's screen saver line-up now includes TERMINATOR 2: JUDGMENT DAY-TM-, THE
TWILIGHT ZONE-TM- and SATURDAY NIGHT LIVE-TM-. Additionally, the sub-license for
STAR TREK-TM- AUDIOCLIPS-Registered Trademark- now extends to STAR TREK: THE
NEXT GENERATION-TM-, STAR TREK: THE MOTION PICTURES-TM- and a Stardate Desktop
Calendar.
Entertainment utility products may include AUDIOCLIPS-Registered Trademark-,
screen savers based on animation, video and still images, and wallpaper,
VISUALCLIPS-Registered Trademark- and jigsaw puzzles.
- LIMITED EDITION ENTERTAINMENT UTILITIES. The Company's new entertainment
computer software utilities incorporate screen savers,
AUDIOCLIPS-Registered Trademark- and other content based on entertainment
properties. The new entertainment utilities are marketed as limited issue,
serialized collector editions. For Christmas 1995, the Company released a
Limited Edition BABYLON 5-TM- (Warner Bros.) Entertainment Utility which
contains screen savers and AUDIOCLIPS-Registered Trademark-. Limited
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edition products are serialized and retail at approximately $30 each. The
Company expects the limited edition products to replace stand alone screen
savers and AUDIOCLIPS-Registered Trademark- by Christmas of 1996. The
Company currently sells the following limited edition entertainment
utilities:
<TABLE>
<CAPTION>
TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- --------------------------- ---------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
STAR WARS TRILOGY-TM- Lucasfilm, Ltd. July 1995 Macintosh-Registered Trademark-,
Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BABYLON 5-TM- Warner Bros. November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
TERMINATOR 2; Carolco Pictures July 1996 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
STAR TREK: DEEP SPACE Paramount/Viacom August 1996 Windows-Registered Trademark- and
NINE-TM- Windows '95-Registered Trademark-
STAR TREK: VOYAGER-TM- Paramount/Viacom November 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
I LOVE LUCY-TM- CBS November 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>
- AUDIOCLIPS-Registered Trademark-. The Company's
AUDIOCLIPS-Registered Trademark- Desktop Diversion Utilities are audio
computer software utilities which utilize segments of dialogue, music or
sound effects from original soundtracks of major motion pictures and hit
television shows to provide complementary audio "cues" for certain
computer system functions. The AUDIOCLIPS-Registered Trademark- utilities
are packaged with default assignments to enable consumers to personalize
their computing environment. Thus, although
AUDIOCLIPS-Registered Trademark- are pre-programmed for use by the
computer novice, the technology enables the user to assign other sounds to
the computer function of their choice. AUDIOCLIPS-Registered Trademark-
products were first introduced into the marketplace in December 1991.
Currently, the products are sold at a suggested retail price of
approximately $15 each, a price point intended to generate impulse
purchases among consumers at the retail level. The Company currently sells
the following AUDIOCLIPS-Registered Trademark- products:
<TABLE>
<CAPTION>
AUDIOCLIPS-REGISTERED TRADEMARK- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ------------------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
TERMINATOR 2: JUDGMENT DAY-TM- Carolco Pictures January 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
TOTAL RECALL-TM- Carolco Pictures February 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. October 1992 Macintosh-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. August 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
THE EMPIRE STRIKES BACK-TM- Lucasfilm, Ltd. August 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
RETURN OF THE JEDI-TM- Lucasfilm, Ltd. October 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK-TM- (original TV show) Paramount/Viacom March 1995 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK: THE NEXT GENERATION-TM- Paramount/Viacom March 1995 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK: THE MOTION PICTURES-TM- Paramount/Viacom October 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
</TABLE>
39
<PAGE>
- SCREEN SAVERS. Originally developed as a utility to protect computer
monitors from image "burn-in," screen saver utilities have evolved into
desktop entertainment software. Market observers estimate the screen saver
market currently to exceed $80 million per annum. The Company first
introduced its screen saver product line into the marketplace in August
1993 with the release of its TERMINATOR 2: JUDGMENT DAY-TM- screen saver.
In November 1994, the Company released its THE TWILIGHT ZONE-TM- screen
saver and SATURDAY NIGHT LIVE-TM- screen saver.
Currently, the stand alone screen saver products are sold at a suggested
retail price of approximately $20 each, a price point intended to generate
impulse purchases among consumers at the retail level. The Company currently
sells the following screen saver products:
<TABLE>
<CAPTION>
SCREEN SAVERS TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ---------------------------- ------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
TERMINATOR 2: Carolco Pictures August 1993 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
THE TWILIGHT ZONE-TM- CBS Television November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
SATURDAY NIGHT LIVE-TM- Broadway Video November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>
MUSIC INDUSTRY PRODUCTS
The Company's original products were sound libraries for professional
musicians sold to musical instrument manufacturers, music stores and directly to
end users. Although sales of the hardware that utilize the products continue
today, software sales remain flat due to the limited consumer population. The
Company recently discontinued its music industry products operations in order to
focus entirely on the computer software market. The Company will continue to
utilize its sound laboratory facilities and its sound library as it exists today
for incorporation into multimedia products as necessary. Using its own sound
library, the Company is capable of providing all of its own music and sound
effects for its software products, and creating new sounds as required for each
project. The Company believes that the discontinuance of its music industry
business will not materially affect its future earnings.
DEVELOPMENT AGREEMENTS
The Company has entered into development agreements with MTV Music
Television, NBC Television and Fox Interactive, pursuant to which the Company is
entitled to receive fees for its development services and/or royalties on the
products sold by the contracting parties. The Company has developed or is in
current development with the following entities for the following titles:
<TABLE>
<CAPTION>
CLIENT CONTENT CATEGORY STATUS
- ------------------ ------------------- ----------------------------- ---------------------
<S> <C> <C> <C>
MTV Music DEAD AT 21-TM- Screen Saver Completed
Television
NBC Television HISTORIC Screen Saver Completed
PEACOCK-TM-
Fox Interactive EEK! THE CAT-TM- INTERACTIVE MOVIEBOOK-TM- In Final Approval
Fox Interactive THE TICK-TM- INTERACTIVE MOVIEBOOK-TM- In Final Approval
Fox Interactive BOBBY'S WORLD-TM- INTERACTIVE MOVIEBOOK-TM- In Development
Fox Interactive LIFE WITH LOUIE-TM- INTERACTIVE MOVIEBOOK-TM- In Development
</TABLE>
The Company currently does not intend to enter into additional development
agreements in the foreseeable future, because it intends to emphasize the
development of its own products.
40
<PAGE>
PRODUCT DISTRIBUTION
RELATIONSHIP WITH ACCLAIM
In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software. The Company had no sales to or through Acclaim during its fiscal year
ended June 30, 1995. During the nine-month period ended March 31, 1996, of the
Company's total revenues from retail software sales of $1,824,734, a total of
$1,617,839 (84 percent) were generated by Acclaim. Under the terms of this
agreement, Acclaim was the exclusive distributor of the Company's products on a
worldwide basis to retail accounts, resellers and distributors except with
respect to distribution in North America by direct mail, "infomercials,"
television home shopping channels or through "bundling" agreements with OEMs. As
a result of the foregoing, the Company was substantially dependent upon Acclaim
for the distribution and sale of its products through March 31, 1996. The
Company was not satisfied with the distribution of its products through Acclaim
and determined to terminate the Acclaim distribution agreement in March 1996.
The Company and Acclaim have terminated the distribution agreement as of April
30, 1996.
On or before June 30, 1996, Acclaim will render a final accounting to the
Company together with payment of the balance of any amounts due to the Company
under the distribution agreement. Acclaim has notified its accounts that it will
not accept returns of any of the Company's software products after June 30,
1996. The Company, however, will remain liable for all such returns regardless
of when received by Acclaim. As of March 31, 1996, the Company had established a
reserve equal to 50 percent of the amount of its account receivable from
Acclaim. The Company believes that such reserve is sufficient to cover any
foreseeable returns or uncollectible accounts of Acclaim. There can be no
assurance, however, as to the adequacy of the reserve.
RELATIONSHIP WITH SSIDS
On June 1, 1996 the Company entered into a Distribution Services Agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS", as previously
defined). SSIDS is the consumer software distribution unit of Simon & Schuster,
Inc., the publishing operation of Viacom Inc. Pursuant to this new distribution
agreement, SSIDS will provide distribution, warehousing and order fulfillment
services for all of the Company's products (subject to certain exceptions)
throughout the United States and Canada. The Company's relationship with SSIDS
is exclusive except as regards the rights to distribute the Company's products
in direct-to-the-customer programs including direct mail, telemarketing and
in-box coupon fulfillment, which are nonexclusive.
SSIDS will make a monthly payment to the Company in an amount equal to its
"gross revenues" during such month from the Company's products, less a
distribution fee and reserve for returns equal to stated percentages of the
gross revenues and less certain other items, including out-of-pocket costs
associated with inventory maintenance and order fulfillment. "Gross revenues"
are defined as amounts actually billed by SSIDS to its customers for Company
products sold by it. The payments by SSIDS will be due not later than 75 days
after the billing calendar month. Under the SSIDS distribution agreement, SSIDS
will be responsible for collection of accounts, whereas the Company will be
responsible for product returns. The Company intends to maintain an appropriate
reserve for product returns based upon its prior experience and current market
conditions, which will approximate 15 percent of gross revenues, against which
credits for actual returns will be applied.
The SSIDS distribution agreement provides that the Company may designate
whether SSIDS shall perform manufacturing and/or technical support services for
any of the licensed products. SSIDS shall have the exclusive right to duplicate,
assemble and manufacture all licensed products for which the Company requests
that it provide manufacturing services, and the exclusive right to provide
technical support for all licensed products for which the Company requests that
it provide technical support services. The Company will reimburse SSIDS for all
out-of-pocket costs incurred by it in performing such manufacturing and
technical support services. In addition, the Company will pay SSIDS a fee for
any manufacturing and technical support services it may provide.
41
<PAGE>
The SSIDS distribution agreement is for a term of two years. The Company
will be substantially dependent upon SSIDS for the distribution of its products
throughout North America during the term of the agreement. SSIDS, however, will
not be obligated to sell any specified minimum quantity of the Company's
products. There can be no assurance as to the volume of product sales that may
be achieved by SSIDS. Because the Company's rights to market its products
through channels other than SSIDS are limited, the Company's ability to realize
the cash flow necessary to fund its ongoing operations and to achieve
profitability will be largely dependent upon the success of SSIDS in marketing
its products. In addition, the Company may experience a loss of sales momentum
as a result of the transition from utilizing Acclaim to SSIDS as its exclusive
distributor.
GENERAL
The Company believes that its products currently are in distribution to
approximately 6,000 retail outlets, pursuant to its previous distribution
arrangements with Acclaim. Retailers currently selling the Company's products
include Target, Tower Records, Sears, Wal-Mart, Price/Costco, CompUSA, Best Buy,
BJ's, Computer City, Egghead, Electronics Boutique, Babbages, Software Etc.,
Kmart, Barnes & Noble, Sam Goody, Sam's Club, QVC, Musicland, Circuit City,
Blockbuster Video and others. The Company believes that mass market retailers
will increasingly be significant outlets for consumer software.
In fiscal 1994, the Company had four customers who collectively represented
29 percent of the Company's sales, including two distributors, Cameo Interactive
and Good Times Interactive, each of which accounted for ten percent or more of
the Company's sales. As a result of the Company's broader distribution to retail
customers during fiscal 1995, only one customer, Comp USA, accounted for 18
percent of the Company's gross sales, and no other customer accounted for ten
percent or more of the Company's gross sales. During the nine months ended March
31, 1996, Acclaim accounted for 84 percent of the Company's sales.
Significantly, all accounts receivable at March 31, 1996 is due from such
customer.
SALES AND MARKETING
By offering a wide variety of products, the Company can provide retailers
with an assortment of titles in categories of interest to consumers. The Company
also supports all its retailers by setting up special displays, end caps and
kiosks, executing targeted promotions and analyzing sales trends to help build
incremental sales. The Company is currently developing a variety of
cross-marketing promotional programs with its movie studio licensors and other
licensees of movie titles. These promotional programs will include discount
coupons for products in video cassettes, rebate coupons with action figures,
movie trailers in the Company's software products, and promotional contests with
various motion picture studios.
Drawing upon established consumer marketing techniques, the Company's
marketing department creates and executes high-impact merchandising programs
with the goal of maximizing each product's retail exposure. The Company believes
that its consumer-driven marketing, the high perceived value and competitive
price points of its products, and easily identifiable packaging which emphasizes
high-impact design and concise, nontechnical product information lead to higher
visibility and impulse purchases of its products in retail stores.
The Company provides technical support by telephone at no additional charge.
The Company has installed a telephone system and a call handling center to
facilitate its response to customer inquiries. Customer feedback is shared among
other support representatives and made available to product managers for
development of product enhancements and upgrades.
Under the new SSIDS distribution agreement, the Company's direct retail
accounts will be serviced by the SSIDS sales force with direction and assistance
from the Company. The Company will work closely with SSIDS to assure that
wholesale and retail accounts are adequately serviced and that inventory levels
are adequate and that merchandising programs are properly executed. See
"Business -- Product Distribution -- Relationship With SSIDS."
42
<PAGE>
DEVELOPMENT
The Company develops a broad line of products in sustainable market
categories in which a leading market share can be obtained. The Company depends
on a flow of creative ideas to develop high-quality, value-priced products. The
Company believes that its efficient development model has certain key advantages
including consistent product quality, reliable delivery schedules, cost
containment and low investment risk.
The Company's product managers oversee the development of various products
from conception through completion, and control the content, design, scope and
development schedule. New product ideas are evaluated with each studio partner
based upon upcoming theatrical releases, detailed market research on the subject
matter, the type and demographics of the target consumer, and the existence and
characteristics of competitive products. The Company seeks to design new
products which incorporate all of the important functions and features of the
leading competitive products. Once a product is approved for development, a
detailed design specification is created that includes the product's features
and a user interface that is consistent with other Company products. Whenever
possible, the software is designed to incorporate technology used in existing
Company products in an effort to shorten the development cycle and improve
quality and consistency. The overall product, including documentation, is
designed to meet a manufacturing specification that will meet the Company's
margin requirements at consumer price points.
The product managers then execute the development project with a team that
includes programmers, sound engineers, artists, animators, designers, writers
and testers. The Company's internal development efforts are focused primarily on
product design and features, consistent user interfaces, and product quality
consistency. The Company supplements its internal product development resources
by utilizing existing technologies and externally developed programming when
such utilization can result in a more efficient method of creating a higher
quality product. Using this method, the Company maintains internal control over
the creative and market-driven aspects of product development while using
external resources to shorten development time and lower development risks.
Development costs associated with externally licensed technology are generally
paid by royalties based on net sales, which lowers the Company's investment
risk. The Company's agreements with its external developers typically grant the
Company an exclusive worldwide license to use the developers' software. The
agreements typically have three-year terms, with renewal provisions upon mutual
agreement of the parties.
The Company currently is the licensee under technology licenses with Apple
Computer, Inc., Iterated Systems, Inc., Qsound Labs, Inc., Rock Ridge
Enterprises, EchoMedia, Inc. and Rhode Island Soft Systems, Inc. The Company
utilizes technology provided by these licensors to develop and operate several
of its products. With the exception of the Apple Computer license, there are
alternative products for each of the technologies now licensed by the Company.
Therefore, the Company believes that it could readily obtain licenses to
comparable products from other sources at comparable costs.
Products under development are extensively tested by the quality assurance
department, and must be approved by the licensor before being released for
production. The department tests for bugs, functionality, ease-of-use and
compatibility with the many popular Multimedia PC configurations that are
available to consumers.
Product managers are also responsible for reviewing customer feedback,
competitive products, product performance and market positioning in order to
introduce upgrades that keep abreast of consumer tastes and trends. The Company
has increased its development of new CD-ROM products to address the shift to
CD-ROM-based products.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent
43
<PAGE>
contractors in accordance with the Company's specifications. The Company intends
to invest in management information systems and other capital equipment which it
believes are necessary to achieve operational efficiencies and support
increasing sales volumes.
The Company prepares master software disks, user manuals and packaging
designs. Disk and CD-ROM duplication, printing of documentation and packaging,
as well as the assembly of purchased components and the shipment of finished
products, are performed by third parties in accordance with the Company's
specifications. Under the new distribution agreement with SSIDS, the Company may
utilize SSIDS to provide manufacturing and related services. See "Business --
Product Distribution -- Relationship With SSIDS." The Company has multiple
sources for all components, with assembly and shipping currently performed by
three independent fulfillment houses. To date, the Company has not experienced
any material difficulties or delays in the production and assembly of its
products. To the extent that the Company's fulfillment houses do not continue to
perform assembly and shipping functions in a cost-efficient and timely manner,
and transition to substitute fulfillment houses is not completed in a timely
fashion, the Company's business, operating results and financial condition could
be adversely affected.
COMPETITION
The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. Existing consumer
software companies may broaden their product lines to compete with the Company's
licensed products, and potential new competitors, including computer hardware
and software manufacturers, diversified media companies and book publishing
companies, may enter or increase their focus on the consumer software market,
resulting in greater competition for the Company.
Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. Principal competitive
factors in marketing consumer software include product features, quality,
reliability, tradename and licensed title recognition, ease-of-use,
merchandising, access to distribution channels and retail shelf space,
marketing, price, and the availability and quality of support services. The
Company believes that it competes effectively in these areas, particularly in
the areas of quality, brand recognition, ease-of-use, merchandising, access to
distribution channels and retail shelf space and price. To the extent that
competitors achieve performance, price or other selling advantages, the Company
could be adversely affected. There can be no assurance that the Company will
have the resources required to respond to market or technological changes or to
compete successfully in the future. In addition, increasing competition in the
consumer software market may cause prices to fall, which could adversely affect
the Company's business, operating results and financial condition.
The Company considers Microsoft Corp., Broderbund, Inc., Knowledge
Adventure, Disney, Maxis, 7th Level, Inc. and A.D.A.M. Software, Inc. its chief
competitors in the interactive entertainment CD-ROM market. The Company
considers Microsoft, Inc. and Berkeley Systems its chief competitors in the
entertainment utility software market. Microsoft has introduced screen savers
and generic sounds, as well as licensed sounds from the MGM/Turner film library.
The Company considers Berkeley Systems its chief competitor in the screen saver
market. The Company developed the concept and provided the introductions that
led to the development of the STAR TREK-TM- series of screen savers by Berkeley
Systems. The Company has received over $300,000 in earnings from this sub-
license, which continues until 1997. The Company notes that there are a number
of other smaller entertainment utility publishers competing in this market.
The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), Lucasfilm Ltd., Warner Bros.
Consumer Products, CBS Entertainment, MCA/Universal Merchandising, Inc., Carolco
Pictures, Inc., DC Comics, MGM/UA Merchandising, Inc. and others. Several of the
major motion picture studios now have captive interactive software
44
<PAGE>
divisions. As these types of software become better known in the marketplace,
these profit centers may begin to vie for their studio's product. Management
believes that Disney, Lucasfilm and Paramount/Viacom are currently the most
active studios in publishing their own product to create software packages. Fox,
Universal Pictures, Sony Pictures and Warner Bros. each have announced the
formation of divisions to publish software products using their own license
content. See "Risk Factors -- Competition."
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these products further
overlaps, software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Any such claims, with or without merit, can be time
consuming and expensive to defend and resolve.
Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors -- Limited Protection of Intellectual Property and
Proprietary Rights."
The Company's licenses and other intellectual property may not be
transferred to third parties without the consent of the licensors. Transfer of
ownership of stated percentages of the Common Stock could constitute a
prohibited transfer of the Company's licenses for the LASSIE-TM-, SATURDAY NITE
LIVE-TM- and STAR TREK-TM- titles. All of the Company's licenses with Warner
Bros. (including THE SECRET GARDEN-TM-, BLACK BEAUTY-TM-, FREE WILLY 2-TM- and
BABYLON 5-TM-) provided that a change in "management" will be deemed
unauthorized assignment of the license. It is not clear under what circumstances
the Company might be deemed to have experienced a change in management which
could result in the termination of these licenses, but the planned expansion of
the Company's Board of Directors to include three independent directors and/or
its appointment of a new Chief Executive Officer could be deemed to constitute
such a change. See "Management -- Directors and Executive Officers."
Any future change in ownership or control of the Company, including exercise
of the ASSI Warrants and/or the ASSI Loan Warrants (if any) (see "Certain
Transactions -- Agreements with ASSI, Inc."), could result in the termination of
the licenses referred to above. The potential terminability of such licenses
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock.
45
<PAGE>
The Company's products are based upon licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. See "Business -- General" and "-- Products." All of
such license and development agreements to which the Company currently is a
party are for fixed terms which will expire over the next one to five years. The
Company anticipates that the licensor under each agreement will extend its
terms, although no licensor is required to extend any license, provided that the
Company is in compliance with all requirements of each license, including most
significantly that the Company have satisfied the applicable minimum royalty
guarantees. In the event that any licensor failed to renew its license
agreement, then the subject license would terminate and the Company would no
longer be entitled to sell the licensed product. The loss of one or more of the
licenses could have a material adverse effect on the Company's revenues and
profits. There can be no assurance that the Company will satisfy its performance
obligations under any license or development agreement, or that, even if such
requirements are satisfied, all material licenses will be renewed.
EMPLOYEES
As of March 31, 1996, the Company had 30 full-time employees, including five
employees in sales and marketing, 20 employees in development and customer
support and five employees in administration and finance. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with its employees are good.
FACILITIES
The Company leases approximately 8,000 square feet of office and warehousing
space in Westlake Village, Ventura County, California. The lease for the
Company's current office space expires on March 31, 1997. The Company currently
expects that this facility will be sufficient for its needs at least through the
term of the lease. The Company may lease additional adjacent space as its needs
require, which it believes will be available on acceptable terms.
LEGAL MATTERS
The Company is, and in the future the Company and/or its officers and
directors may be, involved in suits and actions incidental to the Company's
business. The Company does not believe that the resolution of any of the current
suits or actions will result in any material adverse effect on the financial
condition or operations of the Company. At present there is no pending
litigation or proceeding involving any director or officer of the Company.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and their
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Vincent J. Bitetti 41 Chairman of the Board, Chief Executive Officer and Director
Eric H. Winston 48 President, Chief Operating Officer and Director
Ulrich E. Gottschling 37 Chief Financial Officer, Treasurer, Secretary and Director
</TABLE>
VINCENT J. BITETTI founded Sound Source Interactive, Inc., a California
corporation (the "Subsidiary"), in 1989 and served as the President of the
Subsidiary from its formation. Since the Company acquired the Subsidiary in
1994, Mr. Bitetti has served as the Chairman of the Board and Chief Executive
Officer and as a director of the Company and the Subsidiary. Prior to founding
the Subsidiary, from 1986 to 1988 Mr. Bitetti was President of Fantastic Planet
Consultants, a sound and musical instrument design consulting company. Mr.
Bitetti is a published music composer and lyricist. From 1986 to 1993, Mr.
Bitetti was a consultant to manufacturers of keyboard synthesizers in the music
industry. Mr. Bitetti developed the concepts for the Company's INTERACTIVE
MOVIEBOOKS-TM-, AUDIOCLIPS-REGISTERED TRADEMARK-,
VISUALCLIPS-REGISTERED TRADEMARK-, limited edition and creativity center
products.
ERIC H. (RICK) WINSTON has served as President and director of the Company
and the Subsidiary since April 1994, and Chief Operating Officer of the Company
and the Subsidiary since October 1995. Prior to joining the Company, Mr. Winston
was President of E.H. Winston & Associates, a business consulting firm which he
established in 1991. Mr. Winston was President and Chief Executive Officer of
Computer Data Information Systems, Inc. from 1985 to 1989, when it was acquired
by NYNEX. As part of that acquisition, Mr. Winston was retained as Vice
President and General Manager of The DATAGROUP, a NYNEX subsidiary, and remained
with The DATAGROUP until 1991 when he departed to start E.H. Winston &
Associates.
ULRICH E. GOTTSCHLING was appointed as Chief Financial Officer, Treasurer
and director of the Company on October 9, 1995, and as Secretary of the Company
on November 17, 1995. Prior to joining the Company, Mr. Gottschling was employed
from June 1991 through September 1995 as a certified public accountant with
Corbin & Wertz, the Company's independent auditors. From 1987 through May 1991,
he was employed as a certified public accountant by Deloitte & Touche. From 1980
through 1986, Mr. Gottschling held various management positions with Westin
Hotels and Marriott Corporation.
The Company is currently conducting a search for a new Chief Executive
Officer. It is anticipated that such person will be appointed following the
closing of this offering. Upon the commencement of his or her employment by the
Company, Mr. Bitetti will resign his current position as Chief Executive
Officer.
It is also anticipated that the Board of Directors will be reconstituted
following this offering to comprise a total of five members. Mr. Gottschling
will resign as a director, and three independent directors are expected to be
appointed. Thereafter, all of the Company's directors will be elected annually
and will serve until the next annual meeting of stockholders or until the
election and qualification of their successors. The Board of Directors elects
the Company's officers and such officers serve at the discretion of the Board of
Directors. There are no family relationships between the directors and executive
officers of the Company. See generally "Risk Factors -- Dependence on Key
Personnel."
The Company has agreed to grant to each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc., the right to nominate from time to time
one director of the Company or to have an individual designated thereby attend
all meetings of the Board of Directors of the Company as a nonvoting advisor.
See "Underwriting" and "Certain Transactions -- Agreements With ASSI, Inc."
47
<PAGE>
Vincent J. Bitetti and Eric H. Winston have entered into voting agreements
with each of The Boston Group, L.P., Joseph Stevens & Company, L.P. and ASSI,
Inc. Pursuant to these agreements, Messrs. Bitetti and Winston have agreed to
vote all of their Common Stock for the three director nominees of The Boston
Group, L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. In addition, ASSI,
Inc. has agreed to vote all of its shares of Common Stock for two directors
nominated by Mr. Bitetti for as long as he holds 20 percent or more of the
issued and outstanding Common Stock, and for one director nominated by Mr.
Bitetti for as long as he holds at least ten percent but less than 20 percent of
the issued and outstanding Common Stock. The voting agreements with ASSI, Inc.
will terminate when Messrs. Bitetti and Winston together cease to own at least
ten percent of the issued and outstanding Common Stock.
BOARD OF DIRECTORS AND COMMITTEES
The business of the Company's Board of Directors currently is conducted
through full meetings of the Board. Upon the expansion of the Board following
the completion of this offering, it is expected that the Board also will conduct
business through meetings of its committees. Set forth below is a description of
the committees of the Board.
The Audit Committee will review and report to the Board on various auditing
and accounting matters, including an annual audit report from the Company's
independent public accountants. The Chief Financial Officer, if a director, will
not be a member of the Audit Committee.
The Compensation Committee will establish compensation levels for the
Company's executive officers and will administer and determine appropriate
awards under the Company's 1995 Stock Option Plan. See "Management -- 1995 Stock
Option Plan." Two of the independent directors to be appointed by the Board of
Directors will serve on the Compensation Committee.
The Executive Committee will have the authority to act on behalf of the full
Board of Directors in between meetings of the Board, except that the Executive
Committee will not have the authority to amend the Certificate of Incorporation
or the Bylaws of the Company, adopt an agreement of merger or consolidation,
recommend to the stockholders a dissolution of the Company or a revocation of
dissolution or remove or indemnify a director. To the extent authorized by the
Board of Directors, the Executive Committee will also be authorized to declare
dividends of the Company and to issue shares of authorized and unissued Common
Stock of the Company. The Executive Committee will also act as the Nominating
Committee to nominate officers and directors of the Company for election. The
Executive Committee will consist of the Chairman of the Board, the new Chief
Executive Officer and an independent director.
COMPENSATION OF BOARD OF DIRECTORS
Directors previously have received no cash compensation for serving on the
Board of Directors. Beginning in December 1995, the Company adopted a policy
that will provide for payment of fees to its nonofficer directors for serving on
its Board of Directors and for their attendance at Board and committee meetings.
The Company will pay each nonofficer director an annual fee of $15,000. In
addition, each nonofficer director will receive options to purchase 10,000
shares of Common Stock annually.
48
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth information concerning
compensation of the Company's Chief Executive Officer and each of the Company's
other executive officers who received compensation from the Company and/or the
Subsidiary in excess of $100,000 for the fiscal year ended June 30, 1995 (the
"Named Executives"). No other executive officer's compensation exceeded $100,000
during fiscal year 1995.
<TABLE>
<CAPTION>
LONG-TERM
SUMMARY ANNUAL COMPENSATION
COMPENSATION -------------------------------------
NAME AND ---------------------- STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) (SHARES) COMPENSATION(2)
- ------------------------------------------------ --------- ----------- --------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti,
Chairman of the Board and Chief Executive
Officer 1995 $ 150,000 $ 75,000 0 $ 6,200
Eric H. Winston,
President and Chief Operating Officer 1995 150,000 75,000 0 9,600
</TABLE>
- ------------------------
(1) The bonuses accrued for fiscal year 1995 were fully paid in December 1995.
(2) The amounts in this column for 1995 consist of the following: (a) personal
use of Company car (50 percent of payment for car expenses): Mr. Bitetti --
$4,800; Mr. Winston -- $4,800; (b) life insurance premiums: Mr. Bitetti --
$1,400; and (c) medical insurance premiums: Mr. Winston -- $4,800.
OPTION GRANTS. The following table provides information concerning options
granted by the Company to each of the Named Executives during its fiscal year
ended June 30, 1995 and to Ulrich E. Gottschling during its current fiscal year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------
PERCENT OF
NUMBER OF SHARES TOTAL OPTIONS
SUBJECT TO COMMON GRANTED TO
STOCK OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
- --------------------------------------------------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Vincent J. Bitetti................................. 0 0.0% $ -- --
Eric H. Winston.................................... 0 0.0 -- --
Ulrich Gottschling (1)............................. 200,000 100.0 3.70 4/30/06
</TABLE>
- ------------------------
(1) Mr. Gottschling became an executive officer and employee of the Company on
October 9, 1995. The information concerning Mr. Gottschling is as of April
30, 1996 and includes an option granted to Mr. Gottschling on April 30,
1996. The option is presently exercisable as to 100,000 shares of Common
Stock at an exercise price of $3.40 per share, and will become exercisable
as to an additional 100,000 shares of Common Stock at an exercise price of
$4.00 per share on September 30, 1997. The number of options granted and the
exercise price per share were established by negotiation between the Company
and Mr. Gottschling at the time of his hiring by the Company. See
"Management -- Employment Agreements."
49
<PAGE>
OPTION EXERCISES AND HOLDINGS. The following table sets forth information
concerning each exercise of a stock option during the fiscal year ended June 30,
1995 by each of the Named Executives and the number and value of unexercised
options granted by the Company held by each of the Named Executives on June 30,
1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-ENDED OPTION VALUES
----------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN- THE-MONEY OPTIONS
OPTIONS AT 6/30/95(1) AT 6/30/95(1)
NUMBER OF SHARES ----------------------- -----------------------
NAME ACQUIRED ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- ----------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Vincent J. Bitetti........... 0 $ 0 0/0 $ 0/0
Eric H. Winston (2).......... 0 0 292,838/0 1,153,782/0
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock in this offering ($4.00
per share), less the option exercise price.
(2) Does not include a presently exercisable option held by Mr. Winston to
purchase 100,000 shares of Common Stock from Mr. Bitetti at $2.00 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Vincent J.
Bitetti, Chairman of the Board and Chief Executive Officer, for a term ending on
September 15, 1998. Pursuant to that employment agreement, Mr. Bitetti is to
receive annual base compensation of $200,000, which will be reduced to $160,000
upon the date of this Prospectus. Mr. Bitetti's annual base compensation will be
increased by $40,000 at such time as the Company realizes net sales (gross sales
less returns and allowances) of $1,500,000 or more for any three consecutive
calendar months. Mr. Bitetti's salary also is subject to escalation annually in
accordance with the Consumer Price Index (the "CPI"). In addition, Mr. Bitetti's
employment agreement entitles him to receive bonuses based on three criteria:
attainment of specified gross revenues, attainment of specified gross profits,
and attainment of specified pre-tax profitability. If the Company acquires any
new businesses in the future, the related revenues and profits will not be taken
into account in determining entitlements to these bonuses.
The gross revenue bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross revenues are attained for the fiscal year ending
June 30, 1996.
<TABLE>
<CAPTION>
GROSS REVENUE CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
$7,500,000.................... $ 25,000
10,000,000.................... 75,000
15,000,000.................... 125,000
</TABLE>
The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year will be increased by 60 percent annually.
The gross profit bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross profit amounts (defined as annual sales revenue
less all costs of sales as determined by the Company's independent public
accountants) are attained for the fiscal year ending June 30, 1996:
<TABLE>
<CAPTION>
GROSS PROFIT CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
$2,000,000.................... $ 50,000
2,250,000..................... 75,000
2,500,000..................... 100,000
</TABLE>
The gross profit levels required to receive each bonus level for each
subsequent fiscal year will be increased by 60 percent annually.
The pre-tax profitability bonus would entitle Mr. Bitetti to the following
amounts if the following pre-tax profit amounts (defined as annual earnings
before interest, taxes, depreciation and amortization) are attained for each
fiscal year during the term of Mr. Bitetti's employment agreement:
<TABLE>
<CAPTION>
PROFITABILITY CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
10%........................... $ 50,000
15%........................... 100,000
</TABLE>
50
<PAGE>
Pursuant to his employment agreement, Mr. Bitetti is entitled to certain
other fringe benefits including use of a Company automobile or automobile
allowance, $5,000,000 in life insurance coverage (provided that in no event will
the Company be required to pay a premium for such insurance in excess of $7,500
per year) and the right to participate in the Company's customary benefit plans.
Mr. Bitetti's employment agreement further provides that following the voluntary
or involuntary termination of his employment by the Company, Mr. Bitetti is
entitled to two demand registration rights with respect to the Common Stock held
by or issuable to him. These registration rights will only become effective upon
the voluntary or involuntary termination of Mr. Bitetti's employment with the
Company. Mr. Bitetti's employment agreement further provides that his salary may
not be less than that of the Company's new Chief Executive Officer, up to a
maximum of $300,000.
The Company has entered into an employment agreement with Eric H. Winston,
President and Chief Operating Officer, for a term ending on September 15, 1998.
Pursuant to that employment agreement, Mr. Winston is to receive annual base
compensation of $175,000, which will be reduced to $140,000 upon the date of
this Prospectus. Mr. Winston's annual base compensation will be increased by
$35,000 at such time as the Company realizes net sales of $1,500,000 or more for
any three consecutive calendar months. Mr. Winston's salary also is subject to
escalation annually in accordance with the CPI. Mr. Winston's employment
agreement entitles him to receive three annual bonuses payable in accordance
with the same provisions described above with respect to Mr. Bitetti's
employment agreement. Mr. Winston is also entitled to the same fringe benefits
as Mr. Bitetti.
Pursuant to his employment agreement the Company has granted Mr. Winston
options to purchase 292,838 shares of Common Stock at an exercise price of $.06
per share. See "Management -- Executive Compensation." Mr. Winston's employment
agreement further provides that following the voluntary or involuntary
termination of his employment by the Company, Mr. Winston is entitled to two
demand registration rights with respect to the Common Stock held by or issuable
to him. The registration rights will only become effective upon the voluntary or
involuntary termination of Mr. Winston's employment with the Company. Mr.
Bitetti has separately granted Mr. Winston a presently exercisable option to
acquire 100,000 shares of Common Stock at a purchase price of $2.00 per share.
Pursuant to his employment agreement, Mr. Winston has granted Mr. Bitetti a
right of first refusal as to all Common Stock that Mr. Winston may from time to
time acquire. Such first offer right provides that before Mr. Winston offers to
sell any such Common Stock to any third party, he must first offer to sell such
shares to Mr. Bitetti on no less favorable terms than proposed to be offered to
the third party. If Mr. Bitetti rejects such offer, then Mr. Winston is free to
sell to the third party on terms no less favorable than offered to Mr. Bitetti.
The Company also separately agreed to pay each of Messrs. Bitetti and
Winston a bonus equal to the sum of three percent of the Company's net sales.
The entitlement to receive such bonuses ended November 30, 1995. A bonus of
$16,578 was paid to each of Messrs. Bitetti and Winston for the two-month period
ended November 30, 1995.
The Company entered into an employment agreement with Ulrich E. Gottschling,
Chief Financial Officer, Treasurer, Secretary and director, for a term ending
October 9, 1997. The employment agreement entitles Mr. Gottschling to receive
annual cash compensation of $110,000. Pursuant to his employment agreement, on
October 9, 1995 Mr. Gottschling also was granted options to purchase 100,000
shares of Common Stock at an exercise price of $5.00 per share. See "Management
- -- Executive Compensation" and "-- 1992 Stock Option Plan." On April 30, 1996,
Mr. Gottschling agreed to the termination of his existing 100,000 share option
in consideration for the Company's agreement to grant to him a new 200,000 share
option pursuant to the 1992 Stock Option Plan. The Company granted this option
to Mr. Gottschling on April 30, 1996. The option is exercisable upon the date of
its grant as to 100,000 shares at a purchase price of $3.40 per share, and will
become exercisable as to 100,000 shares on September 30, 1997 at a purchase
price of $4.00 per share.
51
<PAGE>
Mr. Gottschling's employment agreement further provides that following the
voluntary or involuntary termination of his employment by the Company, Mr.
Gottschling is entitled to a single demand registration right with respect to
the Common Stock held by or issuable to him pursuant to his option agreement.
1995 STOCK OPTION PLAN
GENERAL
On October 9, 1995, the Board of Directors of the Company adopted the
Company's 1995 Stock Option Plan. The Board of Directors adopted the Company's
Amended and Restated 1995 Stock Option Plan on May 15, 1996. The following
summary of the Company's 1995 Stock Option Plan is qualified in its entirety by
the 1995 Stock Option Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The 1995 Sound Source Interactive, Inc. Stock Option Plan (the "1995 Stock
Option Plan") is designed to promote and advance the interests of the Company
and its stockholders by (i) enabling the Company to attract, retain, and reward
managerial and other key employees and nonemployee directors, and (ii)
strengthening the mutuality of interests between participants in the 1995 Stock
Option Plan and the stockholders of the Company in its long term growth,
profitability and financial success by offering stock options.
The 1995 Stock Option Plan empowers the Company to award or grant from time
to time until September 30, 2005, to officers, directors and key employees of
the Company and its subsidiaries, Incentive and Non-Qualified Stock Options
("Options") authorized by the Compensation Committee of the Board of Directors
(the "Committee") which will administer the 1995 Stock Option Plan.
The Company has not yet granted any options under the 1995 Stock Option
Plan. The Board of Directors however, has resolved to grant 13,610 to
nonexecutive Company employees on the closing date of this offering at an
exercise price of $4.00 per share.
ADMINISTRATION
The 1995 Stock Option Plan will be administered by the Committee. The 1995
Stock Option Plan provides that the Committee must consist of at least two
directors of the Company who are "disinterested directors" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee has the sole authority to construe and interpret the 1995
Stock Option Plan, to make rules and procedures relating to the implementation
of the 1995 Stock Option Plan, to select participants, to establish the terms
and conditions of Options and to grant Options, with broad authority to delegate
its responsibilities to others, except with respect to the selection for
participation of, and the granting of Options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Members of the Committee will not be
eligible to receive discretionary Options under the 1995 Stock Option Plan.
ELIGIBILITY CONDITIONS
All officers and key employees of the Company and its subsidiaries and
nonemployee directors will be eligible to receive Options under the 1995 Stock
Option Plan. Nonemployee directors are only eligible to receive Non-Qualified
Stock Options under the 1995 Stock Option Plan. Except for Non-Qualified Stock
Options granted to nonemployee directors, the selection of recipients of, and
the nature and size of, Options granted under the 1995 Stock Option Plan will be
wholly within the discretion of the Committee. Subject to specific formula
provisions relating to the grant of options to nonemployee directors and except
with respect to the exercisability of Incentive Stock Options and the total
shares available for option grants under the 1995 Stock Option Plan, there is no
limit on the number of shares of Common Stock or type of option in respect of
which Options may be granted to or exercised by any person.
52
<PAGE>
SHARES SUBJECT TO 1995 STOCK OPTION PLAN
The maximum number of shares of Common Stock in respect of which Options may
be granted under the Plan (the "Plan Maximum") is 500,000. For the purpose of
computing the total number of shares of Common Stock available for Options under
the 1995 Stock Option Plan, the above limitations shall be reduced by the number
of shares of Common Stock subject to issuance upon exercise or settlement of
Options previously granted, determined at the date of the grant of such Options.
However, if any Options previously granted are forfeited, terminated, settled in
cash or exchanged for other Options or expire unexercised, the shares of Common
Stock previously subject to such Options shall again be available for further
grants under the 1995 Stock Option Plan. The shares of Common Stock which may be
issued to participants in the 1995 Stock Option Plan upon exercise of an Option
may be either authorized and unissued Common Stock or issued Common Stock
reacquired by the Company. No fractional shares may be issued under the 1995
Stock Option Plan.
The maximum number of shares of Common Stock issuable upon the exercise of
Options granted under the 1995 Stock Option Plan is subject to appropriate
equitable adjustment in the event of a reorganization, stock split, stock
dividend, combination of shares, merger, consolidation or other recapitalization
of the Company. The effect of such adjustment would be to provide customary
anti-dilution protection.
TRANSFERABILITY
No Option granted under the 1995 Stock Option Plan, and no right or interest
therein, shall be assignable or transferable by a participant except by will or
the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION
The 1995 Stock Option Plan will terminate on September 30, 2005 except with
respect to Options then outstanding. The Board of Directors of the Company may
amend or terminate the 1995 Stock Option Plan at any time, except that, to the
extent restricted by Rule 16b-3 promulgated under the Exchange Act, as amended
and in effect from time to time (or any successor rule), the Board of Directors
may not, without approval of the Stockholders of the Company, make any amendment
that would increase the total number of shares covered by the 1995 Stock Option
Plan, change the class of persons eligible to receive Options granted under the
1995 Stock Option Plan, reduce the exercise price of Options granted under the
1995 Stock Option Plan or extend the latest date upon which Options may be
exercised.
INCENTIVE STOCK OPTIONS
Options designated as Incentive Stock Options, within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), in respect of
up to the Plan Maximum may be granted under the 1995 Stock Option Plan. The
number of shares of Common Stock in respect of which Incentive Stock Options are
first exercisable by any participant in the 1995 Stock Option Plan during any
calendar year shall not have a fair market value (determined at the date of
grant) in excess of $100,000 (or such other limit as may be imposed by the
Code). To the extent the fair market value of the shares for which options are
designated as Incentive Stock Options that are first exercisable by any optionee
during any calendar year exceed $100,000, the excess amount shall be treated as
Non-Qualified Stock Options. Incentive Stock Options shall be exercisable for
such period or periods, not in excess of ten years after the date of grant, as
shall be determined by the Committee.
NON-QUALIFIED STOCK OPTIONS
Non-Qualified Stock Options may be granted for such number of shares of
Common Stock and will be exercisable for such period or periods as the Committee
shall determine.
OPTIONS TO NONEMPLOYEE DIRECTORS
The 1995 Stock Option Plan also provides for the grant of Options to
nonemployee directors of the Company without any action on the part of the Board
or the Committee, only upon the terms and conditions set forth in the 1995 Stock
Option Plan. Each nonemployee director shall automatically receive Non-Qualified
Options to acquire 10,000 shares of Common Stock upon appointment, and
53
<PAGE>
shall receive Non-Qualified Options to acquire an additional 10,000 shares of
Common Stock for each additional year that the nonemployee director continues to
serve on the Board of Directors. Each Option shall become exercisable as to 50
percent of the shares of Common Stock subject to the Option on the first
anniversary date of the grant and 50 percent on the second anniversary date of
the grant, and will expire on the earlier of ten years from the date the Option
was granted, upon expiration of the 1995 Stock Option Plan or three weeks after
the optionee ceases to be a director of the Company. The exercise price of such
Options shall be equal to 100 percent of the fair market value of the Common
Stock subject to the Option on the date on which such Options are granted. Each
option shall be subject to the other provisions of the 1995 Stock Option Plan.
OPTION EXERCISE PRICES
The exercise price of any Option granted under the 1995 Stock Option Plan
shall be at lest 100 percent of the fair market value of the Common Stock on the
date of grant, except that the exercise price of any Option granted to any
participant in the 1995 Stock Option Plan who owns in excess of ten percent of
the outstanding voting stock of the Company shall be 110 percent of the fair
market value of the Common Stock on the date of grant. Fair market value per
share of Common Stock is quoted by the Nasdaq SmallCap Market, or as the amount
determined in good faith by the Committee if the Common Stock is neither listed
for trading on an exchange or quoted by the Nasdaq SmallCap Market. Options
granted effective as of the closing date of this offering will have an exercise
price equal to the initial public offering price per share.
EXERCISE OF OPTIONS
No Option may be exercised, except as provided below, unless the holder
thereof remains in the continuous employ or service of the Company. Options
shall be exercisable upon the payment in full of the applicable option exercise
price in cash or, if approved by the Committee, by instruction to a broker
directing the broker to sell the Common Stock for which such Option is exercised
and remit to the Company the aggregate exercise price of the Option or upon such
terms as the Committee shall approve, in shares of the Common Stock then owned
by the optionee (at the fair market value thereof at exercise date).
1992 STOCK OPTION PLAN
On May 4, 1992, the Board of Directors adopted the Company's 1992 Stock
Option Plan. The Board of Directors has resolved that no further options are to
be granted pursuant to the 1992 Stock Option Plan. All existing options
previously issued under the 1992 Stock Option Plan will remain enforceable in
accordance with their respective terms.
Options to purchase a total of 384,070 shares of Common Stock currently are
issued pursuant to the 1992 Stock Option Plan. All of such options are
non-qualified stock options, and have exercise prices of from $.06 to $4.00 per
share. Of the 384,070 options that have been granted pursuant to the 1992 Stock
Option Plan, 191,199 are presently exercisable, 45,840 will become exercisable
in fiscal 1997 and the balance will become exercisable in fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company presently does not have a compensation committee or other
committee of the Board of Directors performing similar functions. Decisions
concerning compensation of executive officers have been made by the Board of
Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
DIRECTOR EXCULPATION
The Company's Certificate of Incorporation provides that a director of the
Company, to the maximum extent now or hereafter permitted by Section 102 (b)(7)
of the Delaware GCL will have no personal liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the Delaware GCL currently provides that directors of
corporations that have adopted such a provision will not be so liable, except
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) as provided under
Section 174 of the Delaware GCL for the payment of certain unlawful dividends
and the making of certain stock
54
<PAGE>
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit. This provision would absolve directors of
personal liability for negligence in the performance of their duties, including
gross negligence. It would not permit a director to be exculpated, however, for
liability for actions involving conflicts of interest or breaches of the
traditional "duty of loyalty" to the Company and its stockholders, and it would
not affect the availability of injunctive or other equitable relief as a remedy.
This provision does not eliminate or alter the duty of the Company's
directors; it merely limits personal liability for monetary damages to the
maximum extent now or as may be permitted by the Delaware GCL. Moreover, it
applies only to claims against a director arising out of his role as a director;
it does not apply to claims arising out of his role as an officer (if he is also
an officer) or arising out of any other capacity in which he serves. While this
provision does not affect the availability of injunctive or other equitable
relief as a remedy for breach of duty by directors, it does limit the remedies
available to a stockholder who has an otherwise valid claim that a director
acted in violation of his duties, if the action is among those as to which
liability is limited. Because of this provision, stockholders will not have a
claim for monetary damages based on breach of the directors' duty, even if the
directors' conduct involved gross negligence (including a grossly negligent
business decision involving a takeover proposal for the Company), unless the
conduct is of a type for which the Delaware GCL does not permit limitation of
liability. If the stockholders do not have a claim for monetary damages, their
only remedy may be a suit to enjoin completion of the Board's action or to
rescind completed action. The stockholders may not be aware of a proposed
transaction that might otherwise give rise to a claim until the transaction is
completed or until it is too late to prevent its completion by injunction. In
such a case, the Company and its stockholders may have no effective remedy for
an injury resulting from the Board's action.
This provision may reduce the likelihood of stockholder derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duties,
even though such action, if successful, might otherwise have benefited the
Company and its stockholders. The Securities and Exchange Commission has taken
the position that similar provisions added to other corporations' certificates
of incorporation would not protect those corporations' directors from liability
for violations of the federal securities laws.
The Company included this exculpation provision in its Certificate of
Incorporation to provide its directors with the maximum protection from personal
liability made available by the Delaware GCL. It is believed that this provision
will help the Company to attract and retain as directors the persons most
qualified for those positions.
DIRECTOR INDEMNIFICATION
The Company's Bylaws generally require the Company to indemnify and advance
expenses to its directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. The Company also has entered into
indemnification agreements with each of its existing directors, and plans to
enter into indemnification agreements with directors appointed in the future,
whereby the Company will indemnify each such person against certain claims
arising out of certain past, present or future acts, omissions or breaches of
duty committed by an indemnitee while serving as a Company director. Such
indemnification does not apply to acts or omissions which are knowingly
fraudulent, deliberately dishonest or arise from willful misconduct.
Indemnification will only be provided to the extent that the indemnitee has not
already received payments in respect of a claim from the Company or from an
insurance company. Under certain circumstances, such indemnification (including
reimbursement of expenses incurred) will be allowed for liability arising under
the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock, prior to the offering and immediately following completion
of the offering, by (i) each selling stockholder, (ii) each person who is known
to the Company to own, of record or beneficially, more than five percent of the
Common Stock; (iii) each of the Company's directors; and (iv) all directors, and
executive officers as a group. The Company and a selling stockholder have
granted the Underwriters an option to purchase up to an aggregate of 360,000
additional shares of Common Stock, exercisable within 30 days of the date
hereof, solely to cover over-allotments, if any. The Common Stock being offered
by the selling stockholder will be sold only if such over-allotment option is
exercised. See "Underwriting." Unless otherwise indicated, each of the
stockholders shown in the table below has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
BEFORE OFFERING(2)-(3) AFTER OFFERING(2)-(3)
------------------------ NUMBER OF --------------------------
NUMBER SHARES BEING NUMBER
NAME(1) OF SHARES PERCENT OFFERED OF SHARES PERCENT(4)
- -------------------------------------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti (5)............................ 1,557,901 86.2% 20,000 1,537,901 36.5%
Eric H. Winston (6)............................... 392,838 18.7 392,838 8.7
Ulrich E. Gottschling (7)......................... 100,000 5.2 0 100,000 2.3
All directors and executive officers as a group
(three persons) (8).............................. 1,950,739 88.6 20,000 1,930,739 42.0
Mark Lane......................................... 122,323 6.8 0 122,323 2.9
GFL Ultra Fund Limited............................ 183,723 10.2 0 183,723 4.4
</TABLE>
- ------------------------
(1) The address of each of Messrs. Bitetti, Winston and Gottschling is c/o the
Company, 2985 E. Hillcrest Drive, Suite A, Westlake Village, California
91362. The address of Mark Lane is 2818 Birch Creek Place, Thousand Oaks,
California 91360. The address of GFL Ultra Fund Limited is Kaya Flamboyan 9,
P.O. Box 812, Netherlands Antilles.
(2) Each person's beneficial ownership is determined by assuming that options
and warrants that are held by such person or entity (but not those held by
any other person or entity) and which are exercisable within 60 days have
been exercised.
(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to all
shares of stock beneficially owned by them.
(4) Reflects the sale of 2,400,000 shares of Common Stock by the Company, and
20,000 shares of Common Stock by Vincent J. Bitetti as part of the
Underwriter's over-allotment option, pursuant to this offering.
(5) Includes 73,394 and 122,323 shares of Common Stock owned of record by Martin
H. Meyer and Mark Lane, respectively, for which Vincent J. Bitetti holds a
right of first offer to purchase and an irrevocable voting proxy. See
"Certain Transactions -- 1994 Acquisition." Also includes 100,000 shares of
Common Stock which Mr. Winston is entitled to acquire from Mr. Bitetti
pursuant to a presently exercisable option. See "Certain Transactions --
Sales by Controlling Stockholder." Does not include up to 292,838 shares
that may be acquired by Mr. Winston from the Company pursuant to the options
described below, as to which Mr. Bitetti has a right of first refusal. See
"Management -- Employment Agreements."
(6) Includes 292,838 shares of Common Stock issuable under stock options granted
by the Company to Mr. Winston which are presently exercisable. See
"Management -- Executive Compensation." Also includes 100,000 shares of
Common Stock which Mr. Winston is entitled to acquire from Mr. Bitetti
pursuant to a presently exercisable option. See "Certain Transactions --
Sales by Controlling Stockholder."
(7) Includes 100,000 shares of Common Stock issuable to Mr. Gottschling under a
presently exercisable option. Excludes 100,000 shares of Common Stock
issuable to Mr. Gottschling under an option that is not presently
exercisable. See "Management -- Employment Agreements."
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(8) Includes 292,838 shares of Common Stock issuable to Mr. Winston and 100,000
shares of Common Stock issuable to Mr. Gottschling under presently
exercisable options. Excludes 100,000 shares of Common Stock issuable to Mr.
Gottschling under an option that is not presently exercisable.
RESALE OF OUTSTANDING SECURITIES
This Prospectus relates to the sale by the Company of 2,400,000 shares of
Common Stock and 1,200,000 Redeemable Warrants for aggregate gross consideration
of $9,900,000. A separate Prospectus is being filed with the Registration
Statement of which this Prospectus is a part which relates, in part, to the sale
by the Selling Security Holders of 500,338 shares of Common Stock (including
392,338 shares of Common Stock purchasable by Eric H. Winston, the Company's
President and Chief Operating Officer, pursuant to presently exercisable
options) and 5,689,665 Redeemable Warrants for aggregate gross consideration of
$3,423,768 (assuming an offering price of $4.00 per share of Common Stock and
$.25 per Redeemable Warrant). None of the Common Stock or Redeemable Warrants
being offered by the Selling Security Holders are being underwritten by the
Underwriters. The second Prospectus also will be used by the Company for the
issuance of Common Stock pursuant to the exercise of Redeemable Warrants, ASSI
Warrants and ASSI Loan Warrants (if any).
The Company will not receive any of the proceeds of the sale of the Common
Stock or Redeemable Warrants by the Selling Security Holders, although it will
receive the exercise price of such Redeemable Warrants when and if they are
exercised. None of the Selling Security Holders had any position, office or
material relationship with the Company or its affiliates during the last three
years except for Eric H. Winston, the Company's President and Chief Operating
Officer, and Larry Levenstone, Louie Ucciferri and Paradox Holdings, who are
affiliates of Financial West Group, Inc., which served as dealer manager for the
Company's 1995 Bridge Offering and its 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement."
Prior to this offering, the Selling Security Holders collectively held
500,338 shares of Common Stock (including 392,338 shares of Common Stock
purchasable by Eric H. Winston pursuant to presently exercisable options) and
Redeemable Warrants to purchase 5,689,665 of Common Stock. Assuming the sale of
all such Common Stock and Redeemable Warrants pursuant to the separate
Prospectus referred to above, the Selling Security Holders will not own any
securities of the Company after the completion of such offering. Eric H. Winston
has agreed with the Representatives not to sell more than 10,000 shares of
Common Stock during the 18-month period following the date of this Prospectus
without the prior written consent of the Representatives. See "Underwriting."
CERTAIN TRANSACTIONS
1994 ACQUISITION
On May 16, 1994, the Company consummated the 1994 Acquisition, whereby the
Company acquired all the issued and outstanding capital stock of the Subsidiary
in exchange for newly issued stock of the Company. The 1994 Acquisition was
accomplished by the issuance of 1,278,515 shares of Common Stock and 1,000,000
shares of the Company's Series A Preferred Stock to Vincent J. Bitetti, 73,394
shares of Common Stock to Martin H. Meyer and 122,323 shares of Common Stock to
Mark Lane, and the simultaneous cancellation of 60,241 shares of Common Stock
held by former directors and officers of the Company, the cancellation of an
option to purchase 3,347 shares of Common Stock held by a former director and
officer of the Company, which option was to become exercisable only upon the
satisfaction of certain contingencies, and the cancellation of an option to
purchase 3,347 shares of Common Stock held by a former director of the Company,
which option was to become exercisable only upon the satisfaction of certain
contingencies. Effective upon the closing of the 1994 Acquisition, all of the
Company's former directors and officers resigned and were replaced by Vincent J.
Bitetti, Joseph Urquidi, Eric H. Winston and Martin H. Meyer. Mr. Urquidi
resigned as an
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officer and director as of June 29, 1994. Mr. Meyer resigned as a director as of
August 5, 1994. Subsequent to the 1994 Acquisition, Mr. Bitetti exchanged his
1,000,000 shares of Series A Preferred Stock for 83,669 shares of Common Stock
issued by the Company.
Simultaneously with the 1994 Acquisition, Martin H. Meyer and Mark Lane each
granted to Vincent J. Bitetti a right of first offer to purchase their Common
Stock. Such first offer right provides that before Messrs. Meyer and Lane offer
all or any of their shares to any third party, they must first offer to sell
such shares to Mr. Bitetti at a price which Mr. Bitetti determines to be their
fair market value. If the selling party disagrees with Mr. Bitetti's
determination as to fair market value, then the issue will be resolved by an
arbitration procedure. If Mr. Bitetti does not elect to purchase the shares
proposed for sale, then they may be sold to third parties. Messrs. Meyer and
Lane also have granted Mr. Bitetti an irrevocable proxy to vote all their shares
of Common Stock on all matters coming before the holders of the Common Stock for
a vote. See "Risk Factors -- Control of the Company" and "Principal
Stockholders."
1994 PRIVATE PLACEMENT
During May through August 1994, the Company conducted a private offering of
its Common Stock (the "1994 Private Placement"). Pursuant to that offering, a
total of 113,036 shares of Common Stock were sold for total cash consideration
of approximately $1,492,000. An additional 1,841 shares were issued to the
brother of the Chief Executive Officer in payment of a $22,000 note payable. An
additional 81,997 shares of Common Stock were issued to the placement agent for
such offering in partial payment for its services as such. Subsequently, the
Company's founders, who also were affiliates of the placement agent, distributed
all 81,997 such shares plus an additional 26,772 shares held by them to the
investors in the 1994 Private Placement in settlement of litigation initiated by
one of such investors, and returned 15,120 shares of Common Stock to the
Company, which were cancelled. The Company agreed to register the Common Stock
issued in the 1994 private placement under the Securities Act by April 30, 1995.
The Company, however, has never registered such shares, which therefore may be
entitled to be registered, except to the extent their holders may have waived
their registration rights.
1995 BRIDGE FINANCING
During June through August of 1995, the Company conducted a private offering
(the "1995 Bridge Financing") of Units consisting of notes and warrants.
Pursuant to that offering, a total of 32 Units were sold at a price of $10,000
per Unit. Each Unit consisted of $9,975 principal amount of the Company's 10%
Secured Promissory Notes due August 15, 1995 (the "Bridge Notes") and warrants
to purchase 586 shares of Common Stock (the "Bridge Warrants"). The gross
offering proceeds of the 1995 Bridge Financing were $320,000. Pursuant to the
1995 Bridge Financing, $319,200 in aggregate principal amount of the Bridge
Notes were issued. The Bridge Notes were repaid in full out of the proceeds of
the 1995 Private Placement, and the related liens upon the assets of the Company
and the Subsidiary were extinguished. Such repayment was in the amount of
$332,320. Pursuant to the 1995 Bridge Financing, the Company also issued 18,747
Bridge Warrants to investors, and issued 20,918 Bridge Warrants to Financial
West Group, Inc. in partial consideration for its services as dealer manager for
the 1995 Bridge Offering.
Subsequent to the completion of the 1995 Bridge Offering, the Company and
the Subsidiary agreed with the holders of all of the Bridge Warrants as to
certain changes to the terms of the Bridge Warrants. As amended, the terms of
the Bridge Warrants, including the registration rights applicable thereto, are
identical to those of the Private Warrants as described below. See "Certain
Transactions -- 1995 Private Placement."
The terms of the Bridge Warrants provide that if the Company consummates an
initial public offering (an "IPO") which includes warrants to purchase shares of
Common Stock, then the Bridge Warrants shall automatically be converted into
warrants included in the IPO; such warrants into which the Bridge Warrants are
automatically converted shall be exercisable to purchase the same number of
shares as the Bridge Warrants, and shall contain the same terms (including
exercise price)
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as the warrants offered to the public. Accordingly, the Bridge Warrants, which
in the aggregate are exercisable to purchase 39,665 shares of Common Stock,
will, upon the consummation of this offering, be automatically converted into
Redeemable Warrants to purchase an aggregate of 39,665 shares of Common Stock
and such Redeemable Warrants, as well as the underlying shares of Common Stock,
have been included in the Registration Statement of which this Prospectus is a
part.
1995 PRIVATE PLACEMENT
In September and October 1995, the Company conducted a private offering (the
"1995 Private Placement"). Pursuant to that offering, a total of 52.5 Units were
sold at a price of $100,000 per Unit. Each Unit consisted of $95,000 principal
amount of the Company's 10% Secured Promissory Notes due 1996 (the "Private
Notes") and warrants to purchase 100,000 shares of Common Stock (the "Private
Warrants"). The gross offering proceeds of the 1995 Private Placement were
$5,250,000. Pursuant to the 1995 Private Placement, $4,987,500 in aggregate
principal amount of the Private Notes were issued. The Private Notes are secured
by a first priority lien on substantially all of the assets of the Company
(including a pledge of all capital stock of the Subsidiary) and are guaranteed
by the Subsidiary. The Private Notes are due and payable in the principal amount
plus accrued interest on the earlier of (i) September 1, 1996 or (ii) the
completion of any IPO by either the Company or the Subsidiary. Accordingly, the
aggregate principal amount of $4,987,500 of the Private Notes, and accrued
interest estimated at $242,500 as of March 31, 1996, will be repaid out of the
net proceeds of this offering. See "Use of Proceeds." Pursuant to the 1995
Private Placement, the Company issued 5,250,000 Private Warrants to investors
and issued 400,000 Private Warrants to Financial West Group, Inc. in partial
consideration for its services as dealer manager for the 1995 Private Placement.
The Private Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) one year following the completion by the Company or
the Subsidiary of any IPO, and expire on December 31, 2001. The exercise price
of the Private Warrants is 110 percent of the price per share of the Common
Stock (or the Subsidiary's common stock as applicable) in the IPO, or if the IPO
has not occurred by December 31, 1996, $4.50 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an IPO by
the Subsidiary is completed, the Private Warrants will be automatically
converted to warrants exercisable for shares of Subsidiary Common Stock on a
one-for-one basis, at an exercise price of $4.50 per share, for the period
commencing December 31, 1996 and ending on December 31, 2001. In addition, the
holders of the Private Warrants and Common Stock issued or issuable upon the
conversion of the Private Warrants have certain registration rights.
Concurrently with the registration of the Securities in this offering, the
Company is registering the Private Warrants and the underlying Common Stock as
part of the Registration Statement of which this Prospectus is a part,
satisfying the applicable rights.
The terms of the Private Warrants provide that, if the Company consummates
an IPO which includes warrants to purchase shares of Common Stock, then the
Private Warrants shall automatically be converted into warrants included in the
IPO; such warrants into which the Private Warrants are automatically converted
shall be exercisable to purchase the same number of shares as the Private
Warrants, and shall contain the same terms (including exercise price) as the
warrants offered to the public. Accordingly, the Private Warrants, which in the
aggregate were exercisable to purchase 5,650,000 shares of Common Stock, will,
upon the consummation of this offering, be automatically converted into
Redeemable Warrants exercisable to purchase an aggregate of 5,650,000 shares of
Common Stock and such Redeemable Warrants, as well as the underlying shares of
Common Stock, have been included in the Registration Statement of which this
Prospectus forms a part, and comprise a portion of the Selling Security Holders'
Securities. See "Selling Security Holders."
Contemporaneously with the 1995 Private Placement, Vincent J. Bitetti, the
Company's Chief Executive Officer, privately sold 107,500 shares of Common Stock
for total cash consideration of $537,500. Such shares of Common Stock have been
included in the Registration Statement of which this Prospectus is a part, and
comprise a portion of the Selling Security Holders' Securities. See "Selling
Security Holders."
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On April 3, 1995, Vincent J. Bitetti, for nominal consideration granted Eric
H. Winston, the Company's President, an option to purchase 100,000 shares of the
Common Stock owned by Mr. Bitetti at an exercise price of $2.00 per share, such
price determined to be the fair market value by management.
AGREEMENTS WITH ASSI, INC.
The Company has entered into a Consulting Agreement with ASSI, Inc. dated
April 30, 1996. Pursuant to that Agreement, ASSI, Inc. is to provide certain
financial and personnel consulting services to the Company, including advising
the Company regarding capital raising alternatives and executive recruiting. In
consideration of the services to be provided by ASSI, Inc. pursuant to the
Consulting Agreement, on April 30, 1996, the Company issued to ASSI, Inc.
warrants to purchase 2,000,000 shares of Common Stock at an exercise price of
$4.40 per share (the "ASSI Warrants," as previously defined). Pursuant to the
Consulting Agreement, the Company also agreed to certain changes to the terms of
the Private Warrants held by ASSI, Inc. as described below.
Pursuant to a Stockholder Voting Agreement dated April 30, 1996, the Company
has also agreed to grant ASSI, Inc. the right to nominate from time to time one
director of the Company, and Vincent J. Bitetti and Eric H. Winston have agreed
to vote all of their shares of Common Stock for the election of such nominee. In
addition, ASSI, Inc. has agreed to vote all of its shares of Common Stock for
two directors nominated by Mr. Bitetti for as long as he holds 20 percent or
more of the Common Stock, and for one director nominated by Mr. Bitetti for as
long as he holds at least ten percent but less than 20 percent of the issued and
outstanding Common Stock. The voting agreements with ASSI, Inc. will terminate
when Messrs. Bitetti and Winston together cease to own at least ten percent of
the Common Stock. See "Management -- Directors and Executive Officers."
On May 30, 1996, the Company entered into a Note Purchase Agreement with
ASSI, Inc. pursuant to which ASSI, Inc. loaned the Company $500,000 (the "ASSI
Convertible Loan," as previously defined). The ASSI Convertible Loan bears
interest at the rate of eight percent per annum. The principal of and all
accrued interest on the ASSI Convertible Loan is due in full on the earlier of
September 1, 1996 or the closing date of the Company's initial public offering
made hereby. Upon the closing of the Company's initial public offering, ASSI,
Inc. has the option to convert all or any part of the ASSI Convertible Loan into
warrants (the "ASSI Loan Warrants," as previously defined) to purchase Common
Stock at a conversion price of $.25 per warrant.
The terms of the ASSI Warrants and Private Warrants held by ASSI, Inc.
presently are substantially the same as those of the Private Warrants, subject
to the differences identified in clauses (i) to (iii) of the following sentence.
Upon the completion of the offering made hereby, the terms of the ASSI Warrants,
the Private Warrants held by ASSI, Inc. and the ASSI Loan Warrants (if any) will
become substantially the same as those of the Redeemable Warrants except that
(i) they will become exercisable September 1, 1996, (ii) they will not be
mandatorily redeemable by the Company and (iii) they will be subject to separate
registration rights, including one demand registration right and unlimited
piggyback registration rights for as long as they are held by ASSI, Inc. or one
of its affiliates. Upon a transfer of the ASSI Warrants or ASSI Loan Warrants to
any nonaffiliate of ASSI, Inc., the terms of such transferred ASSI Warrants and
ASSI Loan Warrants will become identical to those of the Redeemable Warrants.
The demand registration rights will expire on August 31, 2001. Until and unless
exercised, the holders of the ASSI Warrants and ASSI Loan Warrants will have no
voting, dividend or other rights as shareholders of the Company.
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DESCRIPTION OF SECURITIES
GENERAL
The Securities consist of shares of Common Stock and Redeemable Warrants.
One Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock.
Under the Company's Restated Certificate of Incorporation, the authorized
capital stock of the Company consists of 20,000,000 shares of Common Stock. As
of March 31, 1996, the Company had 1,808,291 shares of Common Stock outstanding,
which were held by approximately 130 shareholders of record.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share on
all matters to be voted on by the stockholders. Holders of shares of Common
Stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the Board of Directors in its discretion, from funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive rights to purchase Common Stock.
There are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock. All of the outstanding shares of Common Stock
issuable upon exercise of the Warrants will be, when issued and delivered, fully
paid and non-assessable.
As a QUASI-California corporation, the Company will be subject to certain
provisions of the California GCL, as more fully described under "Description of
Securities -- Application of California GCL." Amongst other consequences of the
Company's status as a QUASI-California corporation, at the request of any
stockholder, the election of the Company's directors will be determined by
cumulative voting procedures. Consequently, following this offering the
Company's stockholders other than its current officers and directors will have
sufficient votes, if cumulative voting rights are exercised, to elect two of its
three directors (or three of its five directors, upon the anticipated expansion
of the Board following this offering) assuming no exercise of the Redeemable
Warrants and two of its three (or four of its five, as applicable) directors
assuming exercise of the Redeemable Warrants in full. See "Risk Factors --
Control of the Company by Officers and Directors" and "Management -- Directors
and Executive Officers."
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Redeemable
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and Corporate Stock Transfer Company as warrant agent (the "Warrant
Agreement"). A copy of the Warrant Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
Each Redeemable Warrant entitles the holder thereof to purchase, at any time
during the 54-month period commencing one year after the date of this
Prospectus, one share of Common Stock at a price of 110 percent of the initial
public offering price per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below.
The Redeemable Warrants are subject to redemption by the Company, at any
time, commencing one year after the date of this Prospectus, at a price of $.25
per Redeemable Warrant if the average closing bid price of the Common Stock
equals or exceeds 140 percent of the initial public offering price per share for
any 20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of notice of redemption. If the Redeemable
Warrants were redeemed prior to their exercise, the holders thereof would lose
the benefit of the difference between the market price of the underlying Common
Stock as of such date and the exercise price of such Warrants, as well as any
possible future price appreciation in the Common Stock.
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The exercise price and the terms of the Redeemable Warrants bear no relation
to any objective criteria of value and should in no event be regarded as an
indication of any future market price of the Securities offered hereby.
The exercise price and the number of shares of Common Stock purchasable upon
the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification on or of the common Stock and issuances of
shares of Common Stock for a consideration less than the exercise price of the
Redeemable Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable holders of Redeemable Warrants to
acquire the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares that might
otherwise have been purchased upon the exercise of the Redeemable Warrant. No
adjustments will be made unless such adjustment would require an increase or
decrease of at least $.10 or more in such exercise price. No adjustment to the
exercise price of the shares subject to the Redeemable Warrants will be made for
dividends (other than stock dividends), if any, paid on the Common Stock.
The Redeemable Warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of the Warrant
Agent, with the exercise form on the reverse side of the certificate completed
and executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
Redeemable Warrants being exercised. The holders of Redeemable Warrants do not
have the rights or privileges of holders of Common Stock.
No Redeemable Warrant will be exercisable unless at the time of exercise the
Company has filed a current prospectus with the Securities and Exchange
Commission (the "Commission") covering the shares of Common Stock issuable upon
exercise of such Redeemable Warrant and such shares have been registered or
qualified or deemed to be exempt under the securities laws of the jurisdiction
of residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.
The Bridge Warrants issued by the Company in the 1995 Bridge Financing and
the Private Warrants issued by the Company in the 1995 Private Placement provide
that, if the Company consummates a public offering of its securities which
includes warrants to purchase shares of Common Stock, then the Bridge Warrants
and the Private Warrants shall automatically be converted into warrants included
in the public offering; accordingly, the 39,665 Bridge Warrants issued in the
1995 Bridge Financing and the 5,650,000 Private Warrants issued in the 1995
Private Placement have been converted as of the date of this Prospectus into a
like number of Redeemable Warrants.
APPLICATION OF CALIFORNIA GCL
Although incorporated in Delaware, the business of the Company has been
conducted through its operating subsidiary which is domiciled and headquartered
in the State of California. Section 2115 of the California GCL ("Section 2115")
provides that certain provisions of the California GCL shall be applicable to a
corporation organized under the laws of another state to the exclusion of the
law of the state in which it is incorporated, if the corporation meets certain
tests regarding the business done in California and the number of its California
stockholders.
An entity such as the Company can be subject to Section 2115 even though it
does not itself transact business in California if, on a consolidated basis, the
average of the property factor, payroll factor and sales factor is more than 50
percent deemed to be in California during its latest full income year and more
than one-half of its outstanding voting securities are held of record by persons
having
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addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the Company currently would be deemed to
meet these factors and does not currently qualify as a national market security
on NASDAQ, it is subject to Section 2115.
During the period that the Company is subject to Section 2115, the
provisions of the California GCL regarding the following matters are made
applicable to the exclusion of the law of the State of Delaware: (i) general
provisions and definitions; (ii) annual election of directors; (iii) removal of
directors without cause; (iv) removal of directors by court proceedings; (v)
filling of director vacancies where less than a majority in office were elected
by the stockholders; (vi) directors' standard of care; (vii) liability of
directors for unlawful distributions; (viii) indemnification of directors,
officers and others; (ix) limitations on corporate distributions of cash or
property; (x) liability of a stockholder who receives an unlawful distribution;
(xi) requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on mergers;
(xvi) reorganizations; (xvii) dissenters' rights in connection with
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants is Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202.
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SHARES ELIGIBLE FOR FUTURE SALE
The offering made by this Prospectus is the initial registered public
offering of the Securities. There is no public trading market for any of the
Company's securities at the present time. There can be no assurance that a
public trading market will ever develop or, if a market develops, that it will
be sustained. See "Risk Factors -- No Prior Market; Arbitrary Determination of
Offering Price; Possible Volatility of Trading Prices for Securities." Although
it has no legal obligation to do so, the Representative and one or more other
Underwriters may from time to time become market-makers or otherwise effect
transactions in the Securities (and the Representative has indicated to the
Company that it intends to do so). The Representative, if it participates in the
market, may be a dominating influence in any market that might develop for any
of the Securities. The price and liquidity of the Securities may be
significantly affected by the degree, if any, of the Representative's
participation in the market. Such activities, if commenced, may be discontinued
at any time or from time to time. See "Risk Factors -- Representative's
Potential Influence on the Market."
Upon the consummation of this offering, 4,208,291 shares of Common Stock
will be outstanding, assuming that the Underwriters' over-allotment option is
not exercised and excluding (a) 384,070 shares of Common Stock underlying
options granted pursuant to the Company's 1992 Stock Option Plan; (b) 500,000
shares of Common Stock underlying options which may be granted pursuant to the
Company's 1995 Stock Option Plan; (c) 292,838 shares of Common Stock underlying
options granted to the Company's President; and (d) an aggregate of 11,249,665
shares of Common Stock issuable upon the exercise of (i) the Redeemable Warrants
being offered by the Company (1,200,000 shares), (ii) the Redeemable Warrants
that were issued in connection with the 1995 Bridge Financing (39,665 shares),
(iii) the Redeemable Warrants that were issued in connection with the 1995
Private Placement (5,650,000 shares), (iv) the ASSI Warrants (2,000,000 shares),
(v) the Representative's Warrant (360,000 shares) and (vi) the ASSI Loan
Warrants (if any) (2,100,000 shares).
Of the 4,208,291 shares of Common Stock that will be issued and outstanding
upon the consummation of this offering (subject to the assumptions in the
preceding paragraph), the 2,400,000 shares offered by the Company and 107,500 of
the shares offered by the Selling Security Holders will be freely tradeable
without further registration under the Securities Act, except for any such
shares of Common Stock held by an "affiliate" of the Company. Of the remaining
1,700,791 outstanding shares, 183,723 shares are freely tradeable and the
remainder are "restricted shares" as defined in Rule 144 under the Securities
Act and may not be sold without registration under the Securities Act unless
pursuant to an applicable exemption therefrom.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has satisfied a two-year holding period may, under certain
circumstances, commencing 90 days after the date hereof, sell within any
three-month period, in ordinary brokerage transactions or in transactions
directly with a market maker, a number of shares of Common Stock equal to the
aggregate of one percent of the then outstanding Common Stock or the average
weekly trading volume during the four calendar weeks prior to such sale. Rule
144 also permits the sale of shares of Common Stock without any quantity
limitations by a person who is not an "affiliate" of the Company and who has
owned the shares for at least three years. The foregoing summary of Rule 144 is
not intended to be a complete description thereof.
Vincent J. Bitetti, Eric H. Winston and Ulrich E. Gottschling have agreed
not to directly or indirectly offer, offer to sell, grant an option for the
purchase or sale of, transfer, assign, pledge hypothecate or otherwise encumber
(either pursuant to Rule 144 or otherwise) any of their securities for a period
of 18 months from the date of this Prospectus without the prior written consent
of the Company and the Representatives (provided, that Eric H. Winston may sell
up to 10,000 shares of Common Stock during such period without the consent of
the Representatives). The Company intends to make a public announcement in the
event that a material amount of securities subject to a lock-up arrangement
described in this paragraph are released prior to the expiration of the term of
such arrangement if such announcement is required by the federal securities
laws.
64
<PAGE>
The 1,200,000 Redeemable Warrants being offered by the Company (assuming
that the Underwriters' over-allotment option is not exercised) and the 5,689,665
Redeemable Warrants being registered for the account of the Selling Security
Holders entitle the holders of such Redeemable Warrants to purchase up to an
aggregate of 6,889,665 shares of Common Stock at any time during the 54-month
period commencing one year after the date of this Prospectus. An additional
4,100,000 shares are being registered that may be issued upon exercise of the
ASSI Warrants and the ASSI Loan Warrants (if any), which may be issued upon
exercise of these warrants at any time during the period from September 1, 1996
until the fifth anniversary of the date of this Prospectus. The Common Stock
underlying the Redeemable Warrants, ASSI Warrants and ASSI Loan Warrants (if
any) may be sold commencing upon the date of their issuance upon exercise of the
warrants. The Redeemable Warrants being registered for the account of the
Selling Security Holders may be sold by the Selling Security Holders or their
transferees commencing on the date of this Prospectus. Sales of either the
Redeemable Warrants, or the shares of Common Stock underlying the Redeemable
Warrants, ASSI Warrants and ASSI Loan Warrants, or even the existence of the
right to exercise such Redeemable Warrants, ASSI Warrants and ASSI Loan
Warrants, may depress the price of the Common Stock or the Redeemable Warrants
in any market that may develop for such Securities. See "Selling Security
Holders" and "Description of Securities."
In connection with this offering, the Company will grant to the Underwriters
an over-allotment option, exercisable within 45 days of the date of this
Prospectus, to purchase up to an additional 360,000 shares of Common Stock
and/or up to an additional 180,000 Redeemable Warrants and issue to the
Representative the Representative's Warrant to purchase up to 240,000 shares of
Common Stock. The Company has granted one demand and unlimited piggyback
registration rights to the holders of the Representatives' Warrant. See
"Underwriting." In the event that any holder of warrants issued by the Company
exercises its warrants, the percentage of ownership of the Company by persons
who invest hereunder will be diluted and any sales of the securities acquired
thereby might have an adverse effect on the market price of the Common Stock and
Redeemable Warrants.
The Company has granted options for the purchase of 384,070 shares of Common
Stock to certain key employees, officers, directors and consultants pursuant to
the Company's 1992 Stock Option Plan. The Company has determined not to issue
any further options under its 1992 Stock Option Plan, but all outstanding
options under such plan will remain valid. Of the 384,070 options granted under
the 1992 Stock Option Plan, 191,199 are presently exercisable, 45,840 will
become exercisable in fiscal 1997 and the balance will become exercisable in
fiscal 1998. The Company also has reserved 500,000 shares of Common Stock for
issuance to key employees, officers, directors and consultants pursuant to the
Company's 1995 Stock Option Plan. All Common Stock issuable upon exercise of
such options will be "restricted stock" and will be subject to resale pursuant
to Rule 144 as described above. Following completion of this offering, however,
the Company intends to take action to register all such options and the
underlying Common Stock under the Securities Act. Upon the effectiveness of such
registration, the Common Stock issuable upon exercise of the options will be
freely tradeable. See "Management -- 1995 Stock Option Plan" and "-- 1992 Stock
Option Plan."
The holders of the Bridge Warrants issued in the 1995 Bridge Financing and
the Private Warrants issued in the 1995 Private Placement have certain
registration rights which will be satisfied by virtue of the registration of
such Bridge Warrants and Private Warrants (all of which will be converted to
Redeemable Warrants upon the consummation of this offering and will comprise a
portion of the Selling Security Holders' Securities) pursuant to the
Registration Statement of which this Prospectus is a part. The Company agreed to
register the Common Stock issued in the 1994 private placement under the
Securities Act by April 30, 1995. The Company, however, has never registered
such shares, which therefore may be entitled to be registered, except to the
extent their holders may have waived their registration rights. See "Certain
Transactions -- 1994 Private Placement," "-- 1995 Bridge Financing" and "-- 1995
Private Placement." Except for the registration rights of Vincent J. Bitetti
65
<PAGE>
and Eric H. Winston and ASSI, Inc. described below, following this offering no
other existing security holder of the Company will have registration rights with
respect to any Company security which it holds.
The Company has granted Eric H. Winston, President and Chief Operating
Officer, an option to purchase 292,838 shares of Common Stock which is presently
exercisable. Vincent J. Bitetti, Chairman of the Board and Chief Executive
Officer, has granted Mr. Winston an option to purchase 100,000 shares of Common
Stock which is presently exercisable. See "Management -- Employment Agreements."
Pursuant to a separate Prospectus filed as a part of the Registration Statement
of which this Prospectus is a part, all Common Stock purchasable by Mr. Winston
is being registered. Following exercise of such options such shares may be
freely resold (provided that Mr. Winston has agreed not to sell more than 10,000
shares of Common Stock during the 18-month period following the date of this
Prospectus without the prior written consent of the Representatives). Following
termination of his employment with the Company, Mr. Winston is entitled to
certain registration rights with respect to the Common Stock issuable upon
exercise of this option. Following termination of his employment with the
Company, Vincent J. Bitetti also is entitled to certain registration rights with
respect to the Common Stock owned by him. Upon the effectiveness of such
registration, the Common Stock owned by Mr. Bitetti will be freely tradeable.
See "Management -- Employment Agreements."
The Company has issued to ASSI, Inc. the ASSI Warrants to purchase 2,000,000
shares of Common Stock. The Company also has entered into the $500,000 ASSI
Convertible Loan, which ASSI, Inc. may convert into ASSI Loan Warrants at a
conversion price of $.25 per warrant upon the closing of the Company's initial
public offering made hereby. All such ASSI Warrants and ASSI Loan Warrants (if
any) will be restricted securities and will be subject to resale pursuant to
Rule 144 as described above. The 2,000,000 shares of Common Stock underlying the
ASSI Warrants and up to 2,100,000 shares of Common Stock underlying the ASSI
Loan Warrants issuable upon conversion of the ASSI Convertible Loan are being
registered pursuant to the separate Prospectus filed as a part of the
Registration Statement of which this Prospectus is a part. ASSI, Inc. is
entitled to certain registration rights with respect to all such ASSI Warrants
and ASSI Loan Warrants (if any) and the Common Stock issuable upon exercise
thereof. Upon the effectiveness of such registration, all such warrants and the
underlying Common Stock will be freely tradeable. See "Certain Transactions --
Agreements with ASSI, Inc."
The Company is unable to predict the effect that any subsequent sales of the
Company's securities, under this Registration Statement, Rule 144 or otherwise,
may have on the then-prevailing market price of the Common Stock, although such
sales could have a depressive effect on such market price. See "Risk Factors --
Shares Eligible for Future Sale."
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), the Underwriters named below (the
"Underwriters") have severally agreed to purchase from the Company the
respective number of shares of Common Stock and Redeemable Warrants set forth
opposite their name indicated below. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters will be obligated, as set forth in the Underwriting
Agreement, to purchase all of the 2,400,000 shares of Common Stock and 1,200,000
Redeemable Warrants being offered hereby, excluding shares of Common Stock and
Redeemable Warrants covered by the over-allotment options granted to the
Underwriters, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER NUMBER OF SHARES REDEEMABLE WARRANTS
- -------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
The Boston Group, L.P......................................... 1,200,000 600,000
Joseph Stevens & Company, L.P................................. 1,200,000 600,000
----------------- ----------
Total................................................... 2,400,000 1,200,000
</TABLE>
Both of the Representatives are recently formed, and neither has extensive
experience as an underwriter of securities. The Boston Group, L.P., which was
formed in March 1995, has acted as the managing underwriter for three public
offerings and has acted as a member of an underwriting syndicate on three
occasions. Joseph Stevens & Company, L.P., which was formed in May 1994, has
acted as the managing underwriter for four public offerings and as a member of
an underwriting syndicate on approximately seven occasions. After interviewing
various underwriters, the Company selected the Representatives to act as
co-managers for this offering because it believes they have a thorough
understanding of its business.
Through the Representatives, the Underwriters have advised the Company that
the Underwriters propose to offer the Common Stock and Redeemable Warrants to
the public initially at the public offering price set forth on the cover page of
this Prospectus, and may offer the Common Stock and Redeemable Warrants to
selected dealers at such price less a concession of not more than $.20 per share
and $.01 per Redeemable Warrant. The Underwriters may allow, and such dealers
may reallow, a concession of not more than $.10 per share on sales to certain
other dealers. After the initial public offering, the public offering price and
concessions and re-allowances to dealers may be changed by the Underwriters.
The Company has agreed to pay to the Representatives a nonaccountable
expense allowance equal to three percent of the gross proceeds from the sales of
all shares of Common Stock and Redeemable Warrants offered hereby, including
shares sold to cover over-allotments, if any.
The Underwriters have been granted the option, exercisable within 45 days
after the date of this Prospectus, to purchase up to an aggregate of an
additional 340,000 shares of Common Stock from the Company and up to 20,000
shares of Common Stock from Vincent J. Bitetti (see "Principal and Selling
Stockholders") and to purchase up to 180,000 Redeemable Warrants from the
Company to cover over-allotments, at the same price being paid by the
Underwriters for the other shares of Common Stock and Redeemable Warrants
offered hereby. To the extent that the Underwriters exercise such option, each
of the Underwriters will have, subject to certain conditions, a firm commitment,
as set forth in the Underwriting Agreement, to purchase approximately the same
percentage of the additional shares of Common Stock and Redeemable Warrants as
the percentage of Common Stock and Redeemable Warrants to be purchased by it
shown in the above table bear to 2,400,000 and 1,200,000, respectively, and the
Company and the affiliated selling stockholders will be obligated, pursuant to
the option, to sell such shares of Common Stock and Redeemable Warrants to the
Underwriters.
The Company has agreed to grant to each of the Representatives, effective
upon the closing of the offering, the right to nominate from time to time one
director of the Company or to have an individual
67
<PAGE>
selected by each such Representative attend all meetings of the Board of
Directors of the Company as a non-voting advisor. Vincent J. Bitetti and Eric H.
Winston have agreed to vote their shares of Common Stock for the election of
such nominee. The Company has agreed to indemnify and hold harmless such
directors or advisors to the maximum extent permitted by law in connection with
such individual's service as a director or advisor. See "Management -- Directors
and Executive Officers."
The Company has agreed to sell to the Representatives for an aggregate of
$50 the Representatives' Warrant to purchase up to 240,000 shares of Common
Stock at an exercise price of 145 percent of the initial public offering price
per share of Common Stock or Redeemable Warrants, as applicable. The
Representatives' Warrant may not be transferred for one year, except basically
to officers or partners of the Representatives, any member of the NASD
participating in the offering hereunder, officers or partners of such member or
any successor of any of the foregoing, and is exercisable during the four-year
period commencing one year from the date of this Prospectus (the
"Representatives' Warrant Exercise Term"). The Company has granted one demand
and unlimited piggyback registration rights to the holders of the
Representatives' Warrant. The demand registration right requires the Company to
file a registration statement pertaining to the Representatives' Warrant and the
underlying Common Stock and to maintain the effectiveness of such registration
statement for the period commencing one year after the date of this Prospectus
and continuing until the earlier of the sale of all the registered securities or
the fifth anniversary of the initial effectiveness of the registration
statement. The piggyback registration rights are applicable during the five-year
period commencing one year after the date of this Prospectus.
The Company has agreed, in connection with the exercise of Redeemable
Warrants pursuant to solicitation by the Representatives (commencing one year
from the date of this Prospectus), to pay to the Representatives a fee of five
percent of the Redeemable Warrant exercise price for each Redeemable Warrant
exercised, provided, however, that the Representatives will not be entitled to
receive such compensation in any Redeemable Warrant exercise transactions in
which (i) the market price of the Common Stock of the Company at the time of
exercise is lower than the exercise price of the Redeemable Warrants; (ii) the
Redeemable Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made, in addition to the disclosure provided in
this Prospectus, in documents provided to holders of the Redeemable Warrant at
the time of exercise; (iv) the exercise of the Redeemable Warrants is
unsolicited; (v) after the Company has called the Redeemable Warrants for
redemption; or (vi) the solicitation of exercise of the Redeemable Warrants was
in violation of Rule 10b-6 promulgated under the Exchange Act. In addition,
unless granted an exemption by the Commission from Rule 10b-6, the
Representative will be prohibited from engaging in any market-making activities
or solicited brokerage activities with regard to the Company's securities during
the period prescribed by Rule 10b-6 before the solicitation of the exercise of
any Redeemable Warrant until the later of (i) the termination of such
solicitation activity, or (ii) the termination by waiver or otherwise of any
right the Representatives may have to receive a fee for the exercise of the
Redeemable Warrants following such solicitations. The Company has agreed not to
solicit Warrant exercise other than through the Representative.
The Company's officers and directors, including the controlling beneficial
stockholder, have agreed not to, directly or indirectly offer, offer to sell,
sell, grant an option to purchase or sell, transfer, assign, pledge, hypothecate
or otherwise encumber any shares of Common Stock owned by them for a period of
18 months from the date of this Prospectus without the prior written consent of
the Representatives (provided, that Eric H. Winston may sell up to 10,000 shares
of Common Stock during such 18-month period without the consent of the
Representatives).
The Underwriters have informed the Company that no sales to any accounts
over which they exercise discretionary authority will be made in this offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
68
<PAGE>
Prior to this offering, there has not been an established public market for
the Common Stock or Redeemable Warrants of the Company. The initial public
offering price of the Company Securities and the exercise price and other terms
of the Representatives Warrant have been determined by negotiations between the
Company and the Representatives. The major factors considered in determining the
public offering price of the Common Stock and the Redeemable Warrants were the
prevailing market conditions, the market prices relative to earnings, cash flow
and assets for publicly traded Common Stocks of comparable companies, the sales
and earnings of the Company and comparable companies in recent periods, the
Company's earning potential, the experience of its management and the position
of the Company in the industry.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Washington, D.C. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Jeffer,
Mangels, Butler & Marmaro LLP, Los Angeles, California. Robert G. Kalik, of
counsel to McDermott, Will & Emery, holds a presently exercisable option to
purchase 33,467 shares of Common Stock.
EXPERTS
The financial statements included in this Prospectus have been audited by
Corbin & Wertz, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. The Company is currently not a
reporting company under the Securities Exchange Act of 1934, as amended. This
Prospectus, filed as part of the Registration Statement, does not contain
certain information set forth in or annexed as exhibits to the Registration
Statement, and reference is made to such exhibits to the Registration Statement
for the complete text thereof. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as part thereof, which may be inspected at
the office of the Commission without charge, or copies thereof may be obtained
therefrom upon payment of a fee prescribed by the Commission. Statements
contained in this Prospectus and the contents of any contract or other document
are not necessarily complete, and in each instance reference is made to the
complete text of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Such Registration Statement may be inspected and copied at the
public facilities maintained by the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at the New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048 and at the Chicago Regional Office,
500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511.
69
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
SOUND SOURCE INTERACTIVE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Financial statements
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Stockholders' Deficit................................... F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sound Source Interactive, Inc.
We have audited the accompanying consolidated balance sheet of Sound Source
Interactive, Inc. (a Delaware corporation) and subsidiary (collectively referred
to as the "Company") as of June 30, 1995 and the related consolidated statements
of operations, stockholders' deficit and cash flows for each of the years in the
two-year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sound Source
Interactive, Inc. and subsidiary as of June 30, 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses from
operations, its excess of current liabilities (which, as of March 31, 1996,
include notes payable of $4,987,500 plus accrued interest which come due
September 1, 1996) over current assets and its stockholders' deficit raises
substantial doubt about its ability to continue as a going concern. The Company
is currently funding operations from the proceeds of the 1995 Private Placement
and is in the process of filing a Registration Statement for an initial public
offering of its common stock as more fully described in Note 14. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
September 8, 1995, except for
Note 7, which is as of October 9,
1995, Note 14, which is as of
May 30, 1996, and Note 15, which
is as of June 1, 1996
F-2
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS (Note 14)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash............................................................ $ 213,730 $ 478,585
Accounts receivable, net of allowances of $104,250 and
$1,038,148 (unaudited), as of June 30, 1995 and March 31, 1996,
respectively (Notes 5 and 11).................................. 60,828 708,792
Inventories (Note 2)............................................ 150,320 315,926
Prepaid royalties............................................... 481,412 714,355
Deferred financing costs, net of accumulated amortization of
$532,685 (unaudited) as of March 31, 1996 (Note 14)............ -- 460,915
Deferred offering costs (Note 14)............................... -- 146,890
Prepaid expenses and other...................................... -- 22,781
----------- -----------
Total current assets.......................................... 906,290 2,848,244
Property and equipment, net of accumulated depreciation of $84,724
and $118,019 (unaudited) as of June 30, 1995 and March 31, 1996,
respectively (Notes 3 and 7)..................................... 92,841 189,596
Other assets...................................................... 3,060 12,400
----------- -----------
$ 1,002,191 $ 3,050,240
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 14)......................................... $ -- $ 4,987,500
Accrued interest (Note 14)...................................... -- 242,520
Accounts payable and accrued expenses (Notes 7 and 12).......... 535,046 579,904
Accrued compensation and related taxes.......................... 244,039 89,990
Commissions payable (Note 7).................................... 159,593 --
Accrued royalties............................................... 542,513 578,617
Short-term advance (Note 5)..................................... 400,000 400,000
Deferred revenue (Note 6)....................................... 64,000 82,955
Notes payable to officers (Note 4).............................. 13,500 --
Current portion of capital lease obligations (Note 7)........... 12,921 27,178
----------- -----------
Total current liabilities..................................... 1,971,612 6,988,664
----------- -----------
Capital lease obligations, net of current portion (Note 7)........ 16,771 20,000
----------- -----------
Commitments and contingencies (Notes 5 and 7)
Stockholders' deficit (Notes 8, 9, 10 and 14):
Series A preferred common stock, $.001 par value; 1,000,000
shares authorized, no shares issued and outstanding;
liquidation value of $.001 per share........................... -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
1,859,182 and 1,808,291 shares issued and outstanding at June
30, 1995 and December 31, 1995 (unaudited), respectively....... 1,859 1,808
Warrants (Note 14).............................................. -- 263,350
Additional paid-in capital...................................... 5,124,525 5,124,576
Accumulated deficit............................................. (6,112,576) (9,348,158)
----------- -----------
Total stockholders' deficit................................... (986,192) (3,958,424)
----------- -----------
$ 1,002,191 $ 3,050,240
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE FOR THE NINE MONTHS
30, ENDED MARCH 31,
------------------------ -----------------------
1994 1995 1995 1996
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Notes 6 and 11):
Product sales........................... $ 1,313,890 $ 1,255,230 $1,170,451 $ 1,874,734
Development fees........................ 112,520 343,250 217,250 --
Original equipment manufacturing........ 5,500 479,675 370,409 32,237
Royalties............................... 253,961 76,771 76,253 21,678
----------- ----------- ---------- -----------
Net revenues.......................... 1,685,871 2,154,926 1,834,363 1,928,649
Cost of sales............................. 1,180,803 1,072,691 1,053,665 1,115,105
----------- ----------- ---------- -----------
Gross profit.......................... 505,068 1,082,235 780,698 813,544
----------- ----------- ---------- -----------
Operating costs and expenses:
Marketing and sales (Note 7)............ 356,381 516,886 400,149 922,215
Compensation in connection with common
stock and common stock options issued
for services rendered (Note 10)........ 2,992,862 733,165 289,998 --
Other general and administrative........ 828,866 1,009,858 780,697 1,153,189
Reserve for bad debts................... -- 40,000 30,332 663,421
Research and development................ 116,559 378,471 161,875 489,053
----------- ----------- ---------- -----------
Total operating costs and expenses.... 4,294,668 2,678,380 1,663,051 3,227,878
----------- ----------- ---------- -----------
Operating loss........................ (3,789,600) (1,596,145) (882,353) (2,414,334)
Interest income........................... 855 8,550 522 34,011
Interest expense.......................... (38,513) (2,698) -- (244,679)
Amortization of deferred loan costs (Note
14)...................................... -- -- -- (574,285)
Other income (expense).................... (32,988) 839 (10,554) (35,095)
----------- ----------- ---------- -----------
Loss before provision for income
taxes................................ (3,860,246) (1,589,454) (892,385) (3,234,382)
Provision for income taxes (Note 13)...... 1,600 1,600 1,200 1,200
----------- ----------- ---------- -----------
Loss from continuing operations....... (3,861,846) (1,591,054) (893,585) (3,235,582)
----------- ----------- ---------- -----------
Discontinued operations (Note 12):
Loss from operations of discontinued
music division......................... (115,887) (111,106) (49,046) --
Estimated operating loss and loss on
disposal of discontinued music division
during phase-out period................ -- (32,000) -- --
----------- ----------- ---------- -----------
Loss from discontinued operations..... (115,887) (143,106) (49,046) --
----------- ----------- ---------- -----------
Net loss.............................. $(3,977,733) $(1,734,160) $ (942,631) $(3,235,582)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net loss per common share (Note 14):
Loss from continuing operations......... $ (2.38) $ (0.85) $ (0.48) $ (1.76)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Loss from discontinued operations....... $ (0.07) $ (0.08) $ (0.03) $ --
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net loss per common share............. $ (2.45) $ (0.93) $ (0.51) $ (1.76)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Weighted average number of common shares
outstanding.............................. 1,626,107 1,862,908 1,859,150 1,842,638
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
AND FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT
---------- -------- --------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993................... 1,000,000 $ 1,000 1,474,463 $1,474 $ -- $ 27,526 $ (400,683)
Shares issued in connection with reverse
acquisition............................ 99,992 100 (100)
Issuance of stock options for services
(Note 10).............................. 2,347,862
Issuance of common stock in exchange for
preferred stock (Note 9)............... (1,000,000) (1,000) 83,669 84 644,916
Issuance of common stock in connection
with private offering, net of offering
costs of $58,312 (Note 8).............. 55,639 56 664,944
Shares issued for services performed in
connection with private offering (Note
8)..................................... 39,770 40 475,275
Offering costs (Note 8)................. (475,315)
Net loss................................ (3,977,733)
---------- -------- --------- ------- -------- ---------- ------------
Balance, June 30, 1994.................. -- -- 1,753,533 1,754 -- 3,685,108 (4,378,416)
Issuance of common stock in connection
with private offering, net of offering
costs of $61,759 (Note 8).............. 59,238 59 706,048
Shares issued for services performed in
connection with private offering (Note
8)..................................... 42,227 42 504,644
Offering costs (Note 8)................. (504,686)
Issuance of stock options for services
(Note 10).............................. 733,165
Issuance of common stock in connection
with exercise of options (Note 10)..... 4,184 4 246
Net loss................................ (1,734,160)
---------- -------- --------- ------- -------- ---------- ------------
Balance, June 30, 1995.................. -- -- 1,859,182 1,859 -- 5,124,525 (6,112,576)
Issuance of warrants in connection with
private offerings (Note 14)............ 263,350
Cancellation of shares in connection
with settlement (Note 7)............... (15,120) (15) 15
Cancellation of shares for which the
Company had not received valid
consideration (Note 8)................. (35,771) (36) 36
Net loss................................ (3,235,582)
---------- -------- --------- ------- -------- ---------- ------------
Balance, March 31, 1996................. -- $ -- 1,808,291 $1,808 $263,350 $5,124,576 $(9,348,158)
---------- -------- --------- ------- -------- ---------- ------------
---------- -------- --------- ------- -------- ---------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, July 1, 1993................... $ (370,683)
Shares issued in connection with reverse
acquisition............................
Issuance of stock options for services
(Note 10).............................. 2,347,862
Issuance of common stock in exchange for
preferred stock (Note 9)............... 644,000
Issuance of common stock in connection
with private offering, net of offering
costs of $58,312 (Note 8).............. 665,000
Shares issued for services performed in
connection with private offering (Note
8)..................................... 475,315
Offering costs (Note 8)................. (475,315)
Net loss................................ (3,977,733)
-----------
Balance, June 30, 1994.................. (691,554)
Issuance of common stock in connection
with private offering, net of offering
costs of $61,759 (Note 8).............. 706,107
Shares issued for services performed in
connection with private offering (Note
8)..................................... 504,686
Offering costs (Note 8)................. (504,686)
Issuance of stock options for services
(Note 10).............................. 733,165
Issuance of common stock in connection
with exercise of options (Note 10)..... 250
Net loss................................ (1,734,160)
-----------
Balance, June 30, 1995.................. (986,192)
Issuance of warrants in connection with
private offerings (Note 14)............ 263,350
Cancellation of shares in connection
with settlement (Note 7)...............
Cancellation of shares for which the
Company had not received valid
consideration (Note 8).................
Net loss................................ (3,235,582)
-----------
Balance, March 31, 1996................. $(3,958,424)
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
JUNE 30, ENDED MARCH 31,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations...................................... $(3,861,846) $(1,591,054) $(893,585) $(3,235,582)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization (Note 14)................................ 25,852 27,541 21,821 565,980
Allowance for sales returns............................................ (29,173) (8,732) (8,732) 998,148
Allowance for doubtful accounts........................................ 69,306 (56,566) (19,197) (64,250)
Common stock and stock options issued for services rendered............ 2,992,862 733,165 289,998 --
Changes in operating assets and liabilities:
Accounts receivable.................................................. (68,570) 66,352 (4,754) (1,581,862)
Inventories.......................................................... 83,006 (99,576) (142,549) (165,606)
Prepaid royalties.................................................... (146,903) 1,537 (44,819) (232,943)
Prepaid expenses and other........................................... 1,934 -- -- (22,781)
Other assets......................................................... -- -- -- (9,340)
Accrued interest (Note 14)........................................... -- -- -- 242,520
Accounts payable and accrued expenses................................ 83,186 (125,686) (91,082) 44,858
Accrued compensation and related taxes............................... 139,838 92,394 118,047 (154,049)
Commissions payable.................................................. 44,807 114,786 (17,847) (159,593)
Accrued royalties.................................................... 189,780 (20,697) -- 36,104
Deferred revenue..................................................... 72,795 (8,795) 129,431 18,955
----------- ----------- ----------- ------------
Net cash used by continuing operations..................................... (403,126) (875,331) (663,268) (3,719,441)
----------- ----------- ----------- ------------
Net loss from discontinued operations.................................... (115,887) (143,106) (49,046) --
Reserve for estimated loss on disposal................................... -- 32,000 8,878 --
Depreciation............................................................. 8,328 8,878 -- --
Changes in operating assets and liabilities of discontinued operations:
Accounts receivable.................................................... (5,007) (2,471) (2,118) --
Inventories............................................................ 12,248 1,351 (2,940) --
Accounts payable and accrued expenses.................................. 10,601 3,098 -- --
Accrued royalties...................................................... -- 3,415 (3,415) --
Commissions payable.................................................... -- 12,498 (616) --
----------- ----------- ----------- ------------
Net cash used by discontinued operations................................... (89,717) (84,337) (49,257) --
----------- ----------- ----------- ------------
Cash flows from investing activities of continuing operations --
Purchases of property and equipment...................................... (3,376) (38,876) (38,442) --
----------- ----------- ----------- ------------
Cash flows from investing activities of discontinued operations --
Purchases of property and equipment...................................... (1,036) (6,665) (6,665) (91,579)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock (Note 8).......................... 665,000 684,107 -- --
Proceeds from issuance of warrants (Note 14)............................. -- -- -- 263,350
Proceeds from issuance of notes payable (Note 14)........................ 22,000 -- -- 4,987,500
Notes payable to officers................................................ -- 13,500 -- (13,500)
Payments on note payable................................................. (16,999) (19,587) (19,587) --
Deferred financing costs (Note 14)....................................... -- -- -- (993,600)
Deferred offering costs (Note 14)........................................ -- -- -- (146,890)
Payments on capital lease obligation..................................... (18,257) (13,678) (4,253) (20,985)
Issuance of common stock................................................. -- -- 684,096 --
Short-term advance....................................................... -- 400,000 -- --
----------- ----------- ----------- ------------
Net cash provided by financing activities.................................. 651,744 1,064,342 660,256 4,075,875
----------- ----------- ----------- ------------
Net change in cash......................................................... 154,489 59,133 (97,376) 264,855
Cash, beginning of period.................................................. 108 154,597 154,597 213,730
----------- ----------- ----------- ------------
Cash, end of period........................................................ $ 154,597 $ 213,730 $ 57,221 $ 478,585
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest............................................................... $ 14,785 $ 9,742 $ 14,388 $ 15,279
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Income taxes........................................................... $ 1,800 $ 1,600 $ 1,200 $ 1,200
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the fiscal years ended June 30, 1994 and 1995, the Company purchased
property and equipment valued at $5,653 and $8,979, respectively, through the
issuance of capital leases (Note 7).
During the fiscal year ended June 30, 1995, the Company repaid a note to an
affiliate of a stockholder totalling $22,000 through issuance of common stock
shares in connection with a private placement (Note 4).
During the nine months ended March 31, 1996, the Company purchased property
and equipment valued at $38,471 (unaudited) through issuance of capital
leases (Note 7).
See accompanying notes to consolidated financial statements
F-6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sound Source Interactive, Inc., (a California corporation) was incorporated
on March 5, 1990, under the name Sound Source Unlimited, Inc. On May 16, 1994,
Sound Source Interactive, Inc. ("SSI") consummated a stock-for-stock exchange
with Basic Science Associates, Inc. ("BSA"), a Delaware corporation. As part of
the exchange, BSA issued 1,474,232 shares of its common stock and 1,000,000
shares of its Series A preferred stock (see Note 11) in exchange for all of the
outstanding shares of SSI. The exchange has been accounted for as a reverse
acquisition because stockholders of SSI maintained control of the surviving
entity, BSA. Accordingly, for financial reporting purposes, the shares issued by
BSA are considered outstanding since the date of incorporation of SSI, and the
99,992 shares of common stock retained by the stockholders of BSA are reflected
as consideration issued to consummate the stock-for-stock exchange. No value was
ascribed to the shares of common stock retained by the stockholders of BSA since
as of the date of the exchange, BSA had nominal assets and stockholders' equity
and was an inactive company. Concurrent with the stock-for-stock exchange, BSA
changed its name to Sound Source Interactive, Inc. (a Delaware corporation) (the
"Company").
The Company, through its wholly-owned subsidiary (SSI), is in the business
of developing, publishing and distributing entertainment software, specializing
in interactive educational software, "screen savers" software and sound clips.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying consolidated financial statements, at March 31, 1996,
the Company's current liabilities exceeded its current assets by $4,140,420
(unaudited) and the Company had a stockholders' deficit of $3,958,424
(unaudited). In addition, the Company has incurred net losses of $3,977,733,
$1,734,160, $942,631 (unaudited) and $3,235,582 (unaudited) for the years ended
June 30, 1994 and 1995 and for the nine months ended March 31, 1995 and 1996,
respectively. The Company is currently funding operations from the proceeds of
the 1995 Private Placement (see Note 14). The notes payable of $4,987,500 at
March 31, 1996 (unaudited) and related accrued interest of $242,520 is due
September 1, 1996. The Company has also not generated sufficient cash flows to
fund operations due in part to its problems with its major distributor, Acclaim
Entertainment, Inc. ("Acclaim") (see Note 15). The Company plans to effect an
initial public offering to raise proceeds to repay these notes payable and
related accrued interest and to fund its working capital requirements (see Note
14). These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could materially differ from those estimates.
DISCONTINUED OPERATIONS
In July 1995, the Company approved a formal plan to license the rights to
its music division (which developed and sold sound patches for electronic
keyboards and synthesizers) and sold the
F-7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related inventory and property and equipment to an unrelated third party (see
Note 12). Accordingly, the Company has classified such as discontinued
operations in the accompanying consolidated financial statements for all years
presented.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Sound Source Interactive, Inc. (a
California corporation). The results of operations of BSA, the acquired
business, have been consolidated with those of Sound Source Interactive, Inc.
commencing May 16, 1994. The results of operations of BSA for the period July 1,
1993 to May 16, 1994 were not material.
All significant intercompany transactions and balances have been eliminated
in consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the nine months ended March 31,
1995 and 1996 and the related notes thereto are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at March
31, 1996, and the results of operations and cash flows for the nine months ended
March 31, 1995 and 1996. Results for the interim period are not necessarily
indicative of the results to be expected for the fiscal year ended June 30,
1996.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from distributors and retailers of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and returns. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. As of June 30, 1995, reserves
for credit losses and returns totalled $40,000 and $64,250, respectively. As of
March 31, 1996, reserves for returns totalled $1,038,148 (unaudited). As of
March 31, 1996, reserves for credit losses were not deemed necessary by
management of the Company (see Note 5). The Company's accounts receivable at
March 31, 1996 are primarily from Acclaim. As of March 31, 1996, the Company has
not received any amounts due from Acclaim, except for the short-term advance
(see Note 5). Although the Company expects to collect such amounts due, actual
collections may differ from the estimated amounts. The Company is subject to
rapid changes in technology and shifts in consumer demand which could result in
product returns in excess of the Company's reserves at June 30, 1995 and March
31, 1996.
INVENTORIES
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis. Provision has been made to
write-down obsolete inventories to market value.
Included in the accompanying consolidated balance sheet is inventories at a
carrying value of $315,026 as of March 31, 1996, which represents management's
estimate of its net realizable value. Such value is based on forecasts for sales
of such inventories in the ensuing years. The entertainment software industry is
characterized by rapid technological advancement and change. Should demand for
the Company's products prove to be significantly less than anticipated, the
ultimate realizable value of such products could be substantially less than the
amount shown in the consolidated balance sheet.
F-8
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets, generally ranging from five to
seven years.
Depreciation expense related to continuing operations totalled $25,852 and
$27,541 for the years ended June 30, 1994 and 1995, respectively, and totalled
$21,821 (unaudited) and $33,295 (unaudited), respectively, for the nine months
ended March 31, 1995 and 1996, and is included in other general and
administrative expense in the accompanying consolidated statements of
operations.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs associated with the issuance of
debt. Deferred financing costs are amortized over the term of the related debt.
For the nine months ended March 31, 1996, amortization expense totalled
$532,685.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs associated with the Company's
intended Initial Public Offering ("IPO") (see Note 14). Deferred offering costs
will be recorded as a reduction in proceeds upon completion of the intended IPO.
If the IPO is unsuccessful, such costs will be charged to operations.
REVENUE RECOGNITION
Sales are recognized at the time the products are shipped, in accordance
with the provisions of Statement of Position 91-1, "SOFTWARE REVENUE
RECOGNITION". While the Company has no obligations to perform future services
subsequent to shipment, the Company provides telephone customer support as an
accommodation to purchasers of its products for a limited time. Costs associated
with this effort are expensed as incurred (see Note 5).
The Company recognizes revenue, net of distribution fees, for product
shipped to Acclaim on the date that Acclaim purchases such product and ships it
to their customers. Acclaim is obligated to pay the Company on the earlier of
the month following the date of receipt of payment by it or 120 days following
the end of the month that the product was shipped. The Company is responsible
for product returns, and records a reserve for returns based on management's
evaluation of historical experience and current industry trends (see Note 15).
ROYALTIES
The Company enters into license agreements with movie studios, actors and
sound developers for recognizable movie and television properties which require
the Company to pay royalties to such movie studios, actors and sound developers.
The license agreements generally require the Company to pay a percentage of
sales of the products but no less than a specified amount (the minimum
guaranteed royalty). The Company records the minimum guaranteed royalty as a
liability and a related asset at the time the agreement is consummated. The
liability is extinguished as payments are made to the license holders and the
asset is amortized on a straight-line basis over the expected number of units to
be sold. Royalties are recognized upon the sale of the related product. Royalty
liabilities in excess of the minimum guaranteed amount are recorded when such
amounts are earned. Royalties for the years ended June 30, 1994 and 1995
amounted to $275,407 and $325,981, respectively. Royalties for the nine months
ended March 31, 1995 and 1996 amounted to $269,174 (unaudited) and $334,195
(unaudited), respectively, and are included in cost of sales in the accompanying
consolidated statements of operations.
F-9
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, the terms of a license agreement state that, upon any bankruptcy
or liquidation of the Company, licensing rights revert to the license holder.
The Company's products are based upon such licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. All of such license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under each agreement will
extend its terms, provided that the Company is in compliance with all
requirements of each license, including most significantly that the Company has
satisfied the applicable minimum royalty guarantees. In the event that any
licensor fails to renew its license agreement, then the subject license will
terminate and the Company will no longer be entitled to sell the licensed
product. The loss of one or more of the licenses could have a material adverse
effect on the Company's revenues and operating results. There can be no
assurance that the Company will satisfy its performance obligations under any
license or development agreement or, that even if such requirements are
satisfied, all material licenses will be renewed.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED," ("SFAS No. 86"), the Company examines its software development costs
after technological feasibility has been established to determine if
capitalization is required. Through March 31, 1996, all software development
costs have been expensed.
INCOME TAXES
The Company accounts for income taxes under Statement on Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOMES TAXES" ("SFAS No. 109"),
which requires that deferred income taxes be recognized for the tax consequences
in future years of differences between the tax basis of assets and liabilities
and their financial reporting basis at rates based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes (see Note 13).
STOCK SPLIT
In September, 1995, the Company effectuated a 1-for-5.976 reverse stock
split of issued and outstanding common shares and common shares reserved for
options in connection with the August 1995 private placement (see Note 14). The
accompanying consolidated financial statements have been adjusted to reflect the
reverse stock split.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective period. Common stock equivalents include
shares issuable upon the exercise of the Company's stock options. For the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1995
(unaudited) and 1996 (unaudited), common stock equivalents were excluded from
the computation of loss per common share because the effect of including such in
the computation would have been anti-dilutive (see Notes 10 and 14), except as
discussed below.
F-10
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to Securities and Exchange Commission Staff Bulletin No. 83, common
shares issued for consideration below an assumed initial public offering price
(estimated at $4.00 per share) and stock options granted (see Note 14) with
exercise prices below the IPO price during the twelve-month period preceding the
date of the filing of the Registration Statement have been included in the
calculation of common share equivalents, using the treasury stock method, as if
they were outstanding for all periods presented, including loss years where the
impact is anti-dilutive.
The only securities issued within twelve months of the registration
statement are options to purchase 100,000 shares granted at $3.40 per share (see
Note 14).
The computations of the weighted average common shares and equivalents
outstanding follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding during the
period...................................................... 1,611,107 1,847,908 1,844,150 1,827,638
Incremental shares assumed to be outstanding related to stock
options granted............................................. 15,000 15,000 15,000 15,000
----------- ----------- ----------- -----------
Weighted average common shares and equivalents outstanding... 1,626,107 1,862,908 1,859,150 1,842,638
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEASONALITY
The consumer software business traditionally has been seasonal. Typically,
net sales are highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern is
due primarily to the increased demand for consumer software during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect seasonality.
CONCENTRATION OF CREDIT RISK
The Company, at times, maintains cash balances at certain financial
institutions in excess of the federally insured maximum.
RECLASSIFICATIONS
Certain reclassifications have been made to 1994 amounts to conform to the
1995 presentation.
NOTE 2 -- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Finished goods........................................................ $ 66,114 $ 266,306
Raw materials (components)............................................ 84,206 49,620
--------- -----------
$ 150,320 $ 315,926
--------- -----------
--------- -----------
</TABLE>
F-11
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Studio computers and equipment........................................ $ 118,496 $ 246,701
Office furniture and equipment........................................ 59,069 60,914
--------- ---------
177,565 307,615
Less accumulated depreciation......................................... (84,724) (118,019)
--------- ---------
$ 92,841 $ 189,596
--------- ---------
--------- ---------
</TABLE>
NOTE 4 -- NOTES PAYABLE
During the year ended June 30, 1995, the Company repaid a note due to a
stockholder amounting to $19,587. The Company also repaid a $22,000 note due to
an affiliate of a stockholder through issuance of shares in conjunction with the
1994 private placement.
As of June 30, 1995, the Company owed certain officers of the Company
$13,500 in the form of short-term non-interest bearing advances. In July 1995,
such advances were paid.
For discussion of notes payable issued in connection with the August 1995
private placement and with ASSI, Inc., see Note 14.
NOTE 5 -- SHORT-TERM ADVANCE
In June 1995, the Company entered into a five-year sales and distribution
agreement (the "Agreement") with a subsidiary of Acclaim, a distributor of
entertainment software. Under the terms of the Agreement, Acclaim was
responsible for the distribution of the Company's products on a world-wide basis
to retail accounts. The Company retained the rights to certain direct
distribution, such as direct mail and infomercials.
In conjunction with the signing of the Agreement, the Company received a
non-interest bearing advance from Acclaim in the amount of $400,000. The advance
was due in twelve monthly installments of $33,333 each, commencing no later than
90 days subsequent to first billing by the Company. The installments were to be
deducted from amounts due the Company from Acclaim related to product sales.
Management of the Company expects that this advance will be deducted in its
entirety from amounts due from Acclaim prior to June 30, 1996.
The Company is required under the terms of the Agreement to expend six
percent of the "projected sales revenues", as defined by Acclaim, related to
each product on the advertising and marketing of such product.
Under the Acclaim Distribution Agreement, all risks associated with
collection of accounts receivable with respect to all products sold by the
Company through Acclaim are solely the responsibility of Acclaim, whereas the
risk of product returns remains with the Company. The Company, however, is
exposed to the risk of credit collection from retailers and distributors other
than Acclaim. As discussed in Note 1, the Company establishes reserves for
returns that it believes to be adequate based upon historical return data and
its analysis of current customer inventory levels and sell through rates.
Nonetheless, the Company could be forced to accept substantial product returns
to maintain its relationships with retailers and its access to distribution
channels. The Company's policies also allow for returns of defective merchandise
for credit. Any significant amount of product returns could have a material
adverse effect on the Company's business, operating results and financial
condition.
In March 1996, such agreement was terminated (see Note 15).
F-12
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DEFERRED REVENUE
In August 1994, the Company entered into a contract to develop computer
software for Fox Interactive, a division of Fox, Inc. In exchange, the Company
received nonrefundable advances based upon the attainment of certain milestones.
The Company recognizes these advances into revenues based upon the percentage of
completion method. As of June 30, 1995 and as of March 31, 1996 (unaudited), the
Company had received $24,000 of advances in excess of earnings and has therefore
recorded such amount as deferred revenue in the accompanying consolidated
balance sheet.
The Company has entered into various agreements with computer manufacturers
to sell and distribute certain of the Company's products. In exchange, the
Company receives royalties and advances against expected royalties. As of June
30, 1995, the Company received $40,000 of advances in excess of royalties
earned. Accordingly, the Company has recorded such amounts as deferred revenues
on the accompanying June 30, 1995 consolidated balance sheet. As of March 31,
1996, the Company had earned $15,000 (unaudited) of such advances. As of March
31, 1996, the Company received $12,000 (unaudited) of advance royalties in
connection with the licensing of the music division (see Note 12).
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with five of its
employees, including three officers, which expire on various dates through
April, 1998. Certain of the employment contracts provided for mandatory
increases in salary if the Company completed an initial public offering or a
secondary offering (see Note 14), provided for commissions based on net sales
and provide for automobile allowances.
On September 15, 1995, the employment contracts of two of the officers were
modified as follows:
i) The terms were extended through August 31, 1998 and 2000,
respectively.
ii) The contracts no longer provide for commissions after November
1995, or increases in base salaries other than cost of living increases.
iii) The contracts provide for bonuses based on the attainment of
certain milestones related to gross revenues, gross profits, and pre-tax
profit percentages.
Effective September 5, 1995, another officer of the Company with an
employment contract resigned from the Company.
Effective October 9, 1995, the Company entered into a two-year employment
contract with a new officer of the Company. The contract provides for a minimum
base salary and certain expense reimbursements.
Future minimum base salaries, by year and in the aggregate, after giving
effect to the modification of two of the contracts, the termination of another
due to resignation of the officer and the new contract, consist of the following
at June 30, 1995:
<TABLE>
<S> <C>
1996.................................................................. $ 459,167
1997.................................................................. 485,000
1998.................................................................. 402,500
1999.................................................................. 229,166
2000.................................................................. 200,000
2001.................................................................. 33,333
----------
$1,809,166
----------
----------
</TABLE>
F-13
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commissions under employment contracts for the year ended June 30, 1994 and
1995, related to continuing operations amounted to $44,807 and $132,078,
respectively, and are included in marketing and sales costs in the accompanying
consolidated statements of operations. At June 30, 1995, $156,063 of such
amounts remain unpaid and are included as commissions payable in the
accompanying consolidated balance sheet.
Effective March 31, 1996, the employment contracts of the two officers were
modified (see Note 14).
OPERATING LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases which expire at various dates through February 1997.
The facility lease expense is being recognized on a straight-line basis over
the term of the related lease. The excess of the expense recognized over the
cost paid is included in accounts payable and accrued expenses in the
accompanying consolidated balance sheet.
Future minimum annual lease payments at June 30, 1995 are as follows:
<TABLE>
<S> <C>
1996.................................................................... $ 89,916
1997.................................................................... 55,667
---------
$ 145,583
---------
---------
</TABLE>
Rent expense under operating lease agreements totalled $75,311 and $94,006
for the years ended June 30, 1994 and 1995, respectively, and $58,727
(unaudited) and $68,378 (unaudited) for the nine months ended March 31, 1995 and
1996, respectively, and is included in other general and administrative expenses
on the accompanying consolidated statements of operations.
CAPITAL LEASES
The Company leases certain equipment and computers under capital lease
obligations with interest rates ranging from 13.35% to 30.45% per annum.
Aggregate monthly principal and interest payments total $1,717 at June 30, 1995.
Future minimum lease payments, by year and in the aggregate, under capital
leases for equipment and computers with initial or remaining terms of one year
or more, consist of the following at June 30, 1995:
<TABLE>
<S> <C>
1996.................................................................... $ 17,387
1997.................................................................... 11,462
1998.................................................................... 6,513
1999.................................................................... 2,365
---------
37,727
Less amount representing interest....................................... (8,035)
---------
Present value of net minimum lease payments............................. 29,692
Less current portion.................................................... (12,921)
---------
$ 16,771
---------
---------
</TABLE>
During the nine months ended March 31, 1996, the Company entered into two
capital leases for certain office equipment aggregating $38,471 (unaudited) with
interest rates ranging from 17.38% to 27.93% (unaudited) per annum and which
expire through 1998 (unaudited).
F-14
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Interest expense under capital lease obligations amounted to $5,888 and
$7,045 for the years ended June 30, 1994 and 1995, respectively, and was
insignificant for the nine months ended March 31, 1995 (unaudited) and 1996
(unaudited) and is included in other income (expense) on the accompanying
consolidated statements of operations.
LITIGATION
In July 1995, a stockholder of the Company filed a complaint in the United
States District Court for the District of Washington, naming, among others, the
Company and its subsidiary, and Bentley Richards Investments (the "Placement
Agent") claiming federal and state securities violations, breach of contract,
and negligent misrepresentation related to the 1994 Private Placement (see Note
8). The complaint sought rescission of all monies paid to the Company and
unspecified amounts of punitive damages, attorney's fees and costs, prejudgment
and postjudgment interest and cost of suit.
In September 1995, the stockholder entered into a settlement agreement
whereby the stockholder dismissed all defendants, including the Company and its
subsidiary, upon delivery of certain shares of the Company's common stock owned
by the Placement Agent and its affiliates. A portion of these shares have been
distributed to the 1994 Private Placement holders and the balance are to be
canceled. Pursuant to the settlement, the Placement Agent's options also were
canceled. The Company was not required to pay any consideration as a part of the
settlement. The Company has been dismissed with prejudice from the complaint
(see Note 8).
NOTE 8 -- COMMON STOCK
During the fiscal year 1994, the Company engaged a Placement Agent to sell a
private placement of up to 125,502 shares of its common stock at $13.00 per
share. Through June 30, 1994, the Company issued 55,639 shares of its common
stock for $665,000 in cash, net of offering costs of $58,312.
During the fiscal year 1995, the Company issued an additional 59,238 shares
of its common stock in exchange for $706,107 in cash, net of costs of $61,759.
In accordance with the terms of the private offering, the Company agreed to
compensate the Placement Agent with up to 81,997 shares of its common stock and
an option to purchase up to 60,241 shares of its common stock at a price equal
to the closing bid price of the common stock on the first day of trading
following the stock-for-stock exchange (see Note 1). For the years ended June
30, 1994 and 1995, the Placement Agent earned 39,770 and 42,227 shares valued at
$475,315 and $504,686, respectively.
During September 1995, the Placement Agent notified the Company that all
shares held by the Placement Agent or its affiliates, or held in escrow for the
benefit of the Placement Agent or its affiliates, representing and aggregate of
108,769 shares of the Company's common stock, will be distributed to the holders
of the 1994 Private Placement shares and approximately 15,000 will be returned
to the Company for retirement (see Note 7).
CANCELLATION OF SHARES
In fiscal 1996, it has been determined by the Company that 35,771 shares of
common stock were improperly issued in 1992 due to the fact no consideration was
received. Accordingly, such common shares were canceled effective March 31,
1996.
NOTE 9 -- SERIES A PREFERRED STOCK
In connection with the Company's reverse acquisition of BSA (see Note 1) on
May 16, 1994, the Company issued to its major stockholder 1,000,000 shares of
Series A preferred stock, par value of $.001. The Series A preferred stockholder
was entitled to vote as a single class with the holders of the
F-15
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- SERIES A PREFERRED STOCK (CONTINUED)
Company's common stock on all matters coming before the Company's stockholders
for a vote. The holder of the Series A preferred stock was entitled to ten votes
per share whereas the holders of common stock are entitled to only one vote per
share. The Series A preferred stock was not redeemable or convertible, and the
holder of the Series A preferred stock was not entitled to receive any
dividends. The holder was entitled to a liquidation preference of $.001 per
share, provided the holder would not share any liquidating distribution except
to the extent of such preference. The Company did not ascribe any value to the
preferred shares.
Prior to June 30, 1994, the 1,000,000 shares of Series A preferred stock
were converted into 83,669 shares of the Company's common stock. The Company
ascribed a value to the 83,669 shares of common stock of $645,000 and included
such amount under operating costs and expenses in the 1994 accompanying
consolidated statement of operations.
Subsequent to June 30, 1995, the Company amended its articles of
incorporation and deleted the authorization to issued Series A preferred stock.
NOTE 10 -- STOCK OPTIONS
The Company adopted the 1992 Stock Option Plan (the "Plan") in May, 1992,
authorizing the issuance of up to 2,000,000 shares of common stock to employees,
officers and directors and to employees of companies who do business with the
Company.
Any shares which are subject to an award but are not used because the terms
and conditions of the award are not met, or any shares which are used by
participants to pay all or part of the purchase price of any option may again be
used for awards under the Plan. However, shares with respect to which a stock
appreciation right (see below) has been exercised may not again be made subject
to an award.
At the discretion of a committee comprised of directors, officers and key
employees of the Company and its subsidiaries or employees of companies with
which the Company does business may become participants in the Plan upon
receiving grants in the form of stock options or restricted stock.
Stock options may be granted as non-qualified stock options or incentive
stock options, upon stockholder approval as defined, but incentive stock options
may not be granted at a price less than 100% of the fair market value of the
stock as of the date of grant (110% as to any 10% stockholder at the time of
grant); non-qualified stock options may not be granted at a price less than 85%
of fair market value of the stock as of the date of grant. Restricted stock may
not be granted under the Plan in connection with incentive stock options.
Stock options granted under the Plan may include the right to acquire an
Accelerated Ownership Non-Qualified Stock Option ("AO"). All options granted to
date have included the AO feature. If an option grant contains the AO feature
and if a participant pays all or part of the purchase price of the option with
shares of the Company's common stock, then upon exercise of the option the
participant is granted an AO to purchase, at the fair market value as of the
date of the AO grant, the number of shares of common stock of the Company equal
to the sum of the number of whole shares used by the participant in payment of
the purchase price and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related.
Stock appreciation rights and/or restricted stock may be granted in
conjunction with, or may be unrelated to stock options. A stock appreciation
right entitles a participant to receive a payment, in
F-16
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- STOCK OPTIONS (CONTINUED)
cash or common stock or a combination thereof, in an amount equal to the excess
of fair market value of the stock at the time of exercise over the fair market
value of the date of grant. Stock appreciation rights may be exercised during a
period of time fixed by the Committee.
Restricted stock requires the recipient to continue in service as an
officer, director, employee or consultant for a fixed period of time for
ownership of the shares to vest. If restricted shares or stock appreciation
rights are issued in tandem with options, the restricted stock or stock
appreciation right is canceled upon exercise of the option and the option will
likewise terminate upon vesting of the restricted shares.
On April 6, 1994, the Company issued a non-qualified stock option outside of
the Plan to an officer of the Company to purchase an aggregate of 251,004 shares
of the Company's common stock for $.06 per share and subsequently in fiscal 1994
an option was granted to the officer to purchase 41,834 shares of the Company's
common stock for $.06 per share. All stock options issued to the officer were
immediately vested and are exercisable for a period of up to four years after
termination of employment from the Company. The difference between the fair
market value of the common stock underlying the options at the date of grant and
the exercise price has been included in operating costs and expenses in the
accompanying 1994 consolidated statement of operations.
On April 6, 1994, the Company issued options to purchase 199,130 shares of
the Company's common stock at $.06 per share to employees of the Company and to
certain consultants. The difference between fair market value of the common
stock underlying the options at the date of grant and the exercise price has
been included in operating costs and expenses in the accompanying consolidated
statement of operations. These options had an original vesting period of four
years. In connection with the offerings (see Note 14), the Company modified the
vesting period to 50% vested on the first year anniversary from the date of
grant, 25% on the third year anniversary and 25% on the fourth year anniversary
from the date of grant.
On September 5, 1995, in connection with the resignation of an officer of
the Company, 12,550 options were canceled in accordance with the Plan and the
officer's employment contract. In connection with the resignation of such
officer, 4,184 options were exercised effective June 30, 1995.
On October 9, 1995, the Company granted 100,000 options to an
employee/officer with an exercise price of $5.00, the fair market value of the
common stock as determined by the Company. The options vested immediately and
expire 10 years from the date of grant. On March 31, 1996, such options were
canceled and new options issued (see Note 14).
F-17
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- STOCK OPTIONS (CONTINUED)
The following table summarizes option transactions during the years ended
June 30, 1994 and 1995 and for the nine months ended March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
---------- --------------
<S> <C> <C>
Balances at July 1, 1993.............................................................. -- --
Granted............................................................................. 491,642 $0.06
Exercised........................................................................... -- --
Canceled............................................................................ -- --
---------- --------------
Balances at June 30, 1994............................................................. 491,642 $0.06
Granted............................................................................. -- --
Exercised........................................................................... (4,184) $0.06
Canceled............................................................................ (12,550) $0.06
---------- --------------
Balances at June 30, 1995............................................................. 474,908 $0.06
Granted............................................................................. 300,000 $3.40-$5.00
Exercised........................................................................... -- --
Canceled............................................................................ (100,000) 5.00
---------- --------------
Balances at March 31, 1996 (unaudited)................................................ 674,908 $0.06-$5.00
---------- --------------
---------- --------------
Vested as of March 31, 1996 (unaudited)............................................... 484,037
----------
----------
</TABLE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
financial statements issued after fiscal year 1996.
NOTE 11 -- SIGNIFICANT CUSTOMERS
During the year ended June 30, 1994, four of the Company's customers
accounted for 29% of total revenues. A listing of revenues, as a percentage of
total revenues from continuing operations, for each of such customers for the
years ended June 30, 1994 is as follows:
<TABLE>
<S> <C>
Customer A........................................................................... 10%
Customer B........................................................................... 8%
Customer C........................................................................... 7%
Customer D........................................................................... 4%
--
29%
--
--
</TABLE>
During the year ended June 30, 1995, one customer accounted for 18% of total
revenues from continuing operations.
During the nine months ended December 31, 1994, three different customers
accounted for an aggregate 17% (unaudited) of total revenues from continuing
operations.
During the nine months ended March 31, 1996, one of the Company's customers,
a subsidiary of Acclaim (see Note 5), accounted for 84% (unaudited) of total
revenues from continuing operations. Significantly, all accounts receivable as
of March 31, 1996 is due from such customer.
F-18
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- DISCONTINUED OPERATIONS
In July 1995, the Company approved a formal plan to license certain
proprietary assets to Greytsounds Sound Development ("GSD") in exchange for
royalties, as defined. Upon commencement of a license agreement with GSD,
$15,000 is to be paid to the Company representing advance royalties. GSD also is
to guarantee $50,000 of royalties over the license term of two years. The
expected date of the agreement is to be no later than November 1, 1995. The
license agreement is to be exclusive and worldwide.
The proprietary assets licensed to GSD include the Company's musical
instrument sound library, all music related inventory and all music related
fixed assets owned and leased by the Company. As of June 30, 1995, the net
carrying value of these assets included on the accompanying consolidated balance
sheet amounted to $50,913. Net liabilities related to the Company's music
division not licensed to GSD totalled $32,722 as of June 30, 1995.
The Company recorded a liability of $32,000 as of June 30, 1995 representing
estimated losses on disposal and estimated operating losses from July 1, 1995 to
the date of disposal, net of guaranteed royalties of $50,000. The net
liabilities related to the disposal of the music division are included in
accounts payable and accrued expenses on the accompanying consolidated balance
sheet as of June 30, 1995.
The following summarized the assets and liabilities of the music division at
June 30, 1995:
<TABLE>
<S> <C>
Assets:
Accounts receivable............................................................. $ 4,458
Inventory....................................................................... 24,049
Property and equipment, net..................................................... 26,864
---------
$ 55,371
---------
---------
Liabilities:
Accounts payable and accrued expenses........................................... $ 21,267
Accrued royalties............................................................... 3,415
Commissions payable............................................................. 12,498
---------
$ 37,180
---------
---------
</TABLE>
As of March 31, 1996 (unaudited) no assets or liabilities of the music
division are included on the accompanying consolidated balance sheet. Included
in deferred revenue on the accompanying consolidated balance sheet is $12,000
(unaudited) as of March 31, 1996.
The following summarizes the results of operations for the discontinued
operations:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
JUNE 30, MARCH 31,
-------------------- ------------------------
1994 1995 1995 1996
--------- --------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $ 217,837 $ 220,937 $ 186,221 $ --
Costs and expenses............................ (333,724) (332,043) (235,267) --
--------- --------- --------- -----
Loss from operations.......................... $(115,887) $(111,106) $ (49,046) $ --
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
NOTE 13 -- INCOME TAXES
The provision for income taxes from continuing operations for the years
ended June 30, 1994 and 1995 is comprised of minimum state taxes only.
F-19
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes from continuing
operations with expected income tax benefit computed by applying the federal
statutory income tax rate to loss before provision for income taxes for the
years ended June 30, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
----------------------- ----------------------
$ % $ %
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Income tax benefit computed at federal statutory
tax rate.......................................... (1,312,484) (34.0)% (540,414) (34.0)%
State and local taxes.............................. 1,600 0.0 1,600 0.0
Expenses not deductible for income tax purposes.... 1,028,553 26.6 252,173 15.9
Change in the beginning-of-the-period balance of
the valuation allowance for deferred tax assets
allocated to income tax benefit................... 283,931 7.4 288,241 18.1
---------- ----- --------- -----
$ 1,600 0.0% $ 1,600 0.0%
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>
The components of the net deferred tax asset recorded in the accompanying
balance sheets for the year ended June 30, 1995 is as follows:
<TABLE>
<S> <C>
Accounts receivable, principally due to allowances for sales returns and
doubtful accounts............................................................. $ 48,104
Accrued liabilities, principally due to accrual for financial reporting
purposes...................................................................... 1,882,280
Net operating loss carryforwards............................................... 931,659
Less valuation allowance....................................................... (2,862,043)
-----------
$ --
-----------
-----------
</TABLE>
The valuation allowance increased $1,185,225 during the year ended June 30,
1995.
At June 30, 1995, the Company had federal and state net operating loss
carryforwards of approximately $2,513,000 and $1,248,000, respectively,
available to offset future taxable federal and state income. The federal and
state carryforward amounts expire in varying amounts through 2011 and 2000,
respectively.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for federal income tax reporting purposes are
subject to annual limitations. Should a change of ownership occur, net operating
loss carryforwards may be limited as to use in future years.
NOTE 14 -- SUBSEQUENT EVENTS
1995 BRIDGE FINANCING
During June through August 1995, the Company offered up to $700,000 of Units
(the "1995 Bridge Financing"), each consisting of $9,975 in principal amount of
the Company's 10% Secured Promissory Notes (the "Bridge Notes") and warrants to
purchase 586 shares of the Company's common stock (the "Bridge Warrants").
Pursuant to this offering, the Company sold 32 Units for aggregate proceeds to
the Company of $278,400, net of costs of $41,600. A total of 18,747 Bridge
Warrants were issued in connection therewith which are exercisable as indicated
below. The dealer/ manager received 20,918 Bridge Warrants for $50 as partial
consideration for services in connection with this offering which are
exercisable as indicated below.
During August 1995, the Company notified the dealer/manager to discontinue
offering additional units.
F-20
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
The principal and accrued interest on the Bridge Notes was due and payable
in full on August 15, 1995. The Company did not repay the Bridge Notes upon
their maturity. During the pendency of any such default, the Bridge Note holders
were entitled to receive a penalty of two percent per month in addition to the
interest otherwise payable on the Bridge Notes. These notes were repaid in full
during September 1995 in connection with the 1995 Private Placement (see below).
The obligations of the Company under the Bridge Notes were secured by a
security interest in all the assets of the Company, including a pledge of all of
the issued and outstanding capital stock of the Subsidiary.
Each Bridge Warrant entitles its holder to purchase one share of common
stock. The Bridge Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) the completion by the Company of an initial registered
public offering of its common stock (IPO). The Bridge Warrants will expire on
the earlier of (i) December 31, 2000 or (ii) the date 18 months after completion
of an IPO. The exercise price of the Bridge Warrants will equal 110% of the
price per share of the common stock in the IPO, or if the IPO has not occurred
by December 31, 1996, $5.98 per share. In November 1995, the Bridge Warrant
holders exchanged these Bridge Warrants for new warrants with the same terms as
the warrants issued in connection with the 1995 Private Placement (see below).
1995 PRIVATE PLACEMENT
In August 1995, the Company engaged two dealer/managers to assist in a
private placement (the "1995 Private Placement") to sell a minimum of $1,000,000
of Units to a maximum of $5,000,000 of Units, each consisting of $95,000 in
principal amount of the Company's 10% Secured Promissory Notes (the "Private
Notes") due on the earlier of September 1, 1996 or the completion by the Company
of an IPO, and 100,000 warrants (the "Private Warrants") to purchase one share
of the Company's common stock. A total of 5,250,000 Private Warrants were issued
in connection therewith which are exercisable as indicated below. As of March
31, 1996, the Company had sold 52.5 units for aggregate proceeds of $4,256,400,
of which $262,500 represents the Private Warrants, net of costs of $993,600. In
connection with this offering, the Company issued 400,000 Private Warrants as
partial consideration for services provided by a dealer/manager, which are
exercisable as indicated below.
The obligations of the Company under the Private Notes are secured by a
security interest in all the assets of the Company, including a pledge of all of
the issued and outstanding capital stock of its Subsidiary. A portion of the net
proceeds of this private placement were utilized to retire all of the
outstanding indebtedness of the 1995 Bridge Financing.
Each Private Warrant entitles its holder to purchase one share of common
stock. The Private Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) the completion by the Company of an IPO. The Private
Warrants expire on December 31, 2001. The exercise price of the Private Warrants
will equal 110% of the price per share of the common stock in the IPO, or if the
IPO has not occurred by December 31, 1996, $4.50 per share.
Upon completion of any IPO, each outstanding Private Warrant will be
converted into warrants included in the IPO (the "IPO Warrants"). The terms of
the IPO Warrants may not be any less favorable than the terms of the Private
Warrants, except that the IPO Warrants may be redeemable at the option of the
Company upon certain terms.
STOCKHOLDER PRIVATE PLACEMENT
Concurrent with the 1995 Private Placement, a current stockholder conducted
a private placement of up to 200,000 shares of common stock, held by such
stockholder, at a purchase price of $5.00 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an initial
public offering of the Company's subsidiary's common stock is completed, the
common
F-21
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
stock purchased in this private placement will be exchanged for shares of the
Company's subsidiary's common stock on a one-for-one basis. Through March 31,
1996, the stockholder had sold 107,500 shares.
REGISTRATION STATEMENT
The Company has filed a registration statement on Form SB-2, as amended,
with the Securities and Exchange Commission for an initial public offering of
2,400,000 shares at an estimated offering price of $4.00 and 1,200,000
redeemable warrants at $.25 per warrant. In connection with the proposed
offering, the Company has incurred expenses amounting to $146,890. Such expenses
have been capitalized on the accompanying balance sheet as of March 31, 1996
(unaudited).
In connection therewith, the Company is also registering 340,000 shares of
its common stock and 20,000 shares of common stock held by a selling stockholder
to cover over-allotments and 107,500 shares of common stock registered for the
account of certain selling stockholders. The Company is also registering 180,000
redeemable warrants to cover over-allotments.
The Company will also, in connection with the IPO, sell the representatives
of the underwriters a warrant, for $50, which will entitle the holders to
purchase 240,000 shares of common stock at 145 percent of the IPO price.
ASSI WARRANTS
On April 30, 1996, in consideration of certain financial and personnel
consulting service provided to the Company in 1996, including advising the
Company regarding capital raising alternatives and executive recruiting, the
company has entered into an agreement to issue to ASSI, Inc. warrants to
purchase 2,000,000 shares of common stock at an exercise price of $4.40 per
share (the "ASSI Warrants").
On May 30, 1996, ASSI, Inc. loaned the Company $500,000 (the "ASSI
Convertible Loan"). The ASSI Convertible Loan bears interest at 8% per annum and
principal and accrued interest is due on the earlier of September 1, 1996 or the
completion of the Company's initial public offering. Upon the closing of the
Company's initial public offering, ASSI, Inc. may convert all or part of the
ASSI Convertible Loan plus accrued interest into warrants to purchase common
stock (the "ASSI Loan Warrants") at a conversion price of $.25 per warrant.
The terms of the ASSI Warrants and ASSI Loan Warrants presently are
substantially the same as those of the Private Warrants, subject to the
differences identified in clauses (i) to (iii) of the following sentence. Upon
the completion of the offering made hereby, the terms of the ASSI Warrants and
the ASSI Loan Warrants (if any) will become substantially the same as those of
the Redeemable Warrants except that (i) they will become exercisable September
1, 1996, (ii) they will not be mandatorily redeemable by the Company and (iii)
they will be subject to separate registration rights, including one demand
registration right and unlimited piggyback registration rights for as long as
they are held by ASSI, Inc. or one of its affiliates. Upon a transfer of the
ASSI Warrants or ASSI Loan Warrants to any nonaffiliate of ASSI, Inc., the terms
of such transferred ASSI Warrants and ASSI Loan Warrants will become identical
to those of the Redeemable Warrants. The demand registration rights will expire
on August 31, 2001. Until and unless exercised, the holders of the ASSI Warrants
and ASSI Loan Warrants will have no voting, dividend or other rights as
shareholders of the Company.
OPTIONS
On October 9, 1995, the Company adopted the 1995 Stock Option Plan. On May
15, 1996, the Company adopted the Company's Restated 1995 Stock Option Plan
whereby the Company can grant up to 500,000 options for shares of the Company's
common stock. Currently, no options have been
F-22
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
granted under this plan. On March 31, 1996, an employee/officer agreed to the
termination of his existing 100,000 share option in consideration for the
Company's agreement to grant to him a new 200,000 share option pursuant to the
1992 stock option plan. Such option will be vested and exercisable upon the date
of its grant as to 100,000 shares at a purchase price of $3.40 per share, and
will become vested and exercisable as to 100,000 shares ratably between June 30,
1996 and September 30, 1997 at a purchase price of $4.00 per share. The
employee/officer's employment agreement further provides that following the
voluntary or involuntary termination of his employment by the Company, the
employee/officer is entitled to a single demand registration right with respect
to the common stock held by or issuable to him pursuant to his option agreement.
The Company has also agreed to grant 13,610 options under the 1995 stock
option plan to other non-executive employees at an exercise price of $4.00 per
share.
EMPLOYMENT CONTRACTS
In April 1996, effective March 31, 1996, the Company modified the employment
contracts of two officers. Such modifications reduced the annual base
compensation by a specified amount. Upon the Company achieving specified sales
levels, the annual base compensation is increased by the amount of the specified
reduction. The Company also modified the employment contract of a third officer
in April 1996 to change the number and vesting period of options previously
granted and to grant additional options (see Note 1).
NOTE 15 -- DISTRIBUTION AGREEMENTS
The Company and Acclaim have terminated the distribution agreement as of
April 30, 1996. On or before June 30, 1996, Acclaim will render a final
accounting to the Company together with payment of the balances of any amounts
due to the Company under the distribution agreement. Acclaim has notified its
accounts that it will not accept returns of any of the Company's software
products after June 30, 1996. The Company, however, will remain liable for all
such returns regardless of when received by Acclaim.
On June 1, 1996, the Company entered into a distribution services agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS"). SSIDS is the
consumer software distribution unit of Simon & Schuster, Inc., the publishing
operations of Viacom, Inc. Pursuant to this new distribution agreement, SSIDS
will provide distribution, warehousing and order fulfillment services for all of
the Company's products (subject to certain exceptions) throughout the United
States and Canada. The Company's relationship with SSIDS is exclusive except as
regards the rights to distribute the Company's products in
direct-to-the-customer programs including direct mail, telemarketing and in-box
coupon fulfillment, which are nonexclusive.
Pursuant to the agreement, SSIDS will make a monthly payment to the Company
in an amount equal to its gross revenues during such month from the Company's
products, less a distribution fee and reserve for returns equal to stated
percentages of the gross revenues and less certain other items, including
out-of-pocket costs associated with inventory maintenance and order fulfillment.
The payments will be due not later than 75 days after the billing calendar
month. Under the agreement with SSIDS, the Company will remain liable for
product returns. The Company intends to maintain a reserve of 15 percent of
gross revenues for product returns.
The agreement is for a term of two years. The Company will be substantially
dependent upon SSIDS for the distribution of its product throughout North
America during the term of the agreement. SSIDS, however, will not be obligated
to sell any specified minimum quantity of the Company's products. There can be
no assurance as to the volume of the product sales that may be achieved by
SSIDS. Because the Company's rights to market its products through channels
other than SSIDS are
F-23
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- DISTRIBUTION AGREEMENTS (CONTINUED)
limited, the Company's ability to realize the cash flow necessary to fund its
ongoing operations and to achieve profitability will be largely dependent upon
the success of SSIDS in marketing its products. In addition, the Company may
experience a loss of sales momentum as a result of the transition from utilizing
Acclaim to SSIDS as its exclusive distributor.
F-24
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THE PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
Use of Proceeds................................ 23
Dividend Policy................................ 24
Dilution....................................... 25
Capitalization................................. 27
Selected Financial Data........................ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 29
Business....................................... 34
Management..................................... 47
Principal and Selling Stockholders............. 56
Resale of Outstanding Securities............... 57
Certain Transactions........................... 57
Description of Securities...................... 61
Shares Eligible for Future Sale................ 64
Underwriting................................... 67
Legal Matters.................................. 69
Experts........................................ 69
Additional Information......................... 69
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL JULY , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS OBLIGATION IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,400,000 SHARES
OF COMMON STOCK
AND
1,200,000 REDEEMABLE WARRANTS
[SOUND SOURCE
INTERACTIVE, INC.
LOGO]
------------------
PROSPECTUS
------------------
THE BOSTON GROUP, L.P.
JOSEPH STEVENS & COMPANY, L.P.
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 26, 1996
PROSPECTUS
[SOUND SOURCE INTERACTIVE, INC. LOGO]
500,338 SHARES OF COMMON STOCK
5,689,665 REDEEMABLE WARRANTS
11,169,665 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS
This Prospectus relates to the registration by Sound Source Interactive,
Inc. (the "Company"), at its expense, for the account of certain security
holders (the "Selling Security Holders") of 500,338 shares of common stock, par
value $.001 (the "Common Stock"), and 5,689,665 Redeemable Warrants (the
"Redeemable Warrants") (the Common Stock and Redeemable Warrants offered by the
Selling Security Holders are sometimes collectively referred to herein as the
"Selling Security Holders' Securities"). The Selling Security Holders'
Securities are not being underwritten in this offering and the Company will not
receive any proceeds from the sale of the Selling Security Holders Securities.
See "Selling Security Holders". The Selling Security Holders' Securities may be
sold by the Selling Security Holders or their respective transferees commencing
on the date of this Prospectus. Sales of the Selling Security Holders'
Securities may depress the price of the Common Stock and Redeemable Warrants in
any market that may develop for the Common Stock and Redeemable Warrants. See
"Prospectus Summary -- The Offering," "Selling Security Holders" and "Certain
Transactions."
This Prospectus also relates to the registration by the Company for its own
account of 11,169,665 shares of Common Stock issuable by the Company upon
exercise of the 5,689,665 Redeemable Warrants being registered for the account
of the Selling Security Holders as described in the preceding paragraph,
1,380,000 Redeemable Warrants issued by the Company pursuant to a separate
Prospectus (the "Primary Offering Prospectus") filed with the Registration
Statement of which this Prospectus is a part, 2,000,000 warrants which the
Company has issued, and up to 2,100,000 warrants which the Company may issue, to
ASSI, Inc., a consultant to and creditor of the Company. This Prospectus, except
for this Cover Page, the back Cover Page and the information contained herein
under the heading "Selling Security Holders" and "Plan of Distribution," is
identical to the Primary Offering Prospectus. This Prospectus includes certain
information that may not be pertinent to the sale by the Selling Security
Holders.
Prior to this offering, there has been no public market for the Common Stock
or the Redeemable Warrants and there can be no assurance that such a market will
exist after this offering.
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
AND "DILUTION" COMMENCING ON PAGES AND , RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June , 1996
SS-1
<PAGE>
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. If any Selling Security
Holder sells his, her or its Selling Security Holders' Securities pursuant to
this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
SS-2
<PAGE>
SELLING SECURITY HOLDERS
An aggregate of 107,500 shares of Common Stock and 5,689,665 Redeemable
Warrants are being registered in this offering for the account of the Selling
Security Holders. The Selling Security Holders' Securities may be sold by the
Selling Security Holders or their respective transferees commencing on the date
of this Prospectus. Sales of such shares of Common Stock by the Selling Security
Holders or their respective transferees may depress the price of the Common
Stock and Redeemable Warrants in any market that may develop for such
securities.
The following table sets forth certain information with respect to persons
for whom the Company is registering such shares of Common Stock and Redeemable
Warrants for resale to the public. The Company will not receive any of the
proceeds from the sale of such shares of Common Stock and Redeemable Warrants.
None of the Selling Security Holders has had any position, office or material
relationship with the Company or its affiliates during the last three years
except for Financial West Group, Inc., which served as dealer manager for the
Company's 1995 Bridge Offering and 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement." The
Selling Security Holders' Securities are not being underwritten by the
Underwriters. The Selling Security Holders, however, may sell the Selling
Security Holders' Securities through the Underwriters.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES/WARRANTS SHARES/WARRANTS SHARES/WARRANTS
OWNED BEFORE BEING OWNED AFTER
NAME OF SELLING SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- --------------------------------------- ----------------- ------------- ------------------
<S> <C> <C> <C>
Robert Ahr and Antoinette Ahr, Joint 50,000(4) 50,000(wt) 0
Tenants with Right of Survivorship
Stanley S. Arkin 100,000(4) 100,000(wt) 0
Lester C. Aroh 100,000(4) 100,000(wt) 0
5,000(5) 5,000(sh) 0
ASSI, Inc. 5,200,000(4) 1,100,000(wt) 4,100,000(wt)
(7) 40,000(sh)
40,000(5)
Jonathan Axelrod 200,000(4) 200,000(wt) 0
10,000(5) 10,000(sh) 0
Harvey Bibicoff 100,000(4) 100,000(wt) 0
5,000(5) 5,000(sh) 0
Marvin H. Bluman 50,000(4) 50,000(wt) 0
Charles R. Buckridge, Grantor and 100,000(4) 100,000(wt) 0
Trustee of Charles R. Buckridge
Revocable Trust
Robert Burkhardt 50,000(4) 50,000(wt) 0
Burford A. Carlson and Joan E. Carlson, 586(3) 586(wt) 0
Grantors and Trustees for Burford A.
Carlson Revocable Trust
Mark Jeffrey Chayet, Grantor and 100,000(4) 100,000(wt) 0
Trustee for Mark Jeffrey Chayet
Revocable Trust
Cliffdale Investments, Inc. 100,000(4) 100,000(wt) 0
Arlene Colman-Schwimmer, Grantor and 100,000(4) 100,000(wt) 0
Trustee for Arlene Colman-Schwimmer 5,000(5) 5,000(sh) 0
APC Profit Sharing Plan and Trust
</TABLE>
SS-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES/WARRANTS SHARES/WARRANTS SHARES/WARRANTS
OWNED BEFORE BEING OWNED AFTER
NAME OF SELLING SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- --------------------------------------- ----------------- ------------- ------------------
<S> <C> <C> <C>
David B. Coward and Linda J. Coward, 50,000(4) 50,000(wt) 0
Grantors and Trustees for David B. and 2,500(5) 2,500(sh)
Linda J. Coward Trust
Deller Capital Corporation 1,758(3) 1,758(wt) 0
Laura M. Durso 50,000(4) 50,000(wt) 0
Gerald F. Edelstein 50,000(4) 50,000(wt) 0
Robert Gault and Thelma Gault, Joint 100,000(4) 100,000(wt) 0
Tenants with Right of Survivorship 25,000(5) 25,000(sh) 0
Barbara Goldstein 100,000(4) 100,000(wt) 0
Larry R. Gordon 600,000(4) 600,000(wt) 0
Nicholas Gotten Jr. and Pamela Gotten, 2,929(3) 2,929(wt) 0
Joint Tenants with Right of
Survivorship
Donald B. Greenwood 50,000(4) 50,000(wt) 0
Prabhakar R. Guniganti 100,000(4) 100,000(wt) 0
W. Burns Hoffman 100,000(4) 100,000(wt) 0
Edward Hookstratten 100,000(4) 100,000(wt) 0
Richard Houlihan 100,000(4) 100,000(wt) 0
Edward Jones 50,000(4) 50,000(wt) 0
John Paul DeJoria 100,000(4) 100,000(wt) 0
Gabriel Kaplan 250,000(4) 250,000(wt) 0
10,000(5) 10,000(sh) 0
Gabriel Kaplan, P/ADM City National 250,000(4) 250,000(wt) 0
Bank C/F Rotunda Productions Inc. MPPP
Hazen Peter Kelley and Valerie Kelley, 50,000(4) 50,000(wt) 0
Joint Tenants with Right of
Survivorship
Honorata Knight 586(3) 586(wt) 0
Larry Levenstone 4,184(6) 4,184(wt)
Marc Levin 50,000(4) 50,000(wt) 0
Lexington Ventures, Inc. 100,000(6) 100,000(wt)
Fred Martell and Barbara Martell, Joint 100,000(4) 100,000(wt) 0
Tenants with Right of Survivorship
Edward I. Miller 586(3) 586(wt) 0
L.A. Moore 50,000(4) 50,000(wt) 0
Louis M. Mucci 100,000(4) 100,000(wt) 0
David A. Mulkey Limited Partnership 100,000(4) 100,000(wt) 0
5,000(5) 5,000(sh) 0
T.W. Muller 2,929(3) 2,929(wt) 0
Steve Natale 100,000(4) 100,000(wt) 0
</TABLE>
SS-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES/WARRANTS SHARES/WARRANTS SHARES/WARRANTS
OWNED BEFORE BEING OWNED AFTER
NAME OF SELLING SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- --------------------------------------- ----------------- ------------- ------------------
<S> <C> <C> <C>
Saburo Oto 100,000(4) 100,000(wt) 0
Paradox Holdings 237,990(6) 237,550(wt)
Resources Trust Co., FBO Donald B. 1,172(3) 1,172(wt) 0
Pooley
Patrick J. Riley 100,000(4) 100,000(wt) 0
Patricia C. Rinaldi 2,929(3) 2,929(wt) 0
Stanley B. Schneider 100,000(4) 100,000(wt) 0
Izhar Shy and Nitza Shy, Trustees for 1,172(3) 1,172(wt) 0
Izhar and Nitza Shy Revocable Estate
Trust
David H. Smith 4,100(3) 4,100(wt) 0
Isaac Starkman 100,000(4) 100,000(wt) 0
Triventures 50,000(4) 50,000(wt) 0
Louie Ucciferri 79,184(6) 79,184(wt)
James Edward Willard 50,000(4) 50,000(wt) 0
Eric H. Winston 392,838(8) 392,838(sh) 0
</TABLE>
- ------------------------
(1) Information set forth in the table regarding the Non-Affiliated Selling
Security Holders' Securities is provided to the best knowledge of the
Company based on information furnished to the Company by the respective
Non-Affiliated Selling Security Holders and/or available to the Company
through its stock ledgers.
(2) Assumes that each Selling Security Holder sells all of the Selling Security
Holders' Securities held by such Selling Security Holder.
(3) Represents warrants sold pursuant to the 1995 Bridge Financing, pursuant to
which 32 Units were sold, each Unit consisting in part of 586 Bridge
Warrants, each such warrant to purchase one share of Common Stock. See
"Certain Transactions -- 1995 Private Placement"
(4) Represents warrants sold pursuant to the 1995 Private Placement, pursuant to
which 52.5 Units were sold, each Unit consisting in part of 100,000 Private
Warrants, each such warrant to purchase one share of Common Stock. See
"Certain Transactions -- 1995 Private Placement."
(5) Represents Common Stock acquired in a private purchase from the Company's
controlling stockholder contemporaneously with the 1995 Private Placement.
See "Certain Transactions -- 1995 Private Placement."
(6) Dealer Manager Warrants.
(7) Includes 2,100,000 ASSI Loan Warrants issuable upon conversion of the ASSI
Convertible Loan. See "Certain Transactions -- Agreements with ASSI, Inc."
(8) Includes 100,000 shares of Common Stock as to which Mr. Winston holds a
presently exercisable purchase option from Vincent J. Bitetti and 292,838
shares of Common Stock as to which Mr. Winston holds a presently exercisable
purchase option from the Company. See "Management -- Employment Agreements."
(sh) Shares of Common Stock.
(wt) Redeemable Warrants, each warrant to purchase one share of Common Stock.
SS-5
<PAGE>
PLAN OF DISTRIBUTION
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Selling Security Holders' Securities,
pursuant to this Prospectus at a fixed price or at a negotiated price which is,
in either case, other than the prevailing market price or in a block transaction
to a purchaser who resells, or if any Selling Security Holder pays compensation
to a broker-dealer that is other than the usual and customary discounts,
concessions or commissions, or if there are any arrangements either individually
or in the aggregate that would constitute a distribution of the Selling Security
Holders' Securities, a post-effective amendment to the Registration Statement of
which this Prospectus is a part would need to be filed and declared effective by
the Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Selling Security Holders may effect transactions in their Selling
Security Holders' Securities by selling such securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Securities as
principals and thereafter sell such securities from time to time in the
over-the-counter market, in negotiated transactions, or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
SS-6
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THE PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
Use of Proceeds................................ 23
Dividend Policy................................ 24
Dilution....................................... 25
Capitalization................................. 27
Selected Financial Data........................ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 29
Business....................................... 34
Management..................................... 47
Principal Stockholders.........................
Selling Security Holders.......................
Certain Transactions........................... 57
Description of Securities...................... 61
Shares Eligible for Future Sale................ 64
Plan of Distribution........................... 67
Legal Matters.................................. 69
Experts........................................ 69
Additional Information......................... 69
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
500,338 SHARES
OF COMMON STOCK
5,689,665 REDEEMABLE WARRANTS
AND
11,169,665 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS
[SOUND SOURCE INTERACTIVE, INC. LOGO]
---------------------
PROSPECTUS
---------------------
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended (the
"Delaware GCL"), permits under certain circumstances, the indemnification of any
person with respect to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative, to which
such person was or is a party or is threatened to be made a party by reason of
the fact that such person is or was a director, officer, employee, or agent of
the corporation or was serving in a similar capacity for another enterprise at
the request of the corporation. To the extent that a director, officer,
employee, or agent of the corporation has been successful in defending any such
proceeding, the Delaware GCL provides that he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
With respect to a proceeding by or in the right of the corporation, such
person may be indemnified against expenses (including attorneys' fees) if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. The statute provides, however,
that no indemnification is allowed in such a proceeding if such person is
adjudged liable to the corporation unless, and only to the extent that, the
court may, upon application, determine that he is entitled to indemnification
under the circumstances. With respect to proceedings other than those brought by
or in the right of the corporation, such person may be indemnified against
judgments, fines, and amounts paid in settlement, as well as expenses, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action, had no reasonable cause to believe his conduct was unlawful,
notwithstanding the outcome of the proceeding. Except with respect to mandatory
indemnification of expenses to successful defendants as described in the
preceding paragraph or pursuant to a court order, the indemnification described
in this paragraph may be made only upon a determination in each specific case by
majority vote of a quorum of directors not parties to the proceeding, by written
opinion of independent legal counsel, or by the stockholders, that the defendant
met the applicable standard of conduct described above.
The Delaware GCL permits a corporation to advance expenses incurred by a
proposed indemnitee in advance of final disposition of the proceeding provided
the indemnitee undertakes to repay such advanced expenses if it is ultimately
determined that he is not entitled to indemnification. A corporation may
purchase insurance on behalf of an indemnitee against any liability asserted
against him in his designated capacity, whether or not the corporation itself
would be empowered to indemnify him against such liability.
Delaware law also provides that the above rights shall not be deemed
exclusive of other rights of indemnification or advancement of expenses under
any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise. The Registrant's Bylaws generally require the Registrant to indemnify
and advance expenses to its directors and its officers, employees and other
agents to the fullest extent permitted by the Delaware GCL as the same exists or
may hereafter be amended. The Registrant also has entered into indemnification
agreements with each of its directors whereby the Company will indemnify each
such person against certain claims arising out of certain past, present or
future acts, omissions or breaches of duty committed by an indemnitee while
serving as a Company director. Such indemnification does not apply to acts or
omissions which are knowingly fraudulent, deliberately dishonest or arise from
willful misconduct. Indemnification will only be provided to the extent that the
indemnitee has not already received payments in respect of a claim from the
Company or from an insurance company. Under certain circumstances, such
indemnification (including reimbursement of expenses incurred) will be allowed
for liability arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the
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<PAGE>
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.
Section 102(b)(7) of the Delaware GCL permits Delaware corporations in their
certificates of incorporation to eliminate or limit the personal liability of
directors to the corporation or its stockholders for monetary damages for
breaches of certain duties. Under the Registrant's Certificate of Incorporation,
a director of the Registrant shall, to the maximum extent currently or hereafter
permitted by Section 102(b)(7) of the Delaware GCL (or any successor provision),
have no personal liability to the Registrant or its stockholders for monetary
damages for breach of fiduciary duty as a director. Section 102(b)(7) of the
Delaware GCL provides that Delaware corporations may not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii) as
provided under Section 174 of the Delaware GCL (involving certain unlawful
dividends and stock purchases or redemptions), or (iv) for any transaction from
which the director derived an improper peroneal benefit.
The foregoing descriptions are general summaries only. Reference is made to
the full text of Registrant's Certificate of Incorporation and Bylaws filed as
part of this Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates except the Securities and Exchange
Commission registration and NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 21,158
NASD fees and expenses.......................................... 7,262*
Nasdaq listing fee.............................................. 9,208
Accounting fees and expenses.................................... 40,000*
Printing and engraving expenses................................. 40,000*
Transfer agent and registrar (fees and expenses)................ 3,000*
Blue Sky fees and expenses (including counsel fees)............. 55,000*
Other legal fees and legal expenses............................. 250,000*
Miscellaneous expenses.......................................... 9,472
Total........................................................... 435,000*
</TABLE>
- ------------------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 16, 1994, the Registrant consummated the 1994 Acquisition, whereby
the Registrant acquired all the issued and outstanding capital stock of the
Subsidiary in exchange for newly issued stock of the Company. Pursuant to the
1994 Acquisition, the Registrant issued 1,278,515 shares of Common Stock and
1,000,000 shares of the Registrant's Series A Preferred Stock to Vincent J.
Bitetti, 73,394 shares of Common Stock to Martin H. Meyer and 122,323 shares of
Common Stock to Mark Lane. Each of such persons was an "accredited investor" as
defined in Securities Act Rule 501(a). The issuance of Common Stock to such
persons was exempt from the registration requirements of the Securities Act of
1993, as amended (the "Securities Act") pursuant to Section 4(2) thereof.
During May through August 1994, the Registrant conducted a private offering
of its Common Stock (the "1994 Private Placement"). Pursuant to that offering, a
total of 113,036 shares of Common Stock were sold for total cash consideration
of approximately $1,492,000. An additional 1,841 shares were issued to the
brother of the Chief Executive Officer in payment of a $22,000 note payable. The
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<PAGE>
1994 Private Placement was made on a private basis only to persons who were
"accredited investors" as defined in Securities Act Rule 501(a). The issuance of
Common Stock to such persons was exempt from the registration requirements of
the Securities Act pursuant to Sections 4(2) and 4(6) thereof. In addition,
certain of the issuances pursuant to the 1994 Private Placement may have been
exempt from the registration requirements of the Securities Act pursuant to
Regulation S thereunder or may otherwise have been outside the jurisdictional
means required by Section 5 of the Securities Act.
As compensation for its services as the placement agent for the 1994 Private
Placement, the Registrant paid Bentley, Richards Investments ("Bentley,
Richards"), an affiliate of the Registrant's then controlling stockholders, Jehu
Hand and Eric Anderson, 81,997 shares of Common Stock, and issued to Bentley,
Richards an option to purchase up to 60,241 shares of Common Stock, subject to
the satisfaction of certain contingencies, at a price to be determined in
accordance with a formula. In July 1995, one of the investors in the 1994
Private Placement filed a suit naming as defendants the following: Jehu Hand and
Eric Anderson (who together organized the Registrant and managed it prior to the
1994 Acquisition), and their spouses Jacqueline Hand and Marie Anderson; the
Registrant and the Subsidiary; and Bentley Richards. No then current director or
officer of the Registrant was named as a defendant. Such litigation was settled
in September 1995. In connection with such settlement, Bentley, Richards
distributed all 81,997 shares of Common Stock issued to it for its services as
placement agent for the 1994 Private Placement to the investors in the 1994
Private Placement. Bentley, Richards also agreed to the cancellation of its
option to purchase 60,241 shares of the Registrant's Common Stock. In addition,
Jehu Hand distributed an additional 26,772 shares of Common Stock held by him to
the investors in the 1994 Private Placement, and returned 15,120 shares of
Common Stock to the Company, which were cancelled. The Company did not pay any
consideration to any party in connection with such settlement.
During May 1992 through October 1994, the Registrant, pursuant to its 1992
Stock Option Plan, issued options to purchase 190,763 shares of Common Stock to
its directors, employees and one unaffiliated party. The issuance of such
options to such persons was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof. Of these, options to purchase a
total of 184,070 shares of Common Stock currently are issued pursuant to the
1992 Stock Option Plan. All of such options are non-qualified stock options with
an exercise price of $.06 per share, and are presently exercisable. On June 30,
1995, David Weiss, then an executive officer and director of the Registrant,
exercised an option to purchase 4,184 shares of Common Stock for an aggregate
purchase price of $251, which option had been granted pursuant to the
Registrant's 1992 Stock Option Plan. The issuance of Common Stock to Mr. Weiss
upon such exercise was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) and 4(6) thereof. No one other than Mr.
Weiss has ever exercised an option granted pursuant to the 1992 Stock Option
Plan.
In April 1994, the Registrant granted Eric H. Winston, its President, an
option to purchase 251,004 shares of Common Stock. In June 1994, the Registrant
granted Mr. Winston an option to purchase 41,834 shares of Common Stock. The
issuance of such options to such person was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
During June through August of 1995, the Registrant conducted a private
offering (the "1995 Bridge Financing") of Units consisting of notes and
warrants. Pursuant to that offering, a total of 32 Units were sold at a price of
$10,000 per Unit. Each Unit consisted of $9,975 principal amount of the
Registrant's 10% Secured Promissory Notes due August 15, 1995 and warrants to
purchase 586 shares of Common Stock (the "Bridge Warrants"). The gross offering
proceeds of the 1995 Bridge Financing were $320,000. The 1995 Bridge Financing
was made on a private basis only to persons who were "accredited investors" as
defined in Securities Act Rule 501(a). The issuance of the Units to such persons
was exempt from the registration requirements of the Securities Act pursuant to
Sections 4(2) and 4(6) thereof and Rule 506 of Regulation D thereunder. In
consideration for its services as dealer manager for the 1995 Bridge Offering,
the Registrant paid Financial West Group, Inc. aggregate commissions and fees of
$41,600. The Registrant also issued to Financial West Group, Inc. a
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<PAGE>
Bridge Warrant to purchase 20,918 shares of Common Stock for $50. Such Bridge
Warrant is on the same terms as the other Bridge Warrants, except that the
Company separately agreed that it may be exercised on a cashless basis.
During November 1995, the Registrant effectuated an exchange offer with the
holders of the Bridge Warrants, whereby all of the Bridge Warrants originally
issued in connection with the 1995 Bridge Financing were exchanged for new
Bridge Warrants having terms substantially identical to those of the Private
Warrants referred to below. Such exchange offer was made on a private basis only
to persons who were "accredited investors" as defined in Securities Act Rule
501(a). The exchange offer was exempt from the registration requirements of the
Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of
Regulation D thereunder.
As described under "Certain Transactions -- 1995 Bridge Financing," upon the
effectiveness of this Registration Statement, all of the Bridge Warrants
(including the warrant issued to Financial West Group, Inc.) will be converted
to Redeemable Warrants. In connection with the 1995 Bridge Financing, the
Registrant retained Financial West Group, Inc. as its warrant agent for the
Bridge Warrants. Subsequently, Financial West Group, Inc. assigned to The Boston
Group, L.P. (the "Representative") its right to serve as warrant agent for the
Bridge Warrants. As compensation for such services as warrant agent, the
Representative will receive a solicitation fee of five percent of the exercise
price of the Bridge Warrants, payable upon exercise of the Bridge Warrants.
In September and October 1995, the Registrant conducted a private offering
(the "1995 Private Placement"). Pursuant to that offering, a total of 52.5 Units
were sold at a price of $100,000 per Unit. Each Unit consisted of $95,000
principal amount of the Registrant 10% Secured Promissory Notes due 1996 and
warrants to purchase 100,000 shares of Common Stock (the "Private Warrants").
The gross offering proceeds of the 1995 Private Placement were $5,250,000. The
1995 Private Placement was made on a private basis only to persons who were
"accredited investors" as defined in Securities Act Rule 501(a). The issuance of
the Units to such persons was exempt from the registration requirements of the
Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of
Regulation D thereunder. In consideration for its services as dealer manager for
the 1995 Private Placement, the Registrant paid Financial West Group, Inc.
aggregate commissions and fees of $199,500. Additionally, $483,000 was allocated
to the Representative for its services as a selected broker. The Registrant also
issued to Financial West Group, Inc. a warrant to purchase 400,000 shares of
Common Stock. Such warrant is on the same terms as the Private Warrants, except
that the Company separately agreed that it may be exercised on a cashless basis.
As described under "Certain Transactions -- 1995 Private Placement," upon the
effectiveness of this Registration Statement all of the Private Warrants
(including the warrant issued to Financial West Group, Inc.) will be converted
to Redeemable Warrants. In connection with the 1995 Private Placement, the
Registrant retained Financial West Group, Inc. as its warrant agent for the
Private Warrants. Subsequently, Financial West Group, Inc. assigned to the
Representative its right to serve as warrant agent for the Private Warrants. As
compensation for its services as warrant agent, the Representative will receive
a solicitation fee of five percent of the exercise price of the Private
Warrants, payable upon exercise of the Private Warrants.
On October 9, 1995, the Registrant granted to Ulrich E. Gottschling, who is
the Chief Financial Officer, Treasurer and a director of the Registrant, an
option to purchase 100,000 shares of Common Stock pursuant to the Registrant's
1992 Stock Option Plan. On April 30, 1996, Mr.Gottschling agreed to the
termination of the existing 100,000 share option in consideration for the
Registrant's granting him a new 200,000 share option. Such transactions were
exempt from the registration requirements of the Securities Act pursuant to
Sections 4(2) and 4(6) thereof.
On April 30, 1996, the Company granted ASSI, Inc. warrants to purchase
2,000,000 shares of Common Stock. Such transaction was exempt from the
registration requirements of the Securities Act pursuant to Sections 4(2) and
4(6) thereof.
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<PAGE>
On May 30, 1996, the Company issued a $500,000 promissory note to ASSI, Inc.
The issuance of such note, which is convertible into warrants to purchase Common
Stock at a conversion price of $.25 per warrant, was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) and
4(6) thereof.
See "Certain Transactions" for additional information concerning the
Registrant's stock issuances for the past three years.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXH. NO. DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement, among the Registrant, Vincent J. Bitetti, Eric
H. Winston and The Boston Group, L.P. and Joseph Stevens & Co., L.P., as
Representatives of the Several Underwriters (as defined therein). Filed
herewith.
3.1 Second Restated Certificate of Incorporation of the Registrant. Previously
filed.
3.2 Amended and Restated Bylaws of the Registrant. Previously filed.
4.1 Specimen Common Stock Certificate. Previously filed.
4.2 Form of Warrant Agreement and Warrant. Previously filed.
4.3 Form of Representative's Warrant Agreement and Warrant. Filed herewith.
4.4 Warrant dated April 30, 1996 issued to ASSI, Inc. Previously filed.
5 Opinion of McDermott, Will & Emery. Previously filed.
9.1 Stockholder Voting Agreement, dated as of April 30, 1996, among ASSI, Inc.,
Vincent J. Bitetti and Eric H. Winston. Previously filed.
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April 30, 1996.
Previously filed.
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30, 1996.
Previously filed.
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April 30, 1996.
Previously filed.
9.5 Irrevocable Proxy and Voting Agreement of Martin Meyer to Vincent J. Bitetti,
dated May 4, 1994. Previously filed.
9.6 Irrevocable Proxy and Voting Agreement of Mark Lane to Vincent J. Bitetti, dated
May 10, 1994. Previously filed.
10.1 Second Amended and Restated Employment Agreement of Vincent J. Bitetti dated as
of April 30, 1996. Previously filed.
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston dated as of
April 30, 1996. Previously filed.
10.3 Employment Agreement of Ulrich E. Gottschling, as amended. Previously filed.
10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. Previously filed.
10.5 Sound Source Interactive, Inc. Amended and Restated 1995 Stock Option Plan.
Previously filed.
10.6 Warrant Agreement, dated as of September 26, 1995, among the Registrant, Sound
Source Interactive, Inc., a California corporation ("Subsidiary") and Financial
West Group, Inc., a California corporation ("FWG"), as Warrant Agent,
pertaining to the Bridge Warrants (as defined in the Prospectus). Previously
filed.
10.7 Warrant Agreement, dated as of June 30, 1995, between the Registrant and FWG, as
Warrant Agent, pertaining to the Private Warrants (as defined in the
Prospectus). Previously filed.
10.8 Form of Bridge Warrant and Private Warrant. Previously filed.
10.9 Form of 10% Secured Promissory Note due 1996 of the Registrant (the "Private
Notes"). Previously filed.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXH. NO. DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------
<C> <S>
10.10 Company Security Agreement, dated as of September 26, 1995, among the
Registrant, the Secured Parties (as defined therein) and Paradox Holdings, Inc.
("PHI"), as Security Agent, pertaining to the Private Notes. Previously filed.
10.11 Guaranty of the Subsidiary, dated September 26, 1995, pertaining to the Private
Notes. Previously filed.
10.12 Subsidiary Security Agreement, dated as of September 26, 1995, among the
Registrant, the Subsidiary and PHI, as Security Agent, pertaining to the
Private Notes. Previously filed.
10.13 Sales and Distribution Agreement, dated as of June 15, 1995, between the
Registrant and Acclaim Distribution, Inc. Previously filed.
10.14 Retail License Agreement, dated June 16, 1994, between Warner Bros. Consumer
Products and "Sound Source Interactive," pertaining to the motion picture,
"Willy 2." Previously filed.
10.15 Retail License Agreement, dated July 7, 1995, between Warner Bros. Consumer
Products and "Sound Source Interactive," pertaining to the television series,
"Babylon 5." Previously filed.
10.16 Retail License Agreement, dated June 16, 1994, between Warner Bros. Consumer
Products and "Sound Source Interactive," pertaining to the motion picture, "The
Secret Garden." Previously filed.
10.17 Retail License Agreement, dated June 16, 1994, between Warner Bros. Consumer
Products and "Sound Source Interactive," pertaining to the motion picture,
"Black Beauty." Previously filed.
10.18 Merchandising License Agreement, dated March 7, 1995, between Sony Signature,
Inc., as agent for Columbia Pictures Industries, Inc., and the Subsidiary,
pertaining to the motion picture, "Close Encounters of the Third Kind."
Previously filed.
10.19 CD-ROM Development Agreement, dated August 30, 1994, between Fox Electronic
Publishing, Inc., doing business as Fox Interactive, and "Sound Source
Interactive." Previously filed.
10.20 (a) Merchandising Licensing Agreement, dated December 5, 1994, between MCA/
Universal Merchandising, Inc. and "Sound Source Interactive," pertaining to the
motion picture, "The Little Rascals." Previously filed.
(b) Multimedia Rights License, dated June 14, 1995, between The Harry Fox
Agency, Inc. and "Sound Source Interactive," pertaining to the motion picture,
"The Little Rascals." Previously filed.
(c) Letter of Agreement, dated June 28, 1995, between Roy Shield Music Company
and "Sound Source Interactive," pertaining to the motion picture, "The Little
Rascals." Previously filed.
(d) Multi Media Rights License, dated July 27, 1995, between MCA, Inc. and
"Sound Source Interactive," pertaining to the motion picture, "The Little
Rascals." Previously filed.
10.21 Merchandising Licensing Agreement, dated March 16, 1995, between MCA/Universal
Merchandising, Inc. and "Sound Source Interactive," pertaining to the animated
television series, "ExoSquad." Previously filed.
10.22 Merchandising Licensing Agreement, dated August 10, 1995, between MCA/Universal
Merchandising, Inc. and "Sound Source Interactive," pertaining to the motion
picture, "Babe." Previously filed.
10.23 (a) License Agreement, dated October 1, 1994, between Lucasfilm Ltd. ("LFL") and
"Sound Source Interactive," pertaining to AUDIOCLIPS-C- of sound effects,
dialogue and movie soundtracks for the motion pictures, "Star Wars," "The
Empire Strikes Back," and "Return of the Jedi." Previously filed.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXH. NO. DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------
<C> <S>
(b) License Agreement, dated October 1, 1994, between LFL and "Sound Source
Interactive," pertaining to VISUALCLIPS-C- of film/video cues for the motion
pictures, "Star Wars," "The Empire Strikes Back," and "Return of the Jedi."
Previously filed.
(c) Soundtrack License Agreement, dated October 1, 1994, between LFL and "Sound
Source Interactive," pertaining to the use of the soundtrack of the "Star Wars
Films" (as defined therein). Previously filed.
(d) Film Footage License, dated October 1, 1994, between LFL and "Sound Source
Interactive," pertaining to the use of the film footage of the "Star Wars
Films" (as defined therein). Previously filed.
(e) Letter of Intent and Star Wars Classic License Agreement, dated September
15, 1995, between LFL and "Sound Source Interactive, Inc.," pertaining to the
grant of a license for sales in Canada. Previously filed.
(f) Addendum to the agreement dated October 28, 1992, between Horatio
Productions and the Subsidiary, pertaining to the use of preexisting dialogue
of the Darth Vader character. Previously filed.
10.24 Merchandising License Agreement, dated July 8, 1994, between Viacom Consumer
Products, as agent for Paramount Pictures Corporation, and "Sound Source
Interactive, Inc.," pertaining to the television series, "Star Trek: The
Original Series," the first six motion pictures based thereon and the
television series, "Star Trek: The Next Generation." Previously filed.
10.25 (a) License Agreement, dated as of July 10, 1995, between DC Comics and "Sound
Source Interactive," pertaining to the animated television series initially
entitled "Batman: The Animated Series" and thereafter entitled, "The Adventures
of Batman and Robin." Previously filed.
(b) Interactive/Multimedia Adherence Letter, dated November 10, 1995, between
the Screen Actors Guild and "Sound Source Interactive," pertaining to the
animated television series initially entitled "Batman: The Animated Series" and
thereafter entitled, "The Adventures of Batman and Robin." Previously filed.
10.26 Licensing Agreement, dated as of June 14, 1994 among CBS Entertainment ("CBS"),
Rod Serling Trust and "Sound Source Interactive," pertaining to the television
series, "The Twilight Zone." Previously filed.
10.27 Merchandising License Agreement, dated as of October 30, 1992, among Carolco
Pictures Inc., Carolco International N.V. and "Sound Source Unlimited, Inc.,"
pertaining to the motion picture, "Total Recall." Previously filed.
10.28 Merchandising License Agreement, dated as of October 30, 1992, among Carolco
Pictures Inc., Carolco International N.V. and "Sound Source Unlimited, Inc.,"
pertaining to the motion picture, "Terminator 2: Judgment Day." Previously
filed.
10.29 License Agreement, dated as of September 20, 1994, between Palladium Limited
Partnership and "Sound Source Interactive," pertaining to the motion picture,
"Lassie." Previously filed.
10.30 License Agreement, dated as of September 20, 1994, between Broadway Video
Entertainment and "Sound Source Interactive," pertaining to the television
series, "Saturday Night Live." Previously filed.
10.31 Merchandising License Agreement, dated as of October 12, 1995, between DESILU,
TOO, CBS and "Sound Source Interactive," pertaining to the television series,
"I Love Lucy." Previously filed.
10.32 Memorandum of Understanding, dated May 26, 1994, between Brian Leader, doing
business as Sentient Software, and "Sound Source Interactive, Inc.," pertaining
to program development and licensing agreements related to INTERACTIVE
MOVIEBOOKS-TM-. Previously filed.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXH. NO. DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------
<C> <S>
10.33 (a) Royalty Programming Contract, dated July 12, 1993, between Rhode Island Soft
Systems ("RISS") and the Subsidiary, pertaining to screen saver modules.
Previously filed.
(b) Amendment to Royalty Programming Contract, dated September 12, 1994, between
RISS and the Subsidiary. Previously filed.
(c) Agreement, dated April 12, 1995, between RISS and "Sound Source
Interactive," pertaining to INTERACTIVE MOVIEBOOKS-TM-. Previously filed.
(d) Letter of Intent, dated August 24, 1995, between RISS and "Sound Source
Interactive," pertaining to INTERACTIVE MOVIEBOOKS-TM-. Previously filed.
10.34 Merchandising License Agreement, dated September 1, 1995, between Greytsounds
Sound Development and "Sound Source Interactive," pertaining to Registrant's
Sound Library. Previously filed.
10.35 Indemnification Agreement, dated as of January 1, 1996, between the Registrant
and Vincent J. Bitetti. Previously filed.
10.36 Indemnification Agreement, dated as of January 1, 1996, between the Registrant
and Eric H. Winston. Previously filed.
10.37 Indemnification Agreement, dated as of January 1, 1996, between the Registrant
and Ulrich Gottschling. Previously filed.
10.38 Merchandising License Agreement, dated October 24, 1995, between MCA/Universal
Merchandising, Inc. and "Sound Source Interactive," pertaining to the motion
picture, "Dragonheart." Previously filed.
10.39 Merchandising License Agreement, dated January 10, 1996, between MCA/Universal
Merchandising, Inc. and "Sound Source Interactive," pertaining to the motion
pictures, "The Land Before Time" (I, II and III). Previously filed.
10.40 Agreement, dated March 18, 1996, between Musicians' Union and "Sound Source
Interactive," pertaining to the use of music from the motion pictures, "The
Land Before Time" (I, II and III). Previously filed.
10.41 License Agreement, dated February 27, 1996, between MGM/UA Merchandising, Inc.
and Subsidiary, pertaining to the motion picture, "All Dogs Go To Heaven 2."
Previously filed.
10.42 Agreement, dated January 4, 1996, between Universal Studios Florida and "Sound
Source Interactive," pertaining to the "Universal Studios Florida T2
Screensaver Sweepstakes." Previously filed.
10.43 Agreement, dated January 24, 1996, between Warner Bros. Television and "Sound
Source Interactive," pertaining to the "Babylon 5 Contest." Previously filed.
10.44 Form of Registration Procedures Agreement for execution between the Registrant
and each of the Selling Security Holders. Previously filed.
10.45 Consulting Agreement, dated as of April 30, 1996, between the Company and ASSI,
Inc. Previously filed.
10.46 Share Purchase Agreement, dated April 3, 1995, between Eric Winston and Vincent
Bitetti. Previously filed.
10.47 Distribution Services Agreement, dated as of June 1, 1996, between the
Registrant and Simon & Schuster Interactive Distribution Services. Previously
filed.
10.48 Note Purchase Agreement, dated as of May 30, 1996, between the Registrant and
ASSI, Inc. Previously filed.
10.49 Convertible Promissory Note, dated May 30, 1996, issued by the Company to ASSI,
Inc. Previously filed.
21.1 Subsidiary of the Registrant. Previously filed.
23.1 Consent of Corbin & Wertz. Filed herewith.
23.2 Consent of McDermott, Will & Emery (included in Exhibit 5).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXH. NO. DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (incorporated by reference to page II-11 of the Registration
Statement on Form SB-2).
</TABLE>
(b) Financial Statement Schedules
None Required
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section230.424(b) of this Chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
polish as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
II-9
<PAGE>
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on June 26, 1996.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ VINCENT J. BITETTI
-----------------------------------
Vincent J. Bitetti,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Vincent
J. Bitetti and/or Eric H. Winston his true and lawful attorney-in-fact and
agent, acting alone, with full powers of substitution and re-substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, any Amendments thereto and any Registration Statement for the same
offering which is effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------- ------------------------- ----------------
<S> <C> <C> <C>
/S/ VINCENT J. BITETTI Director, Chairman of the
CHIEF ---------------------------- Board and Chief June 26, 1996
EXECUTIVE OFFICER Vincent J. Bitetti Executive Officer
/S/ ULRICH E. GOTTSCHLING Director, Chief Financial
PRINCIPAL ---------------------------- Officer, Treasurer and June 26, 1996
ACCOUNTING OFFICER Ulrich E. Gottschling Secretary
/S/ ERIC H. WINSTON
PRESIDENT ---------------------------- Director, President and June 26, 1996
Eric H. Winston Chief Operating Officer
</TABLE>
II-11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO.2 TO
FORM SB-2
REGISTRATION STATEMENT
(No. 33-80827)
UNDER
THE SECURITIES ACT OF 1933
---------------
SOUND SOURCE INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Registration Statement on Form SB-2 Exhibit Volume Index
EXH. SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
1 Form of Underwriting Agreement, between the Registrant and The Boston
Group, L.P. ("Representative"), as Representative of the Several
Underwriters (as defined therein). Filed herewith.
3.1 Second Restated Certificate of Incorporation of the Registrant.
Previously filed.
3.2 Amended and Restated Bylaws of the Registrant. Filed herewith.
4.1 Specimen Common Stock Certificate. Previously filed.
4.2 Form of Warrant Agreement and Warrant. Filed herewith.
4.3 Form of Representative's Warrant Agreement and Warrant. Filed
herewith.
4.4 Warrant dated April 30, 1996 issued to ASSI, Inc. Previously filed.
5 Opinion of McDermott, Will & Emery. Previously filed.
9.1 Stockholder Voting Agreement, dated as of April 30, 1996, among ASSI,
Inc., Vincent J. Bitetti and Eric H. Winston. Previously filed.
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April 30,
1996. Previously filed.
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30,
1996. Previously filed.
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April 30,
1996. Previously filed.
9.5 Irrevocable Proxy and Voting Agreement of Martin Meyer to Vincent J.
Bitetti, dated May 4, 1994. Filed herewith.
9.6 Irrevocable Proxy and Voting Agreement of Mark Lane to Vincent J.
Bitetti, dated May 10, 1994. Filed herewith.
10.1 Second Amended and Restated Employment Agreement of Vincent J. Bitetti
dated as of April 30, 1996. Previously filed.
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston
dated as of April 30, 1996. Filed herewith.
10.3 Employment Agreement of Ulrich E. Gottschling, as amended. Previously
filed.
10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. Previously
filed.
10.5 Sound Source Interactive, Inc. and Amended and Restated 1995 Stock
Option Plan. Filed herewith.
10.6 Warrant Agreement, dated as of September 26, 1995, among the
Registrant, Sound Source Interactive, Inc., a California corporation
("Subsidiary") and Financial West Group, Inc., a California
corporation ("FWG"), as Warrant Agent, pertaining to the Bridge
Warrants (as defined in the Prospectus). Previously filed.
10.7 Warrant Agreement, dated as of June 30, 1995, between the Registrant
and FWG, as Warrant Agent, pertaining to the Private Warrants (as
defined in the Prospectus). Previously filed.
10.8 Form of Bridge Warrant and Private Warrant. Previously filed.
10.9 Form of 10% Secured Promissory Note due 1996 of the Registrant (the
"Private Notes"). Previously filed.
10.10 Company Security Agreement, dated as of September 26, 1995, among the
Registrant, the Secured Parties (as defined therein) and Paradox
Holdings, Inc. ("PHI"), as Security Agent, pertaining to the Private
Notes. Previously filed.
10.11 Guaranty of the Subsidiary, dated September 26, 1995, pertaining to
the Private Notes. Previously filed.
<PAGE>
EXH. SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
10.12 Subsidiary Security Agreement, dated as of September 26, 1995, among
the Registrant, the Subsidiary and PHI, as Security Agent, pertaining
to the Private Notes. Previously filed.
10.13 Sales and Distribution Agreement, dated as of June 15, 1995, between
the Registrant and Acclaim Distribution, Inc. Previously filed.
10.14 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Willy 2." Previously filed.
10.15 Retail License Agreement, dated July 7, 1995, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
television series, "Babylon 5." Previously filed.
10.16 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "The Secret Garden." Previously filed.
10.17 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Black Beauty." Previously filed.
10.18 Merchandising License Agreement, dated March 7, 1995, between Sony
Signature, Inc., as agent for Columbia Pictures Industries, Inc., and
the Subsidiary, pertaining to the motion picture, "Close Encounters of
the Third Kind." Previously filed.
10.19 CD-ROM Development Agreement, dated August 30, 1994, between Fox
Electronic Publishing, Inc., doing business as Fox Interactive, and
"Sound Source Interactive." Previously filed.
10.20 (a) Merchandising Licensing Agreement, dated December 5, 1994, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "The Little Rascals." Previously
filed.
(b) Multimedia Rights License, dated June 14, 1995, between The Harry
Fox Agency, Inc. and "Sound Source Interactive," pertaining to the
motion picture, "The Little Rascals." Previously filed.
(c) Letter of Agreement, dated June 28, 1995, between Roy Shield Music
Company and "Sound Source Interactive," pertaining to the motion
picture, "The Little Rascals." Previously filed.
(d) Multi Media Rights License, dated July 27, 1995, between MCA, Inc.
and "Sound Source Interactive," pertaining to the motion picture, "The
Little Rascals." Previously filed.
10.21 Merchandising Licensing Agreement, dated March 16, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the animated television series, "ExoSquad." Previously
filed.
10.22 Merchandising Licensing Agreement, dated August 10, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Babe." Previously filed.
10.23 (a) License Agreement, dated October 1, 1994, between Lucasfilm Ltd.
("LFL") and "Sound Source Interactive," pertaining to AUDIOCLIPS-C- of
sound effects, dialogue and movie soundtracks for the motion pictures,
"Star Wars," "The Empire Strikes Back," and "Return of the Jedi."
Previously filed.
(b) License Agreement, dated October 1, 1994, between LFL and "Sound
Source Interactive," pertaining to VISUALCLIPS-C- of film/video cues
for the motion
- 2 -
<PAGE>
EXH. SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
pictures, "Star Wars," "The Empire Strikes Back," and "Return of the
Jedi." Previously filed.
(c) Soundtrack License Agreement, dated October 1, 1994, between LFL
and "Sound Source Interactive," pertaining to the use of the
soundtrack of the "Star Wars Films" (as defined therein). Previously
filed.
(d) Film Footage License, dated October 1, 1994, between LFL and
"Sound Source Interactive," pertaining to the use of the film footage
of the "Star Wars Films" (as defined therein). Previously filed.
(e) Letter of Intent and Star Wars Classic License Agreement, dated
September 15, 1995, between LFL and "Sound Source Interactive, Inc.,"
pertaining to the grant of a license for sales in Canada. Previously
filed.
(f) Addendum to the agreement dated October 28, 1992, between Horatio
Productions and the Subsidiary, pertaining to the use of preexisting
dialogue of the Darth Vader character. Previously filed.
10.24 Merchandising License Agreement, dated July 8, 1994, between Viacom
Consumer Products, as agent for Paramount Pictures Corporation, and
"Sound Source Interactive, Inc.," pertaining to the television series,
"Star Trek: The Original Series," the first six motion pictures based
thereon and the television series, "Star Trek: The Next Generation."
Previously filed.
10.25 (a) License Agreement, dated as of July 10, 1995, between DC Comics
and "Sound Source Interactive," pertaining to the animated television
series initially entitled "Batman: The Animated Series" and
thereafter entitled, "The Adventures of Batman and Robin." Previously
filed.
(b) Interactive/Multimedia Adherence Letter, dated November 10, 1995,
between the Screen Actors Guild and "Sound Source Interactive,"
pertaining to the animated television series initially entitled
"Batman: The Animated Series" and thereafter entitled, "The
Adventures of Batman and Robin." Previously filed.
10.26 Licensing Agreement, dated as of June 14, 1994 among CBS Entertainment
("CBS"), Rod Serling Trust and "Sound Source Interactive," pertaining
to the television series, "The Twilight Zone." Previously filed.
10.27 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Total Recall."
Previously filed.
10.28 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Terminator 2:
Judgment Day." Previously filed.
10.29 License Agreement, dated as of September 20, 1994, between Palladium
Limited Partnership and "Sound Source Interactive," pertaining to the
motion picture, "Lassie." Previously filed.
10.30 License Agreement, dated as of September 20, 1994, between Broadway
Video Entertainment and "Sound Source Interactive," pertaining to the
television series, "Saturday Night Live." Previously filed.
10.31 Merchandising License Agreement, dated as of October 12, 1995, between
DESILU, TOO, CBS and "Sound Source Interactive," pertaining to the
television series, "I Love Lucy." Previously filed.
- 3 -
<PAGE>
EXH. SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
10.32 Memorandum of Understanding, dated May 26, 1994, between Brian Leader,
doing business as Sentient Software, and "Sound Source Interactive,
Inc.," pertaining to program development and licensing agreements
related to MOVIEBOOKS-TM-. Previously filed.
10.33 (a) Royalty Programming Contract, dated July 12, 1993, between Rhode
Island Soft Systems ("RISS") and the Subsidiary, pertaining to screen
saver modules. Previously filed.
(b) Amendment to Royalty Programming Contract, dated September 12,
1994, between RISS and the Subsidiary. Previously filed.
(c) Agreement, dated April 12, 1995, between RISS and "Sound Source
Interactive," pertaining to MOVIEBOOKS-TM-. Previously filed.
(d) Letter of Intent, dated August 24, 1995, between RISS and "Sound
Source Interactive," pertaining to MOVIEBOOKS-TM-. Previously filed.
10.34 Merchandising License Agreement, dated September 1, 1995, between
Greytsounds Sound Development and "Sound Source Interactive,"
pertaining to Registrant's Sound Library. Previously filed.
10.35 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Vincent J. Bitetti. Previously filed.
10.36 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Eric H. Winston. Previously filed.
10.37 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Ulrich Gottschling. Previously filed.
10.38 Merchandising License Agreement, dated October 24, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Dragonheart." Previously filed.
10.39 Merchandising License Agreement, dated January 10, 1996, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion pictures, "The Land Before Time" (I, II and
III). Previously filed.
10.40 Agreement, dated March 18, 1996, between Musicians' Union and "Sound
Source Interactive," pertaining to the use of music from the motion
pictures, "The Land Before Time" (I, II and III). Previously filed.
10.41 License Agreement, dated February 27, 1996, between MGM/UA
Merchandising, Inc. and Subsidiary, pertaining to the motion picture,
"All Dogs Go To Heaven 2." Previously filed.
10.42 Agreement, dated January 4, 1996, between Universal Studios Florida
and "Sound Source Interactive," pertaining to the "Universal Studios
Florida T2 Screensaver Sweepstakes." Previously filed.
10.43 Agreement, dated January 24, 1996, between Warner Bros. Television and
"Sound Source Interactive," pertaining to the "Babylon 5 Contest."
Previously filed.
10.44 Form of Registration Procedures Agreement for execution between the
Registrant and each of the Selling Security Holders. Previously
filed.
10.45 Consulting Agreement, dated as of April 30, 1996, between the Company
and ASSI, Inc. Previously filed.
10.46 Share Purchase Agreement, dated April 3, 1995, between Eric Winston
and Vincent Bitetti. Previously filed.
- 4 -
<PAGE>
EXH. SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
10.47 Distribution Services Agreement, dated as of June 1, 1996, between the
Registrant and Simon & Schuster Interactive Distribution Services.
Filed herewith.
10.48 Note Purchase Agreement, dated as of May 30, 1996, between the
Registrant and ASSI, Inc. Filed herewith.
10.49 Convertible Promissory Note, dated May 30, 1996, issued by the Company
to ASSI, Inc. Filed herewith.
21.1 Subsidiary of the Registrant. Previously filed.
23.1 Consent of Corbin & Wertz. Filed herewith.
23.2 Consent of McDermott, Will & Emery (included in Exhibit 5).
24.1 Power of Attorney (incorporated by reference to page II-11 of the
Registration Statement on Form SB-2).
<PAGE>
2,400,000 Shares of Common Stock
and 1,200,000 Redeemable Warrants
SOUND SOURCE INTERACTIVE, INC.
UNDERWRITING AGREEMENT
Los Angeles, California
June 27, 1996
THE BOSTON GROUP, L.P.
1999 Avenue of the Stars, Suite 2550
Los Angeles, California 90067
JOSEPH STEVENS & COMPANY, L.P.
33 Maiden Lane
New York, New York 10038
Ladies and Gentlemen:
Sound Source Interactive, Inc., a Delaware corporation (the "Company"),
Vincent J. Bitetti ("Bitetti") and Eric H. Winston ("Winston") confirm their
agreement with you (sometimes referred to herein as the "Underwriters") with
respect to the sale by the Company and the purchase by you, severally and not
jointly, of an aggregate of two million four hundred thousand (2,400,000) shares
("Firm Shares") of the Company's common stock, no par value (the "Common Stock")
and one million two hundred thousand (1,200,000) redeemable warrants (the
"Redeemable Warrants"), each Redeemable Warrant to purchase one (1) additional
share of Common Stock. The public offering price per share of Common Stock is
$4.00 and the public offering price per Redeemable Warrant is $.25. Each
Redeemable Warrant is exercisable commencing on June 27, 1997 until December 27,
2001, unless previously redeemed by the Company, at an initial exercise price
equal to $4.40 per share, subject to adjustment. The Redeemable Warrants may be
redeemed by the Company at a redemption price of twenty-five cents ($.25) per
Redeemable Warrant at any time commencing June 27, 1997, subject to earlier
redemption with the consent of the Underwriters, provided that the
<PAGE>
average closing bid price of the Common Stock equals or exceeds $5.60 per share
for any twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. Such Shares and Redeemable Warrants are hereinafter referred to
collectively as the "Firm Securities." Upon notice by the Underwriters (as
defined below), as provided in Section 3(b) hereof, the Company shall also issue
and sell to the Underwriters, severally and not jointly, an aggregate of up to
an additional three hundred forty thousand (340,000) shares of Common Stock
and/or one hundred eighty thousand (180,000) Redeemable Warrants, and Bitetti
shall sell to the Underwriters, severally and not jointly, twenty thousand
(20,000) shares of Common Stock, for the purpose of covering over-allotments, if
any. Such 360,000 additional shares of Common Stock and/or 180,000 additional
Redeemable Warrants are hereinafter referred to as the "Option Securities." The
Firm Securities and the Option Securities are hereinafter referred to
collectively as the "Securities" and are more fully described in the
Registration Statement and the Prospectus referred to below. The Company also
proposes to issue and sell to The Boston Group, L.P. and Joseph Stevens & Co.,
L.P., or their designees a warrant (the "Underwriters' Warrant") pursuant to the
Underwriters' Warrant Agreement (the "Underwriters' Warrant Agreement"), for the
purchase of an additional two hundred forty thousand (240,000) shares of Common
Stock (the "Underwriters' Shares"). The shares of Common Stock issuable upon
exercise of the Redeemable Warrants are hereinafter referred to as the "Warrant
Shares." Further, the following additional securities are being registered in
connection with this offering, but are not being underwritten by the
Underwriters, for the account of certain non affiliated selling security holders
(collectively, the "Non-Affiliated Selling Security Holders"): (i) one hundred
seven thousand five hundred (107,500) shares of Common Stock for the account of
certain non-affiliated security holders (the "Non-Affiliated Shares"); three
hundred ninety two thousand eight hundred thirty eight shares of Common Stock
for the account of the President of the Company (the "Affiliate Shares") (iii)
five million six hundred eighty nine thousand six hundred sixty five (5,689,665)
previously issued redeemable warrants (the "Non-Affiliated Warrants"); (iv) five
million six hundred eighty nine thousand six hundred sixty five (5,689,665)
shares of Common Stock issuable upon exercise of the Non-Affiliated Warrants
(the "Non-Affiliated Warrant Shares"); (v) two million (2,000,000) shares of
Common Stock issuable upon exercise of warrants granted to ASSI, Inc. ("ASSI
Warrants"); and (vi) up to two million one hundred thousand
-2-
<PAGE>
(2,100,000) shares of Common Stock issuable upon exercise of warrants that may
be issued to ASSI, Inc. upon its election to convert a loan made by ASSI, Inc.
to the Company (the "ASSI Loan Warrants"). The Non-Affiliated Shares, the Non-
Affiliated Warrants and the Non-Affiliated Warrant Shares are sometimes
collectively referred to herein as the "Non-Affiliated Securities".
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and covenants and agrees with, each of the Underwriters as of
the date hereof, and as of the Closing Date and each option Closing Date (as
such terms are defined below), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form SB-2 (Registration No. 33-80827), including any related
preliminary prospectus (the "Preliminary Prospectus"), for the registration of
the Shares under the Securities Act of 1933, as amended (the "Act"). After the
date hereof, the Company shall not file any other amendment to such registration
statement which the Underwriters shall have reasonably objected to after having
been furnished with a copy thereof unless the Company's outside counsel
reasonably determines in a written opinion that such amendment or supplement is
required to be filed pursuant to applicable law. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time it becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part thereof
or incorporated therein (including, but not limited to, those documents or that
information incorporated by reference therein) and all information deemed to be
a part thereof as of such time pursuant to Rule 430A promulgated under the Act
and any information included in a term sheet (the "Term Sheet") as described in
Rule 434 promulgated under the Act), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed with the
Underwriters' consent with the Commission pursuant to Rule 424(b) promulgated
under the Act and including any information included in the Term Sheet, after
the Registration Statement shall have been declared effective by the Commission,
is hereinafter called the "Prospectus." For purposes hereof, "Rules and
Regulations" means the rules and regulations adopted by the Commission under the
Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any of the
foregoing, and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any part thereof
-3-
<PAGE>
have been initiated or are pending, contemplated or threatened. Each
Preliminary Prospectus and the Registration Statement (including each amendment
thereto), at the time of filing thereof, complied with the requirements of the
Act and the Rules and Regulations, and neither any Preliminary Prospectus nor
the Registration Statement, at the time of filing thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; PROVIDED, HOWEVER, that
the foregoing shall not apply to statements made or statements omitted in
reliance upon and in conformity with written information furnished to the
Company by the Underwriters with respect to any Underwriter expressly for use in
any Preliminary Prospectus or the Registration Statement.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to and including the Closing Date and each Option
Closing Date, if any, and during such other periods as a prospectus may be
required to be delivered in connection with sales by any Underwriter or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and will comply with the requirements of the Act
and the Rules and Regulations, and at and through such dates, neither the
Registration Statement, the Prospectus nor any amendment thereof or supplement
thereto will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, PROVIDED, HOWEVER, that the foregoing shall not apply to statements
made or statements omitted in reliance upon and in conformity with written
information furnished to the Company by the Underwriters with respect to any
Underwriter expressly for use in the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto.
(d) Except for Sound Source Interactive, Inc., a California
corporation ("SSI California" or the "Subsidiary"), the Company does not own an
interest in any corporation, partnership, trust, joint venture or other entity.
SSI California is a wholly-owned subsidiary of the Company. Each of the Company
and the Subsidiary has been duly organized and is validly existing as a
corporation in good standing under the laws of the respective jurisdiction of
its incorporation, as applicable. Each of the Company and the Subsidiary is
duly qualified and licensed and in good standing as a foreign corporation, in
each jurisdiction in which it owns or leases property or in which the conduct of
its business, as currently being conducted, requires such qualification or
licensing. Each of the Company and the Subsidiary has all requisite power and
authority (corporate, if applicable, and other), and has obtained any and all
authorizations, approvals, orders, licenses,
-4-
<PAGE>
certificates, franchises and permits of and from all governmental or regulatory
officials, agencies, authorities and bodies (including, without limitation,
those having jurisdiction over environmental, health or similar matters)
necessary to own or lease its properties and conduct its business as described
in the Prospectus other than those authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials, agencies, authorities and bodies (including, without limitation,
those having jurisdiction over environmental, health or similar matters) which,
singularly or in the aggregate, the failure to obtain would not materially and
adversely affect the condition (financial or otherwise), earnings, business
affairs, position, prospects, shareholders' equity, operations, properties,
businesses or results of operations of the Company and the Subsidiary taken as a
whole. Each of the Company and the Subsidiary is and has been doing business in
substantial compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state and local
laws, rules, regulations and orders; and neither the Company nor the Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any such authorizations, approvals, orders, licenses,
certificates, franchises or permits which, singularly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition (financial or otherwise), earnings, business
affairs, position, prospects, shareholders' equity, operations, properties,
businesses or results of operations of the Company or the Subsidiary. The
disclosure in the Registration Statement concerning the effects of federal,
state and local laws, rules, regulations and orders on the Company's and the
Subsidiary's businesses as currently conducted and as contemplated are correct
in all material respects and do not omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances in which they were made, not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or supplement
thereto, under "Capitalization" and "Description of Securities" and will have
the adjusted capitalization set forth therein on the Closing Date and each
Option Closing Date, if any, based upon the assumptions set forth therein.
Neither the Company nor the Subsidiary is a party to or bound by any instrument,
agreement or other arrangement or understanding providing for or requiring it to
issue any capital stock, rights, warrants, options or other securities, except
for this Agreement, the Underwriters' Warrant Agreement, options for 384,070
shares previously issued under the Company's 1992 Stock Option Plan (the "1992
Plan") and options for 13,610 shares to be issued under the Company's 1995 Stock
Option Plan (the 1995 Plan"), options granted by the Company to Eric H. Winston
for 292,838 shares of Common Stock, the ASSI Warrants for 2,000,000 shares and
the Note Purchase Agreement
-5-
<PAGE>
between the Company and ASSI dated May 30, 1996 (the "ASSI Loan Agreement")
providing that ASSI may, at its option, convert all or any part of the loan
provided by ASSI to the Company thereunder into the ASSI Loan Warrants, all as
described in the Registration Statement. The Securities and all other
securities issued or issuable by the Company conform or, when issued and paid
for, will conform, in all respects to the description thereof contained in the
Registration Statement and the Prospectus. All issued and outstanding
securities of the Company and the Subsidiary have been duly authorized and
validly issued and are fully paid and non-assessable; the holders thereof have
no rights of rescission with respect thereto, and the holders of ownership
interests in the Company and the Subsidiary are not subject to personal
liability by reason of being such holders; and none of such securities was
issued in violation of the preemptive rights or other similar rights of any
holders of any security of either the Company or the Subsidiary. Except as
provided in that certain Confidential Offering Memorandum dated September 18,
1995 with respect to certain shares of the Company which may, under certain
conditions, convert to shares of common stock of the Subsidiary and certain
warrants to purchase Common Stock of the Company which may, under certain
conditions, convert to warrants to purchase Stock of the Subsidiary, the Company
has not entered into any agreements, arrangements or understandings pursuant to
which any third party has the right to acquire from the Company any securities
of the Subsidiary owned by the Company. The Securities are not and will not be
subject to any preemptive or other similar rights of any shareholder, have been
duly authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Shares, when delivered by the Company, will be in due and
proper form. Upon the issuance and delivery pursuant to the terms hereof and
the Underwriters' Warrant Agreement of the Securities to be sold by the Company
hereunder and thereunder, respectively, the Underwriters and the Underwriters,
respectively, will acquire good and marketable title to such Securities, free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever.
(f) The combined financial statements of the Company and the notes
thereto included in the Registration Statement, each Preliminary Prospectus and
the Prospectus fairly present the financial position, results of operations and
cash flow and changes in financial position and shareholders' equity of the
Company and its Subsidiary at the respective dates and for the respective
periods to which they apply, and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved. The as
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adjusted and/or pro forma combined financial information included in each
Preliminary Prospectus, the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in conformity with the
Rules and Regulations and have been properly compiled on the basis described
therein consistent with the historical financial statements included in the
Registration Statement, each Preliminary Prospectus and the Prospectus. The
assumptions underlying such as adjusted and/or pro forma financial information
are reasonable, and the adjustments made therein are appropriate to give effect
to the transactions or circumstances referred to therein. There has been no
material adverse change, or development involving a material prospective change,
in the condition (financial or otherwise), earnings, business affairs, position,
prospects, shareholders, equity, operations, obligations, properties, businesses
or results of operations of the Company and the Subsidiary taken as a whole,
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus.
The outstanding debt, the property and assets (both tangible and intangible) and
the businesses of the Company and the Subsidiary conform in all material
respects to the descriptions thereof contained in the Registration Statement and
the Prospectus. The financial information set forth in the Prospectus under the
headings "Prospectus Summary - Summary Financial Data," "Dilution,"
"Capitalization," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly presents the
information set forth therein and such financial information has been derived
from or compiled on a basis consistent with that of the audited combined
financial statements included in the Registration Statement, each Preliminary
Prospectus and the Prospectus as described above.
(g) The Company and the Subsidiary (i) have paid all federal, state
and local taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and any other
assessments, fines or penalties leveled against any of them and have furnished
all information returns any of them are required to furnish pursuant to the Code
or otherwise, (ii) have established adequate reserves for such taxes,
assessments, fines or penalties which are not due and payable and (iii) does not
have any tax deficiency or claims outstanding, proposed or assessed against any
of them.
(h) No transfer tax, stamp duty or other similar tax, fee or duty is
payable by or on behalf of the Underwriters or the Underwriters, as applicable,
in connection with (i) the issuance by the Company of the Securities, (ii) the
purchase by the Underwriters of the Securities or (iii) the consummation of any
of the transactions contemplated by this
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Agreement, the Underwriters' Warrant Agreement, the Registration Statement or
the Prospectus.
(i) The Company and the Subsidiary maintains insurance policies,
including, without limitation, general liability, property and personal
liability insurance, and surety bonds which insure such entities, their
employees and patrons and such other persons to whom such entities may become
liable against such losses and risks generally insured against by comparable
businesses.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding (including,
without limitation, those pertaining to environmental, health or similar
matters) pending, contemplated or threatened (or circumstances that may give
rise to the same), to which the Company or the Subsidiary is subject or to which
any property or assets (tangible or intangible) of the Company or the Subsidiary
is subject (or circumstances that may give rise to the same) which (i) questions
the validity of the capital stock of the Company or the Subsidiary, of this
Agreement, of the Underwriters' Warrant Agreement or of any action or
transaction contemplated by this Agreement, the Underwriters' Warrant Agreement,
the Registration Statement or the Prospectus, (ii) is required to be disclosed
in the Registration Statement which is not so disclosed (and such proceedings as
are summarized in the Registration Statement are accurately summarized in all
respects) or (iii) might, if adversely determined, materially and adversely
affect the condition (financial or otherwise), earnings, business affairs,
position, prospects, shareholders' equity, operations, properties, businesses or
results of operations of the Company or the Subsidiary taken as a whole.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement,
the Warrant Agreement and the Underwriters' Warrant Agreement and to consummate
the transactions contemplated in such agreements, the Registration Statement and
the Prospectus; and this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement have each been or will each be duly and properly authorized,
executed and delivered by the Company. Each of this Agreement, the Warrant
Agreement and the Underwriters' Warrant Agreement constitutes or will constitute
a legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors, rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law).
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<PAGE>
(l) Neither the issuance, delivery and sale of the Securities, the
execution, delivery or performance of this Agreement, the Warrant Agreement and
Underwriters' Warrant Agreement, the consummation of the transactions
contemplated herein, therein, in the Registration Statement and in the
Prospectus, or the conduct of the Company's or the Subsidiary's business as
described in the Registration Statement, the Prospectus and any amendments
thereof or supplements thereto, conflicts or will conflict with, or results or
will result in any breach or violation of any of the terms, covenants,
conditions or provisions of, or constitutes or will constitute (with notice, the
lapse of time or both) a default under, or results or will result in the
creation or imposition of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever upon any
property or assets (tangible or intangible) of the Company or the Subsidiary
pursuant to the terms of, (i) the certificate of incorporation or bylaws of the
Company or the Subsidiary, (ii) except as described in the Prospectus with
respect to certain licenses, any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
shareholders, agreement, purchase order, note, loan or credit agreement or any
other material agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which the Company or the
Subsidiary is a party or by which they are or may be bound or to which any of
their properties or assets (tangible or intangible) are or may be subject or
(iii) any law, statute, judgment, decree, order, rule or regulation applicable
to the Company or the Subsidiary of any arbitrator, court, administrative agency
or other governmental or regulatory official, agency authority or body
(including, without limitation, those having jurisdiction over environmental,
health or similar matters) having jurisdiction over the Company or the
Subsidiary or any of their activities or properties.
(m) No consent, approval, authorization, registration, qualification,
or order of, and no filing with, any court, administrative agency or other
government or regulatory official, agency, authority or body is required for the
issuance, delivery and sale of the Securities pursuant to this Agreement, the
Prospectus and the Registration Statement, the performance of this Agreement,
the Warrant Agreement and the Underwriters' Warrant Agreement and the
consummation of the transactions contemplated hereby, thereby, by the
Registration Statement and by the Prospectus, except such as have been or may be
obtained under the Act, state securities or "blue sky" laws and the rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection with
the Underwriters' purchase and distribution of the Securities.
(n) All material agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed or required to be
filed as exhibits to the
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Registration Statement to which the Company or the Subsidiary is a party or by
which it may be bound are accurately described and fairly present the
information required to be shown with respect thereto by Form SB-2; there are no
agreements, contracts or other documents which are required by the Act to be
described in the Registration Statement or filed as exhibits to the Registration
Statement which are not described or filed as required; and the exhibits which
have been filed are complete and correct copies of the agreements, contracts or
other documents of which they purport to be copies.
(o) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the Company,
nor the Subsidiary has done, or has agreed to do, any of the following,
(i) issued any securities or incurred any liability or obligation, direct,
indirect or contingent, for borrowed money, (ii) entered into any transaction
other than in the ordinary course of business or (iii) declared or paid any
dividend or made any other distribution on or in respect of any class of its
capital stock; and, subsequent to such dates, there has not been any change in
the capital stock or any change in the debt (long- or short-term) or liabilities
or obligations or any material change in the condition (financial or otherwise),
earnings, business affairs, position, prospects, shareholders, equity,
operations, properties, businesses or results of operations of the Company or
the Subsidiary except for debt, liabilities and obligations incurred in the
normal course of business consistent with past practices.
(p) No material default exists, and no event has occurred which, with
notice, lapse of time or both, would constitute a default in the due performance
and observance of any term, covenant, condition or provision of any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of trust,
voting trust agreement, shareholders' agreement, purchase order, note, loan or
credit agreement or any other material agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company or the Subsidiary is a party or by which it is or may be bound
or its properties or assets (tangible or intangible) are or may be subject.
(q) The Company and the Subsidiary have generally enjoyed a
satisfactory employer-employee relationship with their employees and they are in
substantial compliance with all federal, state and local laws, rules,
regulations and orders respecting employment and employment practices,
including, without limitation, terms and conditions of employment and wages and
hours. There are no pending investigations involving the Company or the
Subsidiary by the U.S. Department of Labor, the Department of Justice -
Immigration and Naturalization Service or any other governmental or regulatory
official, agency, authority
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<PAGE>
or body responsible for the enforcement of such federal, state or local laws,
rules, regulations and orders except as previously disclosed in writing to the
Underwriters or the Underwriters' Counsel, which matters are not required to be
disclosed in the Registration Statement. There is no unfair labor practice
charge or complaint pending, threatened or contemplated against the Company or
the Subsidiary before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending, threatened or
contemplated against or involving the Company or the Subsidiary and none has
ever occurred. There are no existing collective bargaining agreements with the
Company or the Subsidiary. No representation question exists respecting the
employees of the Company or the Subsidiary, and no collective bargaining
agreement or modification thereof is currently being negotiated by or on behalf
of the Company or the Subsidiary. No grievance or arbitration proceeding is
pending, threatened or contemplated under any expired collective bargaining
agreements of the Company or the Subsidiary. No labor dispute with the
employees of the Company or the Subsidiary is pending, threatened or
contemplated.
(r) Neither the Company nor the Subsidiary maintains, sponsors,
contributes, has any obligation to contribute or has any obligation with respect
to, or at any time previously maintained, sponsored, contributed, had any
obligation to contribute or had any obligation with respect to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan" or a "multi-employer plan" (each an "ERISA Plan"), as such terms
are defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), other than as
previously disclosed in writing to the Underwriters or to the Underwriters'
Counsel. Neither the Company nor the Subsidiary maintains, sponsors,
contributes, has any obligation to contribute or has any obligation with respect
to or at any time previously has maintained, sponsored, contributed, had any
obligation to contribute or had any obligation with respect to, a "defined
benefit plan," as defined in section 3(35) of ERISA. No ERISA Plan (or any
trust created thereunder) has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the code which could subject
the Company or the Subsidiary to any tax penalty on prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. Neither the Company nor the
Subsidiary is in any way liable in connection with a "multiemployer plan" from
which it has ever completely or partially withdrawn.
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<PAGE>
(s) Neither the Company nor the Subsidiary, nor any of the employees,
directors, shareholders or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing, has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act or otherwise, the illegal
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(t) Each of the Company and the Subsidiary own all trademarks, trade
names, service marks, service names, copyrights, patents and patent applications
or any licenses or rights to the foregoing, which, individually or in the
aggregate, are material to its condition (financial or otherwise), earnings,
business affairs, position, prospects, shareholders, equity, operations,
properties, businesses or results of operations, and, no such used trademarks,
trade names, service marks, service names, copyrights or patents are in dispute
or are in conflict with any right of any other person or entity.
(u) Each of the Company and the Subsidiary has the unrestricted right
to use all trade secrets, know-how (including, without limitation, all
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), inventions, technology, designs, processes, works of authorship,
computer programs and technical data and information that are material to the
development, manufacture, operation and sale of all products and services sold
or proposed to be sold by the Company and the Subsidiary, free and clear of and
without violating any right, lien or claim of others, including, without
limitation, former employers of their employees.
(v) The Company and the Subsidiary have good and marketable title to,
or valid and enforceable leasehold estates in, all items of real and personal
property owned or leased, by them.
(w) Corbin & Wertz, whose report is filed with the Commission as a
part of the Registration Statement, each Preliminary Prospectus and the
Prospectus, is an accounting firm of independent certified public accountants as
required by the Act and the Rules and Regulations.
(x) The Company has caused to be executed agreements pursuant to
which each of Vincent J. Bitetti and Eric H. Winston has agreed, for a period of
eighteen (18) months following the effective date of the Registration Statement,
not to, directly or indirectly, offer, offer to sell, sell, grant an option for
the purchase or sale of, transfer, assign, pledge, hypothecate or otherwise
encumber (whether pursuant to Rule 144 under the Act or otherwise) any
securities issued or issuable by the Company, whether or not owned by or
registered in the name of such person, or dispose of any interest therein,
without the
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prior written consent of the Underwriters (collectively, the "Lock-Up
Agreements"); provided that the Lock-Up Agreement of Eric H. Winston allows him
to sell no more than 10,000 shares of Common Stock during the term of the Lock-
Up Agreement without the prior written consent of the Underwriters, provided
that The Boston Group, L.P. is the broker for all sales of such shares. The
Company will cause its transfer agent to mark an appropriate legend on the face
of the stock certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
(y) There are no claims, payments, issuances, agreements,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's fee, brokerage fee, origination fee or otherwise with
respect to the offerings contemplated by this Agreement, the Underwriters'
Warrant Agreement, the Registration Statement and the Prospectus or any other
arrangements, agreements, understandings, payments or issuances that may affect
the Underwriters' compensation as determined by the NASD other than as disclosed
in the Registration Statement and Prospectus and other than as the Underwriters
may itself have agreed to with third parties.
(z) The Securities have been approved for quotation on the NASDAQ
SmallCap Market (the "SCM"), which has approved the Company's right to delay the
trading of the shares for two days after the Closing Date.
(aa) Neither the Company nor the Subsidiary, nor any officer,
shareholder, employee, agent nor any other person acting on behalf of the
Company or the Subsidiary has, directly or indirectly, given or agreed to give
any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or any official or employee of any
governmental agency or instrumentality of any government or any political party
or candidate for office or any other person who was, is or may be in a position
to help or hinder the business of the Company or the Subsidiary (or assist them
in connection with any actual or proposed transactions) which might subject the
Company or the Subsidiary, or any other such person to any damage or penalty in
any civil, criminal or governmental action, suit, inquiry, investigation,
litigation or proceeding.
(ab) Except as set forth in the Prospectus under "Certain
Transactions," no officer, director or shareholder of the Company or the
Subsidiary, and no affiliate or associate (as those terms are defined in the
Rules and Regulations) of any of the foregoing persons or entities, has or has
had, either directly or indirectly, (i) an interest in any person or entity
which (A) furnishes or sells services or products which are furnished or sold or
are proposed to be furnished or sold by the Company or the Subsidiary or
(B) purchases from or sells or
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<PAGE>
furnishes to the Company or the Subsidiary any products or services or (ii) a
beneficial interest in any contract, arrangement, understanding or agreement to
which the Company or the is a party or by which the Company or the Subsidiary or
any of its property or assets (tangible or intangible) may be bound or affected.
Except as set forth in the Prospectus under "Certain Transactions," there are no
existing agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company or the Subsidiary and any officer or director of the Company or the
Subsidiary or any person listed in the "Principal Shareholders" section of the
Prospectus, or any affiliate or associate of any of the foregoing persons or
entities.
(ac) The minute books of the Company and the Subsidiary have been made
available to the Underwriters, contain a complete summary of all meetings and
actions of the directors, including any committee thereof, and shareholders of
the Company and the Subsidiary since the time of their incorporation or
formation, as applicable, and reflect all transactions referred to in such
minutes accurately in all material respects.
(ad) Except as described in the Registration Statement, no person,
corporation, trust, partnership, association or other entity has the right to
include or register any securities of the Company in the Registration Statement
or to require that any registration statement be filed by the Company or, if
filed, to include any security in such registration statement. No person,
corporation, trust, partnership, association or other entity holds any
antidilution rights exercisable against the Company with respect to any
securities of the Company.
(ae) Any certificate signed by any officer of the Company or the
Subsidiary, and delivered to the Underwriters or to the Underwriters' Counsel
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(af) The Company has (i) entered into an employment agreement with
each of Vincent J. Bitetti, Eric H. Winston and Ulrich Gottschling in the forms
filed as Exhibits 10.1, 10.2 and 10.3, respectively, to the Registration
Statement, and (ii) purchased key-man life insurance on the life of each of
Vincent J. Bitetti, Eric H. Winston and Ulrich Gottschling in the amounts of
$5,000,000, $2,000,000 and $500,000, respectively, which policies name the
Company as the sole beneficiary thereof.
(ag) The Company has entered into a warrant agreement substantially in
the form filed as Exhibit 4.2 to the Registration Statement (the "Warrant
Agreement") with Corporate Stock Transfer Company in form and substance
satisfactory to the
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Underwriters, with respect to the Redeemable Warrants and providing for the
payment of commissions contemplated by Section 4(ab) hereof. The Warrant
Agreement has been duly and validly authorized by the Company and, assuming due
execution by the parties thereto other than the Company, constitutes a valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law).
(ah) Each Redeemable Warrant that is a Non-Affiliated Warrant has been
automatically converted into a Redeemable Warrant without any action by the
holder thereof and all of such Redeemable Warrants, as converted (and the shares
of Common Stock underlying such Redeemable Warrants, as converted), have been
registered in the Registration Statement.
(ai) The Company has entered or will enter into the Underwriters'
Warrant Agreement, substantially in the form filed as Exhibit 4.3 to the
Registration Statement, with the Underwriters. The Underwriters' Warrant
Agreement has been duly and validly authorized by the Company and, assuming due
execution by the Underwriters, constitutes or will constitute a valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law). The Company shall at all times following the Closing Date have reserved
and available for issuance a sufficient number of shares of Common Stock to be
issued upon exercise of the Underwriters' Warrant.
(aj) The Company will apply the proceeds from the sale of the
Securities in the manner set forth in the Prospectus under the caption "Use of
Proceeds."
(ak) The Company is familiar with the Investment Company Act of 1940,
as amended (the "1940 Act"), and the rules and regulations thereunder, and has
in the past conducted, and intends in the future to conduct, its affairs in such
a manner as to ensure that it will not become an "investment company" within the
meaning of the 1940 Act and such rules and regulations.
(al) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the
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transactions and dispositions of the assets of the Company and the Subsidiary.
The system of internal accounting controls maintained by the Company and the
Subsidiary is sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary (A) to permit preparation of
financial statements and (B) to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any difference.
2. REPRESENTATIONS AND WARRANTIES OF BITETTI
With respect to the shares (the "Shares") to be sold by him, Bitetti hereby
represents and warrants to, and covenants and agrees with, each of the
Underwriters as of the date hereof, and as of the Option Closing Date in which
his Shares are sold, as follows:
(a) He has full legal right, power and authority to enter into this
Agreement and to sell and deliver his Shares to the Underwriters. This
Agreement constitutes his legal, valid and binding agreement enforceable against
him in accordance with its terms (except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law).
(b) He has, and on the applicable Option Closing Date will have,
good, valid and marketable title to the Shares; and upon the delivery of and
payment for the Shares, good, valid and marketable title thereto, free and clear
of all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, will pass to
the Underwriters.
(c) Neither the execution, delivery or performance of this Agreement,
the delivery and sale of the Shares nor the consummation of the transactions
contemplated by this Agreement, the Registration Statement and the Prospectus
conflicts or will conflict with or results or will result in any breach or
violation of any of the terms, covenants, conditions or provisions of, or
constitutes or will constitute (with notice, the lapse of time or both) a
default under, or results or will result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon any of his property or assets
(tangible or intangible) pursuant to the terms
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of, (i) any agreement, (ii) any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
purchase order, note, loan or credit agreement or any other material agreement
or instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which he is a party or by which he is or may be bound
or to which any of his properties or assets (tangible or intangible) is or may
be subject or (iii) any law, statute, judgment, decree, order, rule or
regulation applicable to him of any arbitrator, court, administrative agency or
other governmental official, agency, authority or body (including, without
limitation, those having jurisdiction over environmental, health or similar
matters) having jurisdiction over him or any of his activities or properties.
(d) Neither he nor any of his affiliates (within the meaning of the
Rules and Regulations) have taken, or will take, directly or indirectly, any
action designed to or which has constituted or which might be expected to cause
or result in, under the Exchange Act or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares or otherwise.
(e) He has duly delivered to the Company as his attorney-in-fact,
certificates evidencing the Shares, duly executed blank stock powers with
respect thereto and a duly executed power of attorney authorizing the Company to
deliver such certificates as part of, and in accordance with, the transactions
contemplated hereby. Such stock powers and powers of attorney are in form and
substance satisfactory to the Underwriters.
(f) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding pending,
contemplated or threatened (or circumstances that may give rise to the same), to
which he is subject or to which any of his property or assets (tangible or
intangible) is subject (or circumstances that may give rise to the same) which
questions the validity of this Agreement or of any action or transaction
contemplated by this Agreement, the Registration Statement or the Prospectus.
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters the Firm Securities, and
each of the Underwriters agrees, severally and not jointly, to purchase from the
Company that number of the Firm Securities set forth opposite such Underwriter's
name, in Schedule I at a price equal to $3.60 per share of Common Stock and
$.025 per Redeemable Warrant.
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(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company and Bitetti hereby grant an option to
the Underwriters to purchase all or any part of their respective Option
Securities at a price equal to $3.60 per share of Common Stock and $.025 per
Redeemable Warrant. In the event the Option is exercised for less than all of
the Option Securities, the Underwriters shall first purchase all of the Option
Securities held by Bitetti before purchasing any of the Option Securities from
the Company. The Option Securities shall be purchased, if the Option is
exercised as provided herein, from the Company and/or Bitetti, for the accounts
of the several Underwriters, severally and not jointly, in proportion to the
aggregate number of Firm Securities set forth opposite such Underwriter's name
in Schedule I, except that the respective purchase obligations of each
Underwriter may be adjusted by the Underwriters so that no Underwriter shall be
obligated to purchase fractional Option Securities. The option granted hereby
will expire, to the extent unexercised, forty-five (45) days after the date
hereof, and may be exercised, in the Underwriters' sole discretion, in whole or
in part from time to time, only for the purpose of covering overallotments which
may be made in connection with the offering and distribution of the Firm
Securities, upon notice by the Underwriters to the Company and Bitetti setting
forth the number of Option Securities as to which the Underwriters are then
exercising the option and the time and date of payment for and delivery of any
such Option Securities. Any such time and date of delivery (an "Option Closing
Date") shall be determined by the Underwriters, but shall not be later than five
(5) full business days after the exercise of said option, or in any event prior
to the Closing Date, unless otherwise agreed upon by the Underwriters and the
Company. Nothing herein contained shall in any way obligate the Underwriters to
exercise the option granted hereby. No Option Securities shall be delivered
unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
evidencing, the Firm Securities shall be made at the offices of The Boston
Group, L.P. at 1999 Avenue of the Stars, Suite 2550, Los Angeles, California, or
at such other place as shall be agreed upon by the Underwriters and the Company.
Such delivery and payment shall be made at 9:30 a.m. (Los Angeles time) on July
2, 1996 or at such other time and date as shall be agreed upon by the
Underwriters and the Company (such time and date of payment and delivery being
herein called the "Closing Date"). In addition, in the event that any or all of
the Option Securities are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option
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Securities shall be made at the above-mentioned office of The Boston Group, L.P.
or at such other place as shall be agreed upon by the Underwriters and the
Company with respect to each applicable Option Closing Date as specified in the
relevant notice from the Underwriters to the Company. Delivery of the
certificates representing the Firm Securities and the Option Securities, if any,
shall be made to the Underwriters against payment by the Underwriters of the
purchase price for the Firm Securities and the Option Securities, if any,
respectively, to the order of the Company, or to the order of Bitetti with
respect to the Shares sold by him, by certified or official bank checks payable
in Los Angeles Clearing House funds (next day funds). Certificates representing
the Firm Securities and the Option Securities, if any, respectively, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Underwriters may
request in writing at least two (2) business days prior to the Closing Date or
the relevant Option Closing Date, as the case may be. The certificates
representing the Firm Securities and the Option Securities, if any, shall be
made available to the Underwriters at such offices or such other place as the
Underwriters may designate for inspection, checking and packaging no later than
9:30 a.m. Los Angeles time on the last business day prior to the Closing Date or
the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to each of
you, individually and not in your capacities as the Underwriters, or to your
designees, the Underwriters' Warrants for an aggregate purchase price of fifty
dollars ($50), which warrants shall entitle the holders thereof to purchase an
aggregate of an additional two hundred forty thousand (240,000) shares of Common
Stock and one hundred twenty thousand (120,000) Redeemable Warrants. The
Underwriters' Warrants shall be issued pursuant to the Underwriters' Warrant
Agreement, substantially in the form filed as Exhibit 4.3 to the Registration
Statement. Payment for the Underwriters' Warrants shall be made on the Closing
Date. The Underwriters' Warrants and the Securities underlying them shall be
registered in the Registration Statement and such Registration Statement shall
be kept effective as required by the Underwriters' Warrant Agreement.
4. PUBLIC OFFERING OF THE SECURITIES. As soon after the Registration
Statement becomes effective as the Underwriters deems advisable, the
Underwriters shall make a public offering of the Firm Securities and such of the
Option Securities as the Underwriters may determine at the initial price and
upon the other terms set forth in the Prospectus. The Underwriters may from
time to time increase or decrease the public offering price of the Securities
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to such extent as the Underwriters, in their sole discretion, deem advisable.
The Underwriters may enter into one or more agreements as they, in their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
5. COVENANTS AND AGREEMENTS OF THE COMPANY, BITETTI AND WINSTON. The
Company, Bitetti and Winston, jointly and severally, covenant and agree with
each of the Underwriters as follows:
(a) The Company, Bitetti and Winston shall use their best efforts to
cause the Registration Statement and any amendments thereto to become effective
as promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or the Exchange Act before termination of the offering of the
Securities to the public by the Underwriters of which the Underwriters shall not
previously have been advised and furnished with a copy or to which the
Underwriters shall have reasonably objected (unless the Company's outside
counsel reasonably determines in a written opinion that such amendment or
supplement is required to be filed pursuant to applicable law) or which is not
in compliance with the Act, the Exchange Act or the Rules and Regulations. The
Company and Bitetti shall use their best efforts to maintain the effectiveness
of the Registration Statement (by filing supplements or post-effective
amendments or as otherwise may be required under the Act and the Rules and
Regulations) until the earlier of (i) the date that all Redeemable Warrants have
either been exercised or redeemed and all of the Non-Affiliated Securities have
been sold; and (ii) the date which is five years after the Effective Date.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriters and confirm the same in writing
(i) when the Registration Statement, as amended, becomes effective, when any
post-effective amendment to the Registration Statement becomes effective and, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A, (ii) of the
issuance by the Commission or any State or other regulatory body of any stop
order or other order, or of the initiation or the
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threat or contemplation of any proceeding, the outcome of which may result in
the suspension of the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (iii) of the issuance by the Commission or any
State or other regulatory body of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation or the threat or contemplation of any proceeding for that
purpose, (iv) of the receipt of any comments from the Commission and (v) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If the
Commission or any state or other regulatory body shall enter a stop order or
other order suspending the effectiveness of the Registration Statement or
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or suspend such
qualification at any time, the Company will make every effort to obtain promptly
the lifting of such order or suspension.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriters) with the Commission, or transmit the
Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) under the Act (or, if applicable and
if consented to by the Underwriters, pursuant to Rule 424(b)(4)) within the time
period specified in Rule 424(b)(1) (or if applicable, Rule 424(b)(4)) or shall
deliver and shall file with the Commission a Term Sheet (in form and substance
satisfactory to the Underwriters) in accordance with Rule 434 under the Act.
(d) The Company will give the Underwriters notice of its intention to
file or prepare any amendment to the Registration Statement (including any post-
effective amendments) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) under the Act), and will furnish the
Underwriters with copies of any such amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such amendment or supplement to which the Underwriters or Jeffer,
Mangels, Butler & Marmaro, LLP, the Underwriters' counsel (the "Underwriters'
Counsel"), shall reasonably object unless the Company's outside counsel
reasonably determines in a written opinion that such amendment or supplement is
required to be filed pursuant to applicable law.
(e) The Company shall use its best efforts, at or prior to the time
the Registration Statement becomes effective, to qualify the Securities for
offering and sale under the securities or "blue sky" laws of such jurisdictions
as the Underwriters may reasonably designate to permit the continuance of sales
and dealings therein for as long as may be necessary to complete the
distribution, and shall make such applications, file such documents and furnish
such information as
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may be required for such purpose; PROVIDED, HOWEVER, the Company shall not be
required to qualify as a foreign corporation or to execute a general consent to
service of process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will use its best efforts to file
and make such statements or reports at such times as are or may be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall comply with all requirements imposed upon it by
the Act and the Exchange Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or supplements thereto.
If at any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of the Company or counsel for the Company or the Underwriters or the
Underwriters' Counsel, the Prospectus, as then amended or supplemented, would
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances in which they were made, not misleading, or if
it is necessary at any time to amend or supplement the Prospectus to comply with
the Act, the Company will promptly notify the Underwriters and prepare and file,
at the Company's expense, with the Commission an appropriate amendment or
supplement to the Registration Statement or an amendment or supplement to the
Prospectus which will correct such statement or omission, or effect such
compliance, each such amendment or supplement to be reasonably satisfactory to
the Underwriters and the Underwriters' Counsel, and the Company will furnish to
the Underwriters copies of such amendment or supplement as soon as available and
in such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than forty-
five (45) days after the end of the twelve (12) month period beginning after the
effective date of the Registration Statement occurs, the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) under the Act, and to the Underwriters, an earnings statement which will
comply with the provisions of Section 11(a) of the Act and Rule 158(a)
promulgated under the Act.
(h) During the five (5) year period commencing on the date hereof, so
long as the Company has securities which are registered under the Act or the
Exchange Act or otherwise publicly tradeable and Common Stock continues to be
outstanding, the Company, at its expense, will furnish to its shareholders, as
soon as practicable, annual reports (including financial
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statements audited by independent certified public accountants) and unaudited
quarterly reports for each of the first three (3) fiscal quarters of the Company
(such reports, whether or not the Company is then subject to the periodic
reporting requirements of the Exchange Act, are to be in conformity with the
requirements of the Exchange Act) and will deliver to the Underwriters:
(i) concurrently with furnishing such quarterly reports to its
shareholders, statements of income of the Company for such quarter in the form
furnished to the Company's shareholders and certified by the Company's principal
financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, shareholders' equity and
cash flows of the Company for such fiscal year, accompanied by a copy of the
report thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD, Nasdaq
or any securities exchange;
(v) as soon as they are available, all press releases,
material news items or articles of interest to the financial community in
respect of the Company or the Subsidiary or their affairs which are released or
prepared by or on behalf of the Company or the Subsidiary; and
(vi) any additional information of a public nature concerning
the Company and the Subsidiary or their businesses which the Underwriters may
request.
During such five (5) year period, if the Company has active subsidiaries or
is a partner in any venture, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries (including any venture of which it is a partner) are consolidated,
and will be accompanied by similar financial statements for any significant
subsidiary (as defined in the Rules and Regulations) which is not so
consolidated.
(i) The Company will maintain a transfer and warrant agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for the Common Stock.
(j) The Company will furnish to the Underwriters, without charge and
at such place
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as the Underwriters may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which will be signed and will include all financial statements
and exhibits, one for the Underwriters and one for the Underwriters' Counsel),
the Prospectus, and all amendments and supplements thereto, including any
prospectus prepared after the effective date of the Registration Statement and
any Term Sheet, in each case as soon as available and in such quantities as the
Underwriters may request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Underwriters with true copies of valid, duly
executed, legally binding and enforceable Lock-Up Agreements. On or before the
Closing Date, the Company shall deliver instructions to its transfer agent
authorizing such transfer agent to place appropriate legends on the certificates
representing the securities subject to the Lock-Up Agreements and to place
appropriate stop transfer orders on the Company's ledgers. The Company agrees
that, for a period of twelve (12) months commencing with the effective date of
the Registration Statement, except as contemplated hereby, it shall not, without
the prior written consent of the Underwriters, issue, sell, grant an option for
the sale of, assign, transfer, pledge, distribute or otherwise dispose of,
directly or indirectly, or agree or offer to do any of the foregoing, any shares
of Common Stock or any option, warrant or other contract right or security
convertible, directly or indirectly, into shares of Common Stock, other than
grants of options under the 1995 Plan as described (including, without
limitation, as to the maximum number of shares of Common Stock issuable
thereunder) in the Registration Statement and the issuance of shares of Common
Stock upon the exercise of options granted under the 1995 Plan.
(l) Neither the Company nor any of its officers, directors,
shareholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to illegally stabilize or
manipulate the price of any securities of the Company or which might be expected
to cause or result in, under the Exchange Act or otherwise, the illegal
stabilization or manipulation of the price of any security of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities offered to the public in the manner set forth under the caption "Use
of Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company (other
than repayment of the Company's existing indebtedness).
(n) The Company shall timely file all registrations, reports, forms
or other documents as may be required (including, without limitation, any Form
SR required by
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Rule 463 under the Act) from time to time under the Act, the Exchange Act and
the Rules and Regulations, all such registrations, reports, forms and other
documents shall comply as to form and substance with the applicable requirements
under the Act, the Exchange Act and the Rules and Regulations. The Company
shall promptly provide to the Underwriters and, upon request, the Underwriters
copies of such registrations, regulations, reports, forms or other documents.
(o) The Company shall furnish to the Underwriters as early as
practicable prior to the date hereof, the Closing Date and each Option Closing
Date, if any, but no later than two (2) full business days prior thereto, a copy
of the latest available unaudited combined interim financial statements of the
Company (which in no event shall be as of a date more than forty-five (45) days
prior to the date hereof, the Closing Date or the relevant Option Closing Date,
as the case may be) which have been read by the Company's independent certified
public accountants, as stated in their letters to be furnished pursuant to
Sections 7(i) and 7(k) hereof.
(p) The Company shall cause the Securities to be quoted on the SCM or
some other nationally recognized stock exchange immediately upon issuance of the
Securities. Promptly upon becoming eligible for listing on the Pacific Stock
Exchange or on the Nasdaq National Market, the Company will apply for listing
the Securities on either the Pacific Stock Exchange or the Nasdaq National
Market, as determined by the Underwriters. For a period of five (5) years from
the date hereof, the Company shall maintain the appropriate Nasdaq or stock
exchange listing of the Securities so long as the Company continues to have
securities registered under the Act or the Exchange Act or otherwise publicly
tradeable and Securities Stock continue to be outstanding and shall comply with
all registration, filing, reporting and other requirements of Nasdaq or such
stock exchange, which may from time to time be applicable to the Company.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish or cause to be furnished to the Underwriters, upon any and all
reasonable requests of the Underwriters and at the Company's sole expense,
(i) daily consolidated transfer sheets relating to the Common Stock and (ii) a
list of holders of all of the Company's securities.
(r) For a period of five (5) years from the Closing Date, so long as
the Company continues to have securities registered under the Act or the
Exchange Act or otherwise publicly tradeable and Common Stock continues to be
outstanding, the Company shall, at the Company's sole expense, (i) provide the
Underwriters, upon any and all reasonable requests of the Underwriters, with a
"blue sky
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trading survey" for secondary sales of the Company's securities prepared by
counsel to the Company, and (ii) take all necessary and appropriate actions to
further qualify the Company's securities in all jurisdictions of the United
States in order to permit secondary sales of such securities pursuant to the
securities or "blue sky" laws of those jurisdictions, PROVIDED, HOWEVER, that
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction. In the
event that the Company does not comply with the provisions of this Section 5(r),
the Company authorizes the Underwriters' Counsel to take all necessary and
appropriate actions to comply with the provisions of this section 5(r), at the
company's sole expense payable in advance, provided that in no event shall the
Company be obligated for expenses in excess of five thousand dollars ($5,000).
(s) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, the
Company shall file a Form 8-A with the Commission providing for the registration
under the Exchange Act of the Securities, which registration shall become
effective concurrently on such effective date, and (ii) but in no event more
than one hundred twenty (120) days after the effective date of the Registration
Statement, the Company shall take all necessary and appropriate actions to be
included in Standard & Poor's Corporation Manual and Moody's Investors Services,
Inc. Manual and to continue such inclusion for a period of not less than seven
(7) years so long as the Company has securities which are registered under the
Act or the Exchange Act or otherwise publicly tradeable and Common Stock
continues to be outstanding.
(t) The Company hereby agrees that it will not, for a period of
thirty six (36) months commencing with the effective date of the Registration
Statement, without the Underwriters' written approval, (i) adopt, propose to
adopt or otherwise permit to exist, except to the extent outstanding or
committed to on the Closing Date and disclosed in the Prospectus, any employee,
officer, director, consultant or compensation plan, agreement, understanding or
arrangement permitting the grant, issue, sale or entry into any agreement,
understanding or arrangement to grant, issue or sell any option, warrant or
other contract right (x) at an exercise price that is less than the greater of
the initial public offering price of the Securities as set forth herein and the
fair market value per share of Common Stock on the date of grant or sale or
(y) to any of its executive officers or directors or to any holder of five
percent (5%) or more of the Common Stock as the result of the exercise or
conversion of equivalent securities, including, without limitation, options,
warrants or other contract rights or securities convertible, directly or
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indirectly, into shares of Common Stock; (ii) permit the maximum number of
shares of Common Stock or other securities of the Company purchasable at any
time pursuant to options, warrants or other contract rights or securities
convertible, directly or indirectly, into shares of Common Stock to exceed ten
percent (10%) of the outstanding shares (excluding for purposes of this
calculation the Redeemable Warrants, Underwriters' Warrants, ASSI Warrants and
ASSI Loan Warrants) unless such action is approved by at least three independent
directors of the Company; (iii) permit the payment for such securities,
including, without limitation, upon the exercise of any option, warrant or other
contract right upon the conversion of any security convertible, directly or
indirectly, into shares of Common Stock, with any form of consideration other
than cash (other than payments made pursuant to, and in accordance with, the
1992 Plan, the 1995 Plan and the ASSI Loan Warrants); or (iv) permit the
existence of stock appreciation rights, phantom options or similar arrangements.
The provisions of this Section 5(t) shall not apply to grants, issuances or
sales to, or agreements with, the Underwriters or you, individually and not in
your capacities as the Underwriters, the exercise of outstanding options under
the 1992 Plan or held by Winston, grants to and exercises of options of members
of the Company's Stock Option Committee pursuant to, and in accordance with, the
1995 Plan, or the exercise of the Redeemable Warrants, the ASSI Warrants or the
ASSI Loan Warrants.
(u) Until the completion of the distribution (as such term would be
applied under Rule 10b-6 promulgated under the Exchange Act) of the Firm
Securities and, if applicable, the Option Securities to the public, the Company
shall not, without the prior written consent of the Underwriters, issue,
directly or indirectly, any press release or other communication or hold any
press conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations or except as required by law as advised to the Company by
its outside counsel.
(v) Prior to the earlier of (i) the date which is seven (7) years
from the date hereof and (ii) the date of the completion of the sale to the
public of all of the Underwriters' Securities, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration under the Act of the
Underwriters' Securities.
(w) For a period of five (5) years after the effective date of the
Registration Statement, the Company shall cause one (1) individual selected from
time-to-time by The Boston Group, L.P. and one (1) individual selected from time
to time by Joseph Stevens & Company, L.P., to be nominated as directors of the
Company, if requested by you. Vincent J. Bitetti and Eric H. Winston hereby
agree to vote all shares of Common Stock held of record or beneficially by
either of them in favor of each of your nominees. The Company shall provide you
with reasonable
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notification of any meeting of the Company's board of directors held expressly
for the purpose of nominating directors to the Company's board of directors so
as to allow each of you adequate time to select, if desired, an individual to be
nominated as a director of the Company. In the event that either of you shall
not have designated such individual at the time of any meeting of the Company's
board of directors held expressly for the purpose of nominating directors to the
Company's board of directors or in the event that such individual has not been
elected or is unavailable to serve, the Company shall provide you with
reasonable notification of each meeting of its board of directors and, in such
event, an individual selected by you shall be permitted to attend all meetings
of the Company's board of directors as a non-voting advisor and to receive all
notices and other correspondence and communications sent by the Company to
members of its board of directors. Such director or advisor shall receive no
more or less compensation than is paid to other non-officer directors of the
Company for attendance at meetings of the Company's board of directors, and such
director or advisor shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings, including, without
limitation, food, lodging and transportation in accordance with the policy
established by the independent members of the Board of Directors. The Company
hereby agrees to indemnify and hold such director or advisor harmless, to the
maximum extent permitted by law, against any and all actions, suits,
proceedings, inquiries, arbitrations, investigations, litigation, governmental
or other proceedings and awards and judgments arising out of such individual's
service as a director or advisor and, in the event the Company maintains a
liability insurance policy affording coverage for the acts of its officers or
directors, and/or in the event that the Company has entered into an
indemnification agreement with any of its officers or directors, the Company
agrees to include such director or advisor as an insured under such insurance
policy and/or to enter into an indemnification agreement with such director or
advisor which is at least as favorable to such individual as any indemnification
agreement that the Company has entered into with any of its officers or
directors. The rights and benefits of such indemnification and the benefits of
such insurance shall, to the maximum extent possible, extend to you insofar as
you may be or may be alleged to have any obligation or liability in connection
with an action or inaction of such director or advisor.
(x) For a period of thirty-six (36) months after the effective date
of the Registration Statement, the Company shall not, without the written
consent of the Underwriters, restate, amend, modify or otherwise alter any term
of any written employment, consulting or similar agreement entered into between
the Company and any officer, director or key employee as of the effective date
of the Registration Statement in a manner which is more favorable to such
officer, director or key employee. For a period of thirty-six (36) months from
the effective date of the Registration Statement, neither the Company
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nor the Subsidiary shall enter into a written employment, consulting or similar
agreement with any officer, director or key employee with whom the Company has
entered into a written employment, consulting or similar agreement as of the
effective date of the Registration Statement other than the renewal of such
agreement on terms which are no more favorable to such officer, director or key
employee unless agreed upon in writing by the Underwriters.
(y) For a period of seven (7) years from the effective date of the
Registration Statement, the Company and all of its subsidiaries shall obtain and
maintain insurance policies, including, without limitation, general liability,
property, and personal liability insurance, and surety bonds which insure such
entities, their employees and patrons and such other persons to whom such
entities may become liable against such losses and risks generally insured
against by comparable businesses.
(z) For a period of five (5) years from the date hereof, the Company
will retain Corbin & Wertz (or such other nationally-recognized accounting firm
qualified to practice in front of the Commission as is reasonably acceptable to
the Underwriters) as its independent certified public accountants and, during
such period, the Company will promptly submit to the Underwriters copies of all
accountant's management reports, Company representation letters and similar
correspondence between the Company's accountants and the Company.
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(aa) The Company hereby appoints the Underwriters as the exclusive
solicitation agents for the Redeemable Warrants, and hereby agrees to pay the
Underwriters a commission equal to five percent (5%) of the exercise price of
the Redeemable Warrants, payable on the date of the exercise thereof on terms
provided in the Warrant Agreement. The Company will not solicit the exercise of
the Redeemable Warrants other than through the Underwriters.
6. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay (such payment to be made on the
Closing Date as part of the closing on such date and on each Option Closing Date
as part of the closing on such date (to the extent not paid on the Closing Date
or a previous Option Closing Date)) all expenses and fees (other than fees of
the Underwriters' Counsel not specifically provided for in this Section 6)
incident to the issuance, offer, sale and delivery of the Securities and the
performance of the obligations of the Company under this Agreement, the Warrant
Agreement and the Underwriters' Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of each Preliminary Prospectus, the Registration Statement and the
Prospectus and any amendments and supplements thereto and the printing, mailing
(including the payment of postage with respect thereto) and delivery of this
Agreement, the Warrant Agreement, all other underwriting documents, the
Underwriters' Warrant Agreement and agreements with selected dealers, and
related documents, including the cost of all copies thereof and of each
Preliminary Prospectus and of the Prospectus and any amendments thereof or
supplements thereto supplied to each of the Underwriters and such dealers as the
Underwriters may request, in such quantities as the Underwriters may reasonably
request, (iii) all costs and expenses (including issue and transfer taxes)
incurred in connection with the printing,
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engraving, issuance, sale and delivery of the shares, including (x) the purchase
by each of the Underwriters, severally and not jointly, of the number of the
Securities from the Company set forth opposite its name on Schedule I, (y) the
consummation by the Company of any of its obligations under this Agreement, the
Warrant Agreement and the Underwriters' Warrant Agreement and (z) the resale of
the Securities by each of the Underwriters in connection with the distribution
contemplated hereby, (iv) all costs and expenses incurred in connection with the
qualification of the Securities under state securities or "blue sky" laws and
the determination of the status of such securities under legal investment laws,
including the fees of Jeffer, Mangels, Butler & Marmaro, LLP in connection with
such determinations, filings, documents and qualifications and including the
costs of printing and mailing the "Preliminary Blue Sky Memorandum," the
"Supplemental Blue Sky Memorandum" and the "Legal Investments Survey," if any,
(v) the fees incurred in connection with any required filing with the NASD,
(v) all advertising costs and expenses, including costs and expenses in
connection with "road shows," information meetings and presentations, bound
volumes and prospectus memorabilia and "tombstone" advertisements, (vi) all
costs and expenses incurred in connection with due diligence investigations by
an independent third party, subject to the Company's prior approval which shall
not be unreasonably withheld, including the fees of any independent counsel
(other than Jeffer, Mangels, Butler & Marmaro, LLP) or consultants, (vii) the
fees and expenses of a transfer agent and registrar for the Securities,
(viii) the fees payable to the Commission and (ix) the fees and expenses
incurred in connection with the listing of the Securities on the SCM and any
other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or 11 hereof, by the Underwriters in accordance
with a reasonable application of Section 10(a) hereof or the transactions
contemplated hereby are not consummated by the Company for any reason, the
Company shall reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including, without limitation, all of the fees and
disbursements of Underwriters' Counsel (including, without limitation, the fees
of the Underwriters' Counsel specifically provided for herein).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to Section 6(a) hereof, it will pay to each of you,
individually and not in your capacities as the Underwriters, on the Closing Date
by certified or bank cashier's check, or, at your election, by deduction from
the proceeds of the offering of the Firm
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Securities, a non-accountable expense allowance equal to an aggregate of three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities. In the event the Underwriters elect to exercise all or any
part of the over-allotment option described in Section 3(b) hereof, the Company
(and Bitetti with respect to the Shares sold by him) further agrees to pay to
each of you, individually and not in your capacities as the Underwriters, on
each Option Closing Date, by certified or bank cashier's check, or, at your
election, by deduction from the proceeds of the Option Securities purchased on
such Option Closing Date, a non-accountable expense allowance equal to an
aggregate of three percent (3%) of the gross proceeds received by the Company
(or Bitetti with respect to the Shares sold by him) from the sale of such Option
Securities.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of each
of the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date and each Option Closing Date, if
any, of the statements of officers of the Company made and certificates of
officers of the Company delivered pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of all of its covenants and obligations hereunder and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Underwriters, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceedings for that purpose shall have been initiated or shall be
pending, threatened or contemplated by the Commission or any State or other
regulatory body and any request on the part of the Commission or any State or
other regulatory body for additional information shall have been complied with
to the reasonable satisfaction of the Underwriters and the Underwriters'
Counsel. If the Company has elected to rely upon Rule 430A under the Act, the
price of the Securities and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) under the
Act within the prescribed time period or shall have been delivered and shall
have been filed with the Commission as required by Rule 434 under the Act, as
applicable, and, prior to the Closing Date, the Company shall have provided
evidence satisfactory to the Underwriters of such timely filing, or a post-
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effective amendment providing such information shall have been promptly filed
and declared effective in accordance with the requirements of Rule 430A under
the Act. Neither the Registration Statement nor the Prospectus nor any
amendment thereto or supplement thereof (including a Term Sheet) shall have been
filed to which the Underwriters shall have reasonably objected after it shall
have had the chance to review such amendment or supplement unless the Company's
outside counsel reasonably determines in a written opinion that such amendment
or supplement is required to be filed pursuant to applicable law.
(b) No Underwriter shall have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriters' opinion, is material, or omits to state a
fact which, in the Underwriters' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or that the Prospectus,
or any amendment or supplement thereto, contains an untrue statement of fact
which, in the Underwriters' opinion, is material, or omits to state a fact
which, in the Underwriters' opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriters shall have
received from the Underwriters' Counsel such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and such other related matters as the
Underwriters may request and the Underwriters' Counsel shall have received such
papers and information as it may request in order to enable it to pass upon such
matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of McDermott, Will Emery, counsel to the Company, dated the
closing Date, addressed to the Underwriters, in form and substance satisfactory
to the Underwriters' Counsel and subject to customary, qualifications and
conditions, to the effect that:
(i) each of the Company and the Subsidiary (A) is validly
existing as a corporation in good standing under the laws of the respective
jurisdiction of its incorporation or formation (B) is duly qualified and
licensed and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified and licensed would have a material adverse
affect upon the business of the Company and the Subsidiary taken as a whole, and
(c) has all requisite corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus;
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(ii) to such counsel's knowledge, the Company and the Subsidiary
hold all licenses and permits required for the conduct of their respective
businesses under federal law, California state law and the Delaware General
Corporation Law, all of which licenses and permits are in full force and effect,
except where the failure to hold such license or permit would not have a
material adverse effect on the business of the Company or the Subsidiary taken
as a whole;
(iii) the Company owns of record one hundred percent (100%) of
the outstanding capital stock of the Subsidiary; and to such counsel's knowledge
neither the Company nor the Subsidiary owns any other interest in any
corporation, partnership, joint venture, trust or other business entity;
(iv) the Company has a duly authorized, issued and outstanding
capital as set forth in the Prospectus, and any amendment or supplement thereto,
under the heading "Capitalization" and "Description of Securities" and will have
the adjusted capital set forth therein on the Closing Date and the Option
Closing Date, if any, based upon the assumptions set forth therein; and, to such
counsel's knowledge, neither the Company nor any Subsidiary is a party to or
bound by any instrument, agreement or other arrangement or understanding
providing for or requiring it to issue any capital stock, rights, warrants,
options or other securities, except as described in the Registration Statement
and the Prospectus. The Securities conform in all material respects to all
statements with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding capital stock of the Company and the
Subsidiary have been duly authorized and validly issued and are fully paid and
non-assessable (provided, that no opinion need be expressed as to the
approximately 15,000 shares of Common Stock issued in connection with the
formation of the Company prior to April 1, 1994 and outstanding as of March 31,
1996); and none of such securities was issued in violation of the preemptive or
other similar rights of any holders of any security of either the Company or the
Subsidiary. To such counsel's knowledge, except as described in the Prospectus,
the Company has not entered into any agreements or understandings pursuant to
which any third party has the right to acquire from the Company any securities
of the Subsidiary owned by the Company. The Securities are not and will not be
subject to any preemptive or other similar rights of any shareholder, have been
duly authorized and, when issued, paid for and delivered in accordance with the
terms hereof, the Warrant Agreement or the Underwriters' Warrant Agreement, as
applicable, will be validly issued, fully paid and nonassessable; and the
certificates representing the Securities are in due and proper form. The
Underwriters' Warrants constitute valid and binding obligations of the Company
to issue and sell, upon exercise thereof and payment therefor, the number and
type of securities of the Company called for thereby, which obligations are
enforceable against the Company in accordance
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with their terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable principles
in any action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law).
(v) the Registration Statement has become effective under the
Act, and, if applicable filing of all pricing information has been timely made
in the appropriate form under Rule 430A under the Act or under Rule 434 under
the Act, and to our knowledge no stop order suspending the use of the
Preliminary Prospectus, the Registration Statement or the Prospectus or any part
of any thereof or suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending, threatened or contemplated under the Act;
(vi) each Preliminary Prospectus, the Registration Statement and
the Prospectus, and any amendments or supplements thereto (other than the
financial statements and schedules and other financial and statistical data
included therein or omitted therefrom, as to which no opinion need be rendered),
comply as to form in all material respects with the requirements of the Act and
the Rules and Regulations;
(vii) to such counsel's knowledge: (A) there are no agreements,
contracts or other documents required by the Act to be described in the
Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
and the Prospectus and filed as exhibits to the Registration Statement; (B) such
agreements, contracts and other documents as are described in the Registration
Statement and the Prospectus are fairly summarized in all material respects; (C)
except as set forth in the Registration Statement and the Prospectus; there are
no proceedings pending or threatened against the Company or the Subsidiary or
their respective properties or assets;
(viii) the Company has full legal right, power and authority
under its Certificate of Incorporation and Bylaws, to authorize, issue, deliver
and sell the Securities, to enter into each of this Agreement, the Warrant
Agreement and the Underwriters' Warrant Agreement, and to consummate the
transactions contemplated herein, therein, in the Registration Statement and in
the Prospectus; and each of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement has been duly authorized, executed and delivered
by the Company. Each of this Agreement, the Warrant Agreement and the
Underwriters' Warrant Agreement, assuming due authorization, execution and
delivery by the parties thereto other than the Company, constitutes a legal,
valid and binding agreement of the Company,
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enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law). Neither the issuance,
delivery and sale of the Securities, execution, delivery or performance of this
Agreement, the Warrant Agreement and the Underwriters' Warrant Agreement, the
consummation of the transactions contemplated herein, therein, in the
Registration Statement and in the Prospectus, or the conduct of the Company's
business as described in the Registration Statement the Prospectus and any
amendments or supplements thereto conflicts or will conflict with, or results or
will result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute (with notice, the lapse of time or both) a
default under, or results in or will result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon any property or assets
(tangible or intangible) of the Company or the Subsidiary pursuant to the terms
of (A) the Certificate of Incorporation or Articles of Incorporation, as
applicable, or Bylaws of the Company or the Subsidiary, (B) to our knowledge,
except as described in the Registration Statement and the Prospectus, any
material license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, shareholders, agreement, purchase
order, note, loan or credit agreement or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company or the Subsidiary is a party or by
which either of them is or may be bound or to which any of its properties or
assets (tangible or intangible) are or may be subject or (C) any federal or
state law, statute, rule or regulation (other than the securities or "blue sky"
laws of any State and the rules and regulations of the NASD, as to which no
opinion need be rendered) or to our knowledge any judgment, decree or order,
applicable to the Company or the Subsidiary or any of their respective
activities or properties;
(ix) no consent, approval, authorization, registration,
qualification or order of, and no filing with, any court, administrative agency
or other government or regulatory official, agency, authority or body is
required in connection with the issuance, delivery and sale of the Securities,
the performance of this Agreement, the Warrant Agreement and the Underwriters'
Warrant Agreement or the consummation of the transactions contemplated hereby,
thereby, by the Registration Statement and by the Prospectus, other than such as
may be required under the securities or "blue sky" laws of any State and the
rules and regulations of the NASD and the Commission, as t which no opinion need
be rendered;
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(x) the statements in the Prospectus under "Management --
Employment Agreements," "Certain Transactions," "Description of Capital Stock"
and "Shares Eligible for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
rules, regulations or legal conclusions, are accurate summaries and fairly and
correctly present the information called for with respect to such matters;
(xi) to such counsel's knowledge, except as described in the
Registration Statement and the Prospectus no person, corporation, trust,
partnership, association or other entity has the right to include or register
any securities of the Company in the Registration Statement, require the Company
to file any registration statement or, if filed, to include any security in such
registration statement; and no person, corporation, trust, partnership,
association or other entity holds any antidilution rights with respect to any
securities of the Company.
(xii) to such counsel's knowledge, with respect to Bitetti (the
"Selling Stockholder") (only in the event of the purchase by the Underwriters of
the Option Shares):
(1) this Agreement, the Custody Agreement and the Power-of-Attorney
have been duly executed and delivered by the Selling Stockholder; assuming
due authorization, execution and delivery by the Custodian, the Custody
Agreement and the Power-of-Attorney are the legal, valid, binding and
enforceable instruments of such Selling Stockholder (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law),
(2) assuming that (i) the Underwriters have no notice of any adverse claims
with respect to the Option Shares being sold hereunder by the Selling
Stockholder, and (ii) the certificates representing the Option Shares being
sold by such Selling Stockholder are delivered to the Underwriters in good
faith and duly endorsed or accompanied by a duly executed assignment
separate from certificate in the State of California, the delivery by such
Selling Stockholder to the several Underwriters of certificates for the
Option Shares being sold hereunder by such Selling Stockholder against
payment therefor as provided herein, will convey good
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and valid title to such Option Shares to the several Underwriters, free and
clear of all "adverse claims" (as that term is defined in Section 8302 of
the Commercial Code of the State of California);
(3) the sale of the Option Shares to the Underwriters by the Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement and the Custody
Agreement, the Lock-Up Agreement executed by Selling Stockholder and
Winston, and each of the other contracts and agreements described in this
Agreement to which the Selling Stockholder is a party, do not (i) require
the consent, approval, authorization, registration or qualification of or
with any governmental authority, except such as have been obtained and such
as may be required under state securities or blue sky laws, or (ii) based
solely on inquiries of and certificates from the Selling Stockholder,
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, indenture,
mortgage, deed of trust, lease or other agreement or instrument to which
such Selling Stockholder are a party or by which such Selling Stockholder
or any of such Selling Stockholder's properties are bound or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Selling Stockholder.
(xiii) to such counsel's knowledge or as described in the
Prospectus, (A) based solely on certificates and information provided by
officers of the Company and without independent review of the status of
individual agreements, neither the Company nor the Subsidiary is in breach of,
or in default under, and no event has occurred which, with notice, lapse of time
or both, would constitute a material default of, any term, covenant, condition
or provision of any material agreement to which the Company is a party or by
which it is or may be bound or to which its properties or assets which would be
required to be disclosed in the Prospectus in order that such Prospectus would
not be misleading; and (B) neither the Company nor the Subsidiary is in
violation of any term, covenant, condition or provision of its Certificate of
Incorporation or Articles of Incorporation, as the case may be, or its bylaws;
(xiv) to such counsel's knowledge, based solely on a review of
the licensing agreements to which the Company or the Subsidiary is a party and
which are filed as exhibits to the Registration Statement, and upon certificates
and information provided by officers of the Company without independent review
of the status of individual licensing
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agreements, the statements made in the Prospectus concerning the Company's and
the Subsidiary's licensing rights with respect to all of the products listed in
the Prospectus as currently sold or intended to be sold by the Company within
the next 12 months are true and correct in all material respects, and there is
no claim or action by any person pertaining to, or proceeding, pending or
threatened, which challenges the rights of the Company or the Subsidiary with
respect to any of such licenses which would be required to be disclosed in the
Prospectus in order that such Prospectus would not be misleading in any material
respect;
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and the Subsidiary,
representatives of the independent certified public accountants for the Company
representatives of the Underwriters and representatives of the Underwriters'
Counsel at which conferences such counsel made inquires of such officers, such
other representatives of the Company and the Subsidiary and representatives of
such accountants and discussed the contents of each Preliminary Prospectus, the
Registration Statement, the Prospectus and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus (except as
and to the extent stated in (x) above), on the basis of the foregoing and such
counsel's participation in the preparation of each Preliminary Prospectus, the
Registration Statement and the Prospectus, no facts have come to the attention
of such counsel which leads it to believe that either the Registration Statement
or any amendment thereto, at the time such Registration Statement or amendment
became effective or as of the Closing Date (or the Option Closing Date, as the
case may be) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any supplement
thereto, at the date of each such Prospectus or supplement and at the Closing
Date (or the Option Closing Date, as the case may be) contained or contains any
untrue statement of material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in or omitted therefrom in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
supplements or amendments thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
California, to the extent such counsel deems proper and to the extent specified
in such opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to the Underwriters' Counsel) of other counsel, acceptable to the
Underwriters' Counsel, familiar with the applicable laws; and (B) as to matters
of fact, to the extent it
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deems proper, on certificates and written statements of responsible officers of
the Company and certificates or other written statement of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company or the Subsidiary, provided
that copies of any such opinions, statements or certificates shall be delivered
to the Underwriters and the Underwriters' Counsel. The opinion of such counsel
for the Company shall state that the opinion of any such other counsel is in
form satisfactory to such counsel and that the Underwriters and the
Underwriters' Counsel are justified in relying thereon.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of McDermott, Will & Emery, counsel to the Company, dated
such Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of such Option
Closing Date the statements made by McDermott, Will & Emery in its opinion
delivered on the Closing Date.
(e) on or prior to each of the Closing Date and each Option Closing
Date, if any, the Underwriters' Counsel shall have been furnished with such
documents, certificates and opinions as it may reasonably require for the
purpose of enabling it to review or pass upon the matters referred to in Section
7(c) hereof, or in order to evidence the accuracy, completeness or satisfaction
of any of the representations, warranties or conditions of the Company or the
Subsidiary herein contained.
(f) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no adverse change or development involving a
prospective material adverse change in the condition (financial or otherwise),
earnings, business affairs, position, prospects, shareholders' equity,
operations, properties, businesses or results of operations of the Company or
the Subsidiary from the latest dates as of which such matters are set forth in
the Registration Statement and the Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business and consistent with past
practices, entered into by the Company or the Subsidiary, from the latest date
as of which the financial condition of the Company or the Subsidiary is set
forth in the Registration Statement and the Prospectus, which may in any way be
adverse to the Company or the Subsidiary; (iii) neither the Company nor the
Subsidiary shall be in default, and no event shall have occurred which, with
notice, lapse of time or both, would constitute a default under any provision of
any agreement, instrument or other document relating to any outstanding
indebtedness; (iv) neither the Company nor the Subsidiary shall have issued any
securities (other than the Securities) or declared or paid any dividend or made
any distribution in respect of its capital stock of any class, and there shall
not have been any change in the capital stock, or any
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change in the debt (long- or short-term) or liabilities or obligations
(contingent or otherwise), of the Company or the Subsidiary; (v) no material
amount of the property or assets (tangible or intangible) of the Company or the
Subsidiary shall have been pledged, mortgaged or otherwise encumbered; and
(vi) no action, suit, proceeding, inquiry, arbitration, investigation,
litigation or governmental or other proceeding (including, without limitation,
those pertaining to environmental, health or similar matters) shall be pending
or threatened (or circumstances giving rise to same) to which the Company or the
Subsidiary is subject or to which any property or assets (tangible or
intangible) of the Company or the Subsidiary are subject wherein an unfavorable
decision, ruling or finding may materially adversely affect the condition
(financial or otherwise), earnings, business affairs, position, prospects,
shareholders' equity, operations, properties, businesses or results of
operations of the Company and the Subsidiary taken as a whole, except as set
forth in the Registration Statement and Prospectus and except for debts,
liabilities and obligations incurred in the normal course of business consistent
with past practices.
(g) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or such Option Closing Date, as
the case may be, to the effect that each of such persons has carefully examined
the Registration Statement, the Prospectus and this Agreement, and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or such
Option Closing Date, as the case may be, and the Company and the Subsidiary have
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on their part to be performed or satisfied at or
prior to the Closing Date or such Option Closing Date, as the case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been initiated or are pending or threatened;
(iii) the Registration Statement, the Prospectus and each
amendment and supplement thereto, if any, contain all statements and information
required to be included therein, and neither the Registration Statement nor any
amendment thereto, at the time such Registration Statement or amendment became
effective and as of the date of such certificate included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and neither
any Prospectus nor any supplement thereto, at the date of such Prospectus or
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supplement thereto and at the date of such certificate, included any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading; and
(iv) subsequent to the latest respective dates as of which
information is given in the Registration Statement and the Prospectus,
(A) neither the Company nor the Subsidiary has incurred any liabilities or
obligations, direct, indirect or contingent, other than in the ordinary course
of business; (B) neither the Company nor the Subsidiary paid or declared any
dividends or other distributions on its capital stock or other ownership
interests; (C) neither the Company nor the Subsidiary has entered into any
transactions not in the ordinary course of business; (D) there has not been any
change in the capital stock, long-term debt or short-term debt (other than any
increase in short-term debt in the ordinary course of business) of the Company
or the Subsidiary; (E) other than ordinary wear and tear, neither the Company
nor the Subsidiary has sustained any material loss or damage to its property or
assets (tangible and intangible), whether or not insured; (F) there is no
litigation which is pending or threatened (or circumstances giving rise to same)
against the Company or the Subsidiary which is required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(G) there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth.
References to the Registration Statement and the Prospectus in this Section 6(g)
are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, in the amount as described in the Registration Statement.
(i) At or prior to the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters and in form and substance satisfactory in all respects to the
Underwriters from Corbin & Wertz:
(i) confirming that it is an accounting firm of independent
certified public accountants with respect to the Company and the Subsidiary
within the meaning of the Act and the Rules and Regulations;
(ii) stating its opinion that the combined financial statements
and schedules of the Company and the Subsidiary included in the Registration
Statement comply as to form in all material respects with the applicable
accounting
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requirements of the Act and the Rules and Regulations and that each of the
Underwriters may rely upon the opinion of Corbin & Wertz with respect to such
combined financial statements and schedules included in the Registration
Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited combined interim financial
statements of the Company and the Subsidiary (with an indication of the date of
the latest available unaudited combined interim financial statements), a reading
of the latest available minutes of the shareholders and the board of directors,
including any committees of the board of directors, of the Company and the
Subsidiary, consultations with officers and other employees of the Company and
the Subsidiary responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to its attention which
would lead it to believe that (A) the unaudited combined financial statements
and schedules of the Company and the Subsidiary included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited combined
financial statements of the Company and the Subsidiary included in the
Registration Statement or (B) at a specified date not more than five (5) days
prior to the effective date of the Registration Statement, there has been any
change in the capital stock, short-term debt or long-term debt of the Company
and the Subsidiary, or any decrease in the shareholders, equity or net current
assets or net assets of the Company and the Subsidiary as compared with amounts
shown in the March 31, 1996 balance sheet included in the Registration Statement
or, if there was any change or decrease, setting forth the amount of such change
or decrease, or (C) during the period from March 31, 1996 to a specified date
not more than five (5) days prior to the effective date of the Registration
Statement, there was any decrease in revenues, net income or net earnings per
share of Common Stock, in each case as compared with the corresponding period in
the immediately preceding year, or, if there was any such decrease, setting
forth the amount of such decrease;
(iv) stating that it has compared specific dollar amounts,
numbers of shares, percentages, statements and other financial information
pertaining to the Company and the Subsidiary set forth in the Registration
Statement, in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets or analysis, of the Company and the Subsidiary, with the
results obtained from the application of specific readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement;
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(v) stating it has reviewed the internal controls of the
Company and the Subsidiary and that, since June 30, 1995, it has not noted or
brought to the attention of any of the management of the Company or the
Subsidiary any "weakness," as defined in Statement of Auditing Standard No. 60
(entitled "Communication of Internal Control Structure Related Matters Noted in
an Audit"), in any of the Company's or the Subsidiary's internal controls;
(vi) stating it has read the unaudited combined financial
statements referred to in Section 5(o) hereof; and
(vii) statements as to such other matters as the Underwriters
may request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Corbin & Wertz a letter, dated as of the
Closing Date or such Option Closing Date, as the case may be, to the effect that
(i) it reaffirms that statements made in the letter furnished pursuant to
Section 7(i) hereof, (ii) if the Company has elected to rely on Rule 430A under
the Act, to the further effect that it has carried out procedures as specified
in clause (iv) of such Section 7(i) with respect to certain amounts, numbers,
percentages, statements and other financial information as specified by the
Underwriters and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and has found such amounts, numbers, percentages, statements and
other financial information to be in agreement with the documents specified in
such clause (iv); and (iii) it has read the unaudited combined financial
statements referred to in Section 5(o) hereof.
(k) On the Closing Date and each Option Closing Date, if any, there
shall have been duly tendered to the Underwriters the appropriate number of
Securities.
(l) No order suspending the sale of the shares in any jurisdiction
designated by the Underwriters pursuant to Section 5(e) hereof shall have been
issued on either the Closing Date or any Option Closing Date, and no proceedings
for that purpose shall have been initiated or shall be pending, contemplated or
threatened.
(m) On or before the Closing Date, the Company shall have executed
and delivered to you, individually and not in your capacity as the Underwriters,
the Underwriters' Warrant Agreement, substantially in the form filed as
Exhibit 4.3 to the Registration Statement. The executed version of the
Underwriters' Warrant Agreement shall be satisfactory to you.
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(n) On or before the effective date of the Registration Statement,
the Securities shall have been duly approved for quotation on the SCM.
(o) On or before the effective date of the Registration Statement,
there shall have been delivered to the Underwriters all of the Lock-Up
Agreements, in form and substance satisfactory to the Underwriters' Counsel.
(p) The Company and the Subsidiary shall provide the Underwriters
with such additional documents and certificates as the Underwriters may
reasonably request.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or at any Option Closing Date, as the case may
be, is not so fulfilled, the Underwriters may terminate this Agreement, without
liability to any of the Underwriters, or, if the Underwriters so elect in their
sole discretion, they may waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter (for purposes of this Section 8, "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of each
Underwriter), and each person, if any, who controls any of the Underwriters, as
applicable ("controlling person"), within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses (including, without limitation, reasonable attorneys,
fees and expenses) or liabilities and all actions, suits, proceedings,
inquiries, arbitrations, investigations, litigation or governmental or other
proceedings (in this Section 8, collectively, "actions") in respect thereof,
whatsoever (including, without limitation, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any action,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which any Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; (iii) in any application or other
document or written communication (in this Section 8, collectively,
"application") executed by the Company or based upon written information
furnished by the Company in any
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jurisdiction in order to qualify the Securities under the securities or "blue
sky" laws thereof or filed with the Commission, any state securities commission
or agency, the NASD or the SCM or any other securities exchange; or the omission
or alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading (in the case of the
Prospectus, in light of the circumstances in which they were made), unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company by the Underwriters with respect to an
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement thereto, or
in any application, as the case may be. In addition to its other obligations
under this Section 8(a), the Company agrees that, as an interim measure during
the pendency of any action arising out of or based upon any untrue statement or
omission, or alleged untrue statement or alleged omission as described in this
Section 8(a), it will reimburse each Underwriter (and, to the extent applicable,
each controlling person), on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such action,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligations to reimburse each Underwriter and
(and, to the extent applicable, each controlling person), for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement is so held to have been improper as to the Company, each
Underwriter (and, to the extent applicable, each controlling person), shall
promptly return it to the Company together with interest compounded daily, based
on the "reference rate" announced from time to time by Bank of America N.T. &
S.A. (the "Prime Rate"). Any such interim reimbursement payments which are not
made to an Underwriter, or a controlling person, as applicable, within thirty
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request.
The indemnity agreement in this Section 8(a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each Underwriter severally, but not jointly, agrees to indemnity
and hold harmless the Company (for purposes of this Section 8, "Company" shall
include the officers, directors, partners, employees, agents and counsel of the
Company), and each other person, if any, who control the Company ("controlling
person") within the meaning of the Act, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only with respect to
statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon,
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and in strict conformity with, written information furnished to the Company by
the Underwriters with respect to such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto or in any application, provided that
such written information or omissions only pertain to disclosures in any
Preliminary Prospectus, the Registration Statement or the Prospectus directly
relating to the transactions effected by such Underwriter or the Underwriters as
a group in connection with the offering contemplated hereby. The Company
acknowledges that the statements with respect to the Underwriters and the public
offering of the Securities set forth under the headings "Risk Factors --
Recently Formed Underwriters" and "Underwriting" and the stabilization legend in
the Prospectus have been furnished by the Underwriters with respect to the
Underwriters expressly for use therein and constitute the only information
furnished in writing by the Underwriters with respect to the Underwriters for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. In addition to its other obligations under this Section 8(b), each
Underwriter severally, but not jointly, agrees that, as an interim measure
during the pendency of any action arising out of or based upon any untrue
statement or omission, or alleged untrue statement or alleged omission as
described in this Section 8(b), it will reimburse the Company (and, to the
extent applicable, each controlling person) on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such action, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Underwriter's
obligations to reimburse the Company (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to such Underwriter, such Underwriter (and, to the extent
applicable, each controlling person) shall promptly return it to the Company,
together with interest compounded daily, based on the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within thirty
(30) days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. Notwithstanding the provisions of this Section
8(b), no Underwriter shall be required to indemnify or hold harmless the
Company, or any controlling person for, in the aggregate, any amounts in excess
of the underwriting discount applicable to the Securities purchased by such
Underwriter hereunder.
The indemnity agreement in this Section 8(b) shall be in addition to any
liability which each Underwriter severally, but not jointly, may have at common
law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any
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action, such indemnified party shall notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent that it
has been materially prejudiced by such failure). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or parties shall be
entitled to participate therein, and to the extent it or they may elect by
written notice delivered to the indemnified party or parties promptly after
receiving the aforesaid notice from such indemnified party or parties, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified
party. Notwithstanding the foregoing, an indemnified party shall have the right
to employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying party or parties in connection with the defense of such action at
the expense of the indemnifying party or parties, (ii) the indemnifying party or
parties shall not have employed counsel reasonably satisfactory to such
indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party shall have reasonably concluded that there may be one or more
defenses available to it which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel (in addition to appropriate
local counsel) shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to appropriate local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 8 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
PROVIDED, HOWEVER, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 8, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 8 provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
indemnified party, then
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each indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
(A) in such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the party to
be indemnified, on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses) bear to
the total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the cover page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters with respect to an Underwriter, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to in the first sentence of this Section 8(e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(e), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount applicable to the Securities purchased by such Underwriter hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act and the cases and promulgations thereunder) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8(e), each person, if any, who
controls the Company or an Underwriter within the meaning of the Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Underwriters, or the Company, as the case may be, subject in each case to the
provisions of this Section 8(e). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action against such
party in respect to which a claim for contribution may be made against another
party or parties under this Section 8(e), notify such party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the
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party or parties from whom contribution may be sought from any obligation it or
they may have hereunder or otherwise than under this Section 8(e) except to the
extent it has been materially prejudiced by such failure. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, covenants and agreements contained in this
Agreement, or contained in certificates of officers of the Company delivered
pursuant hereto, shall be deemed to be representations, warranties, covenants
and agreements at the Closing Date and at each Option Closing Date, as the case
may be, and such representations, warranties, covenants and agreements of the
Company, and the respective indemnity and contribution agreements contained in
Section 8 hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of the Underwriters, any of the
Underwriters or the Company, and shall survive the termination of this Agreement
and the issuance, sale and delivery of the Securities to the Underwriters.
10. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the date one (1) business day following the date hereof,
or at such earlier time after the Registration Statement becomes effective as
the Underwriters, in their sole discretion shall release the Securities for sale
to the public; PROVIDED, HOWEVER, that the provisions of Sections 6, 8 and 11
hereof shall at all times be effective. For purposes of this Section 10, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Underwriters of telegrams to securities
dealers releasing such Securities for offering or the release by the
Underwriters for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
11. TERMINATION.
(a) The Underwriters shall have the right to terminate this Agreement
after it becomes effective, the exercise of which shall be determined in the
Underwriters' sole discretion, if: (i) any domestic or international event or
act or occurrence has, as determined in the Underwriters' sole judgment,
materially disrupted, or in the Underwriters' sole judgment will in the
immediate future materially disrupt, the financial markets; or (ii) any material
adverse change, as determined in the Underwriters' sole judgment, in the
financial markets shall have occurred; or (iii) trading on the New York Stock
Exchange, the American Stock Exchange, the SCM or the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum
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ranges for prices for securities shall have been required on the over-the-
counter market by the NASD or the Commission or any other governmental authority
having jurisdiction; or (iv) the United States shall have become involved in a
war or in hostilities, or there shall have been an escalation in an existing war
or hostilities or a national emergency shall have been declared in the United
States; or (v) a banking moratorium shall have been declared by any state or
federal authority or body; or (vi) a moratorium in foreign exchange trading
shall have been declared; or (vii) the Company and the Subsidiary taken as a
whole shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Underwriters' sole judgment, make it inadvisable to proceed with the offering,
sale or delivery of the Securities; or (viii) there shall have been a material
adverse change or development involving a material prospective change, in the
condition (financial or otherwise), earnings, business affairs, position,
prospects, shareholders, equity, operations, obligations, properties, businesses
or results of operations of the Company and the Subsidiary taken as a whole,
whether or not arising in the ordinary course of business, or if there shall
have been a material adverse change in the general market, political or economic
conditions, whether in the United States or elsewhere, as in the Underwriters'
sole judgment would make it inadvisable to proceed with the offering, sale or
delivery of the Securities.
(b) Notwithstanding any contrary provision contained in this
Agreement, in the event of any termination of this Agreement (including, without
limitation, pursuant to Sections 7, 11(a) or 12 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of Sections 6 and 8 hereof
shall remain effective and shall not in any way be affected by such termination
or failure to carry out the terms of this Agreement or any part hereof.
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date
or any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell and deliver hereunder on such date,
then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Securities to be purchased on an Option Closing Date, the
Underwriters may, in the Underwriters' sole discretion, by notice from the
Underwriters to the Company, terminate the Underwriters' obligation to purchase
such Option Securities from the Company on such date) with no liability
whatsoever on the part of any non-defaulting party other than pursuant to
Sections 6, 8 and 11 hereof. No action taken pursuant to this Section 12 shall
relieve the Company from liability, if any, in respect of such default.
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13. SUBSTITUTION OF UNDERWRITERS. If any Underwriter defaults in its
obligation to purchase the number of Securities which it has agreed to purchase
under this Agreement, the non-defaulting Underwriters shall be obligated to
purchase (in the respective proportions which the number of Securities set forth
opposite the name of each non-defaulting Underwriter in Schedule I bears to the
total number of Securities set forth opposite the names of all the non-
defaulting Underwriters in Schedule I) the Securities which the defaulting
Underwriter agreed but failed to purchase; except that the non-defaulting
Underwriters shall not be obligated to purchase any of the Securities if the
total number of Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase exceeds 10% of the total number of Securities, and
any non-defaulting Underwriter shall not be obligated to purchase more than 110%
of the number of Securities set forth opposite its name in Schedule I plus the
total number of Option Securities purchasable by it pursuant to the terms of
Section 3(b) hereof. If the foregoing maximums are exceeded, the non-defaulting
Underwriters, and any other underwriters satisfactory to you who so agree, shall
have the right, but shall not be obligated, to purchase (in such proportions as
may be agreed upon among them) all the Securities. If the non-defaulting
Underwriters or the other underwriters satisfactory to you do not elect to
purchase the Securities which the defaulting Underwriter or Underwriters agreed
but failed to purchase, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter, the Company except for the payment of
expenses to be borne by the Company as provided in Section 6(a) hereof and the
indemnity and contribution agreements of the Company and the Underwriters
contained in Section 8 hereof; PROVIDED, HOWEVER, that this provision shall not
affect any Closing which at the time of such termination already shall have
taken place.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have for damages caused by its default. If the other
underwriters satisfactory to you are obligated or agreed to purchase the
Securities of a defaulting Underwriter, either you or the Company may postpone
the Closing Date for up to seven full Business Days in order to effect any
changes that may be necessary in the Registration Statement, the Prospectus or
in any other document or agreement, and to file promptly any amendments or any
supplements to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary.
14. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed, delivered by hand or transmitted by any standard form
of telecommunication. Notices to the Underwriters shall be directed to The
Boston Group, L.P. at 1999 Avenue of the Stars, Suite 2550, Los Angeles,
California 90067, Attention: Mr. Robert A. DiMinico, with a copy to Jeffer,
Mangels, Butler & Marmaro,
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LLP, 2121 Avenue of the Stars, 10th Floor, Los Angeles, California 90067,
Attention: Steven J. Insel, Esq. Notices to the Company shall be directed to
the Company at 2985 E. Hillcrest Drive, Suite A, Westlake Village, California
91362, Attention: Vincent J. Bitetti, with a copy to McDermott, Will & Emery,
1850 K. Street, N.W., Suite 500, Washington, D.C. 20006, Attention: Robert
Kalik, Esq.
15. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company, and the controlling
persons, officers, directors and others referred to in Section 8 hereof, and
their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Securities from an Underwriter shall be
deemed to be a successor merely by reason of such purchase.
16. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California, without giving
effect to conflict of laws principles thereof.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to he one and the same instrument.
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Warrant Agreement
and the Underwriters' Warrant Agreement constitute the entire agreement of the
parties hereto concerning the subject matter hereof and supersede all prior
written or oral agreements, understandings and negotiations with respect to the
subject matter hereof. This Agreement may not be amended, modified or altered
except in a writing signed by the Underwriters and the Company.
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If the foregoing correctly sets forth the understanding among the parties
hereto, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
SOUND SOURCE INTERACTIVE, INC.
By:
-------------------------------------
Name: Vincent J. Bitetti
-------------------------------------
Vincent J. Bitetti
-------------------------------------
Eric H. Winston
Confirmed and accepted as of
the date first above written.
THE BOSTON GROUP, L.P. JOSEPH STEVENS & COMPANY, L.P.
By: By:
--------------------------- --------------------------------
Name: Robert A. DiMinico Name:
Title: Chairman ---------------------------
Title:
--------------------------
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SOUND SOURCE INTERACTIVE, INC.
THE BOSTON GROUP, L.P.
JOSEPH AND STEVENS & COMPANY, L.P.
UNDERWRITERS' WARRANT AGREEMENT
Dated as of June 27, 1996
--------------------
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<PAGE>
UNDERWRITERS' WARRANT AGREEMENT
THIS UNDERWRITERS' WARRANT AGREEMENT (the "Agreement"), dated as of June
27, 1996, is made and entered into by and between SOUND SOURCE INTERACTIVE,
INC., a Delaware corporation (the "Company"), and THE BOSTON GROUP, L.P. and
JOSEPH STEVENS & CO., L.P. ("the Underwriters").
The Company agrees to issue and sell to the Underwriters and the
Underwriters agree to purchase from the Company, for the price of $50, warrants,
as hereinafter described (the "Warrants" and together with any warrants
subsequently issued hereunder, the "Warrants"), to purchase up to 240,000
shares, as may be adjusted from time to time as set forth herein, of the
Company's common stock, no par value (the "Common Stock"). This Warrant is
being issued in connection with a public offering (the "Offering") by the
Company of 2,400,000 shares of Common Stock and 1,200,000 warrants to purchase
Common Stock subject to the terms of the Redeemable Warrant Agreement (the
"Redeemable Warrants"), pursuant to an underwriting agreement (the "Underwriting
Agreement"), dated as of June 27, 1996, by and between the Company, Vincent
Bitetti, Eric H. Winston and the Underwriters. The shares of Common Stock
purchasable upon exercise of these Warrants are hereinafter referred to as the
"Warrant Stock." The Warrants shall be issued pursuant to this Agreement on the
Closing Date, as such term is defined in the Underwriting Agreement.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants, the Warrant Stock and the respective rights and
obligations thereunder, the Company and the Underwriters, for value received,
hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 REGISTRATION. All Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 TRANSFER. The Warrants shall be transferable only on the books
of the Company maintained at its principal office, wherever its principal office
may then be located, upon delivery thereof duly endorsed by a Warrant holder (a
"Warrantholder") or
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by its duly authorized attorney or representative and with the signatures
properly guaranteed, accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver a new certificate evidencing each such Warrant to each
person entitled thereto.
1.3 LIMITATIONS ON TRANSFER OF THE WARRANTS. Warrants and Warrant
Stock (collectively the "Securities") shall not be sold, transferred, assigned
or hypothecated by the Underwriters until 9:00 a.m., Pacific time, on June 27,
1997 and appropriate legends shall be placed on the Securities, except that
Warrants may be transferred before such date: (i) to one or more officers or
partners of any Warrantholder, and the officers or partners of any such partner;
(ii) to any other member of the National Association of Securities Dealers, Inc.
which participated in the Offering and the officers or partners of any such
member; (iii) to successors to a Warrantholder or the officers or partners of
any such successor; (iv) to a purchaser of all or substantially all of the
assets of a Warrantholder; or (v) by will, pursuant to the laws of descent or
distribution or by operation of law. The Warrants may be divided or combined,
upon request to the Company by a Warrantholder, into a certificate
or certificates representing the right to purchase the same aggregate number of
Warrant Stock. Unless the context indicates otherwise, the term "Warrantholder"
shall include the Underwriters and any transferee or transferees of the Warrants
pursuant to this subsection 1.3 and as otherwise permitted by this Agreement,
and the term "Warrants" shall include any and all Warrants outstanding pursuant
to this Agreement, including those evidenced by a certificate or certificates
issued upon division, exchange, substitution or transfer pursuant to this
Agreement.
1.4 FORM OF WARRANTS. The text of the Warrants and of the form of
election to purchase Warrant Stock shall be substantially as set forth in
Exhibit A attached hereto. The aggregate number of shares of Common Stock
issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter or therein provided. The
Warrants shall be executed on behalf of the Company by its Chief Executive
Officer or its President and attested to by its Chief Financial Officer or its
Secretary. A Warrant bearing the signature of an individual who was at any time
the proper officer of the Company shall bind the Company, notwithstanding that
such individual shall have ceased to hold such office prior to the delivery of
such Warrant or did not hold such office on the date of this Agreement or at any
time thereafter.
The Warrants shall be dated as of the date of signature thereof
by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
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1.5 LEGENDS. Each certificate for any of the Securities and the
Common Stock underlying the Warrants shall bear the following legend, unless, at
the time of issuance such Security or Common Stock is subject to a currently
effective Registration Statement under the Securities Act of 1933, as amended
(the "Act"):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT
BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY
MANNER EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE
Underwriters' WARRANT AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to an effective registration
statement under the Act, of the securities represented thereby) shall also bear
the above legend unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions.
SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of shares of Warrant Stock as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in writing delivered to the Company, and shall surrender,
properly endorsed, the certificate evidencing the Warrant to be so exchanged.
Thereupon, the Company shall execute and deliver to the person entitled thereto
a new Warrant certificate or certificates as so requested.
SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
3.1 EXERCISE OF WARRANTS. Subject to the terms of this Agreement,
the Warrantholder shall have the right, at any time from June 27, 1997 (the
"Initial Exercise Date") until 5:00 p.m., Pacific Time, on June 27, 2001 (the
"Termination Date"), to purchase from the Company up to the number of fully paid
and nonassessable shares of Warrant Stock to which the Warrantholder may at the
time be entitled to purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the Warrants to
be exercised, together with the purchase form on the reverse thereof duly
completed and executed, and upon payment to the Company of the Purchase Price
(as defined in and determined in accordance with the provisions of this Section
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3 and Sections 7 and 8 hereof) for the number of shares of Warrant Stock in
respect of which such Warrants are then exercised, but in no event for less than
100 shares of Warrant Stock (unless less than an aggregate of 100 shares of
Warrant Stock are then purchasable under all outstanding Warrants held by such
Warrantholder). This Warrant may be exercised from time to time in whole or in
part.
3.2 PAYMENT OF PURCHASE PRICE. Payment of the Purchase Price shall
be made in cash, by certified or official bank check in Los Angeles Clearing
House funds (next day funds), or any combination thereof.
3.3 CASHLESS EXERCISE. In addition to the method of payment set
forth in Section 3.2 above and in lieu of any cash payment required thereunder,
unless otherwise prohibited by law, the Warrantholders shall have the right at
any time and from time to time to exercise the Warrants in full or in part (i)
by receiving from the Company the number of shares of Warrant Stock equal to the
number of shares of Warrant Stock otherwise issuable upon such exercise less the
number of shares of Warrant Stock having an aggregate value on the date of
exercise equal to the Purchase Price multiplied by the number of shares of
Warrant Stock for which this Warrant is being exercised and/or (ii) by
delivering to the Company the number of shares of Common Stock having an
aggregate value on the date of exercise equal to the Purchase Price multiplied
by the number of shares of Warrant Stock for which this Warrant is being
exercised.
Upon surrender of the Warrants and payment of the Purchase Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Warrantholder, and in
such name or names as the Warrantholder may designate, certificates for the
number of full shares of Warrant Stock so purchased upon such exercise of the
Warrant, together with cash, as provided in Section 9 hereof, in respect of any
fractional shares otherwise issuable upon such surrender. Such certificate or
certificates, to the extent permitted by law, shall be deemed to have been
issued and any person so designated to be named therein shall be defined to have
become a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Purchase Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of the
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Warrantholder, either in full or from time to time in part for Common Stock and,
in the event that a Warrant is exercised in respect of less than all of the
shares of Warrant Stock specified therein at any time prior to the Termination
Date, a new Warrant evidencing the remaining shares of the Warrant Stock
purchasable by such Warrantholders hereunder shall be issued by the Company to
such Warrantholders.
3.4 SOLICITATION FEE. The Company hereby appoints the
Underwriters as the exclusive solicitation agents for the Warrants, and hereby
agrees to pay the Underwriters a commission equal to five percent (5%) of the
exercise price of the Warrants (other than Warrants exercised directly on behalf
of either of the Underwriters), payable on the date of the exercise thereof.
The Company will not solicit the exercise of the Warrants other than through the
Underwriters.
SECTION 4. VALIDITY; PAYMENT OF TAXES. All securities delivered upon
exercise of a Warrant shall be duly and validly issued and non-assessable. The
Company shall pay all documentary stamp taxes, if any, attributable to the
initial issuance of the Warrants and the shares of Warrant Stock issuable upon
the exercise of the Warrants; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants, the Warrant Stock.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant.
SECTION 6. RESERVATION OF SHARES. The Company represents and warrants to
the Warrantholder that there has been reserved, and the Company shall at all
times keep reserved so long as the Warrants remain outstanding, out of its
authorized Common Stock, such number of shares of Common Stock as shall be
subject to purchase under the Warrants. Every transfer agent for the Common
Stock and other securities of the Company issuable upon the exercise of the
Warrants shall be irrevocably authorized and directed at all times to reserve
such number of authorized shares and other securities as shall be requisite for
such purpose. The Company shall keep a copy of this Agreement on file with
every transfer agent for the Common Stock and other securities of the Company
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issuable upon the exercise of the Warrants. The Company shall supply every such
transfer agent with duly executed stock and other certificates, as appropriate,
for such purpose and shall provide or otherwise make available any cash which
may be payable in lieu of the issuance of fractional shares, as provided in
Section 9 hereof.
SECTION 7. PURCHASE PRICE. The price per share at which shares of Warrant
Stock shall be purchasable upon the exercise of the Warrants shall be 145% of
the initial public offering price of Common Stock in the Offering, subject to
adjustment pursuant to Section 8 hereof (as so adjusted from time to time, the
"Purchase Price").
SECTION 8. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON
STOCK DELIVERABLE.
8.1 ADJUSTMENT OF PURCHASE PRICE.
(a) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof, sell any shares
of Common Stock for a consideration per share less than the Purchase Price or
issue any shares of Common Stock as a stock dividend to the holders of Common
Stock, or subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such sale, issuance, subdivision or
combination being herein called a "Change of Shares"), then, and thereafter upon
each further Change of Shares, the Purchase Price for the Warrants in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined by
dividing (A) the sum of (x) the total number of shares of Common Stock
outstanding immediately prior to such Change of Shares, multiplied by the
Purchase Price in effect immediately prior to such Change of Shares, and (y) the
consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination by (B) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; PROVIDED, HOWEVER, that in
no event shall the Purchase Price be adjusted pursuant to this computation to an
amount in excess of the Purchase Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8.1(a) the following provisions shall be applicable:
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(i) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(ii) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash or as
part of a unit, the amount of the consideration therefor other than cash deemed
to have been received by the Company or the amount received per share as part of
a unit shall be the value of such consideration as determined in good faith by
the Board of Directors of the Company on the basis of a record of values of
similar property, services or securities.
(iii) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in Section 8.1(a)(ii) hereof.
(v) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights
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or warrants and upon the conversion or exchange of convertible or exchangeable
securities.
(b) Upon each adjustment of the Purchase Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.
8.2 ADJUSTMENTS FOR OPTIONS, ETC. In case the Company shall at any
time after the date hereof issue options, rights or warrants to subscribe for
shares of Common Stock, or issue any securities convertible into or exchangeable
for shares of Common Stock, for a consideration per share (determined as
provided in Section 8.1(a) hereof and as provided below) less than the Purchase
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Purchase Price in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Section 8.1(a) hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; PROVIDED, HOWEVER, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (a) (and for the
purposes of Section 8.1(a)(v) hereof) shall be reduced by the number of shares
as to which options, warrants and/or rights shall have expired, and such number
of shares shall no longer be deemed to be issued and outstanding, and the
Purchase Price then in effect shall forthwith be readjusted and thereafter be
the price that it would have been had adjustment been made on the basis of the
issuance only of the shares actually issued plus the shares remaining issuable
upon the exercise of those options, rights or warrants as to which the exercise
rights shall not have expired or terminated unexercised.
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(b) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; PROVIDED, HOWEVER, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(b) (and for the purposes of Section 8.1(a)(v) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(c) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in Section 8.2(a)
hereof, or in the price per share or ratio at which the securities referred to
in Section 8.2(b) hereof are convertible or exchangeable, such options, rights
or warrants or conversion or exchange rights, as the case may be, to the extent
not theretofore exercised, shall be deemed to have expired or terminated on the
date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange thereof,
and the Company shall be deemed to have issued upon such date new options,
rights or warrants or convertible or exchangeable securities.
(d) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a Subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
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corporation, as the case may be, shall make lawful and adequate provision
whereby the Registered Holder of each Warrant then outstanding shall have the
right thereafter to receive on exercise of such Warrant the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Warrant Agent a statement signed
by its Chairman of the Board, President or a Vice President and by its Treasurer
or an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing
such provision. Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in Sections 8.1 and 8.2 hereof. The above provisions of this Section 8.2(d)
shall similarly apply to successive reclassifications and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, no changes shall be necessary to the face of the Warrant Certificates
theretofore and thereafter issued.
(f) After each adjustment of the Purchase Price and the
Warrant Exercise Price pursuant to this Section 8, the Company will promptly
prepare a certificate signed by the Chairman of the Board, President, or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth: (i) the Purchase Price and
Warrant Exercise Price, as so adjusted, (ii) the number of shares of Common
Stock purchasable upon exercise of each Warrant, after such adjustment, and
(iii) a brief statement of the facts accounting for such adjustment. The
Company will promptly file such certificate with the Company's Transfer Agent
and cause a brief summary thereof to be sent by ordinary first class mail to
each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a
result of or in connection with (i) the issuance or sale of shares of Common
Stock pursuant to options, warrants, stock purchase agreements and convertible
or exchangeable
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securities outstanding or in effect on the date hereof, (ii) the issuance or
sale of shares of Common Stock upon the exercise of any "incentive stock
options" (as such term is defined in the Internal Revenue Code of 1986, as
amended), or any non-qualified stock options to non-employee directors of the
Company pursuant to the Company's 1995 Stock Option Plan, whether or not such
options were outstanding on the date hereof, or (iii) the issuance or sale of
shares of Common Stock if the amount of said adjustment shall be less than ten
cents ($.10); PROVIDED, HOWEVER, that in such case, any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment that shall
amount, together with any adjustment so carried forward, to at least ten cents
($. 10). In addition, Registered Holders shall not be entitled to cash
dividends paid by the Company prior to the exercise of any Warrant or Warrants
held by them.
8.3 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or other entity or in case of any sale,
lease, conveyance or other transfer to another corporation, person or other
entity of the property, assets or business of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, person or other entity, as the case may be, shall execute with the
Warrantholder, and the agreements governing such consolidation, merger, sale,
lease, conveyance or other transfer shall require such execution of, an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Purchase Price in effect immediately prior to such event, upon exercise of
the Warrants, to receive the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, lease, conveyance or other
transfer had the Warrants (and each underlying security) been exercised
immediately prior to such action. The Company shall promptly mail to each
Warrantholder by first class mail, postage prepaid, notice of the execution of
any such agreement. In the event of a merger described in Section 368(a)(2)(E)
of the Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase shares of Warrant Stock under the Warrants
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shall terminate on the date of such merger and thereupon the Warrants shall
become null and void, but only if the controlling corporation shall agree to
substitute for the Warrants its warrant which entitles the holder thereof to
purchase upon its exercise the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this Section 8.4 shall provide for adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
Section 8 hereof, and shall provide for terms and provisions at least as
favorable to the Warrantholder as those contained in this Agreement. The
provisions of this Section 8.4 shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances or other transfers.
8.4 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action
which would cause an adjustment effectively reducing the portion of the Purchase
Price allocable to each share of Warrant Stock below the then par value per
share, if any, of the Warrant Stock issuable upon exercise of the Warrants, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Stock upon exercise of the Warrants.
8.5 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain Corbin &
Wertz (or such other accounting firm qualified to practice in front of the
Securities and Exchange Commission (the "Commission") as is reasonably
acceptable to the Underwriters) to make any computation required under this
Section 8, and a certificate signed by such firm shall be conclusive evidence of
the correctness of any computation made under this Section 8.
SECTION 9. FRACTIONAL SHARES; CURRENT MARKET PRICE. The Company shall not
be required to issue fractional shares of Common Stock on the exercise of a
Warrant. If any fraction of a share of Common Stock would, except for the
provisions of this Section 9, be issuable upon the exercise of a Warrant (or
specified portion thereof), the Company shall in lieu thereof pay an amount in
cash equal to the then Current Market Price multiplied by such fraction. For
purposes of this Agreement, the term "Current Market Price" shall mean (i) if
the Common Stock is traded on the Nasdaq National Market ("NNM") or on a
national securities exchange, the per share closing price of the Common Stock in
the NNM or on the principal stock exchange on which it is listed, as the case
may be, on the date of exercise of the Warrant or, with respect to any
adjustment pursuant to Section 8.1 hereof, on the date immediately preceding the
announcement of the event causing such adjustment or (ii) if the Common Stock is
traded in the over-the-counter market and not in the NNM or on any national
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securities exchange, the average of the per share closing bid prices of the
Common Stock on the thirty (30) consecutive trading days immediately preceding
the date in question, as reported by The Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if quotations are not reported
on The Nasdaq Small Cap Market). The closing price referred to in clause (i)
above shall be the last reported sale price or, in the case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices, in either case in the NNM or on the principal stock exchange on which
the Common Stock is then listed. For purposes of clause (ii) above, if trading
in the Common Stock is not reported by The Nasdaq Small Cap Market, the bid
price referred to in said clause shall be the lowest bid price as reported in
the Nasdaq Electronic Bulletin Board or, if not reported thereon, as reported in
the "pink sheets" published by National Quotation Bureau, Incorporated, and, if
such Common Stock is not so reported, shall be the price of a share of Common
Stock determined by the Company's Board of Directors in good faith.
SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER. Except as
expressly provided herein, nothing contained in this Agreement or in the
Warrants shall be construed as conferring upon the warrantholder or its
transferees any rights as a shareholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a shareholder in respect
of any meeting of shareholders for the election of directors of the Company or
any other matter. if, however, at any time prior to the expiration of the
Warrants and prior to their exercise, any one or more of the following events
shall occur:
(a) any action which would require an adjustment pursuant to
Section 8 hereof;
(b) an issuance by the Company of rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, containing the right to subscribe for or
purchase Common Stock; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 13 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution or other rights or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation or winding up.
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Such notice shall specify such record date or the date of closing the transfer
books, as the case may be.
SECTION 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS; OBLIGATION'S IN
REGISTRATION.
11.1 NOTICE OF TRANSFER. The Warrantholder agrees that prior to
making any disposition of the Securities, other than to persons or entities
identified in the first sentence of Section 1.3, the Warrantholder shall give
written notice to the Company describing briefly the manner in which any such
proposed disposition is to be made; and no such disposition shall be made unless
the Warrantholder has notified, or currently with such disposition notifies, the
Company that in the opinion of counsel reasonably satisfactory to the Company a
registration statement, application or other notification, filing or post-
effective amendment or supplement thereto (hereinafter collectively a
"Registration Statement") under the Act or the state securities or "blue sky"
laws of any applicable jurisdiction is not required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Commission or state
securities commission or agency. The Warrantholder agrees that it shall use its
reasonable best efforts to obtain from any transferee who acquires any Warrants
in a private transaction with the Warrantholder an agreement by such transferee
that it agrees to be bound by any transfer restrictions set forth in this
subsection 11(a) then applicable to such transferees.
11.2 REGISTRATION OF SECURITIES. The Company shall be obligated to
prepare and file a registration statement, and amendments thereto, with the
Commission for the registration of the Securities under the Act and shall be
obligated to cause such registration statement, and amendments thereto, to be
declared effective by the Commission on or prior to June 27, 1997. The Company
shall be obligated to the registered holders of the Securities to continually
maintain, at the Company's own expense, the currency and effectiveness of such
registration statement of the Company, including the filing of any and all
applications and other notifications, filings and post-effective amendments and
supplements (collectively, the "Current Registration Statement"), as may be
necessary, so as to permit the resale of the Securities until the earlier of the
time that all shares of Securities have been sold pursuant to the Current
Registration Statement or the Termination Date.
11.3 FURTHER RIGHTS OF WARRANT HOLDERS. If at any time after the date
hereof the Current Registration Statement is no longer in effect other than
because all Securities have been sold pursuant to the Current Registration
Statement or because the Termination Date has already occurred, the Company
shall be obligated to the registered holders of the Securities as follows:
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(a) Whenever during the period beginning on June 27, 1997 and
ending on June 27, 2001, the Company proposes to file with the Commission a
Registration Statement (other than as to securities issued pursuant to an
employee benefit plan or as to a transaction subject to Rule 145 promulgated
under the Act), it shall, at least thirty (30) days prior to each such filing,
give written notice of such proposed filing to each holder of the Securities at
their respective addresses as they appear on the records of the Company, and
shall offer to include and shall include in such filing any proposed disposition
of the Securities upon receipt by the Company, not more than twenty (20) days
following the receipt of such notice, of a request therefor setting forth the
facts with respect to such proposed disposition and all other information with
respect to such person reasonably necessary to be included in such Registration
Statement. In the event that such registration statement relates to an
underwritten offering on a "firm commitment" basis and the managing underwriter
for said offering advises the Company in writing that the inclusion of such
Securities in the offering would be materially and substantially detrimental to
the completion of the offering, such Securities shall nevertheless be included
in the Registration Statement, provided that the Warrantholder and each holder
of Securities desiring to have such Securities included in the Registration
Statement agrees in writing for a period of ninety (90) days following such
offering not to sell or otherwise dispose of such Securities pursuant to such
Registration Statement, which Registration Statement the Company shall keep
effective for a period of at least nine (9) months following the expiration of
such ninety (90) day period.
(b) In addition to any Registration Statement pursuant to
subparagraph (i) above, during the four-year period beginning on June 27, 1997
and ending on the Termination Date, the Company will, as promptly as practicable
(but in any event within sixty (60) days), after written request (the "Request")
by the Underwriters, or by a person or persons holding (or having the right to
acquire by virtue of holding the Warrants) at least sixty percent (60%) of the
shares of Warrant Stock which have been (or may be) issued upon exercise of the
Warrants underlying the Warrants, prepare and file at the Company's expense a
Registration Statement with the Commission and such applications or other
filings as required under applicable state securities or blue sky laws
sufficient to permit the public offering of the Securities, and shall use its
reasonable best efforts at its own expense through its officers, directors,
auditors and counsel, in all matters necessary or advisable, to cause such
Registration Statement to become effective as promptly as practicable and to
maintain such effectiveness so as to permit resale of the Securities covered
by the Request until the earlier of the time that all such Securities have been
sold or the expiration of ninety (90) days
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from the effective date of the Registration Statement; provided, however, that
the Company shall only be obligated to file only one such Registration Statement
under this Section 11.3(b). Notwithstanding the foregoing, once and only once
during the period the Company would have an obligation to register the
Securities pursuant to this Section 11.3(b), the Company shall not be obligated
to effect a registration pursuant to this Section 11.3(b) during the three (3)
month period starting with the date thirty (30) days prior to the Company's
estimated date of filing of an underwritten public offering of securities solely
for the account of the Company; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective and that the Company's estimate of the date of filing such
registration statement is made in good faith; provided further, that the Company
shall furnish to the Warrantholder and each holder of Securities a certificate
signed by the managing underwriter stating that it would be seriously
detrimental to the Company or its shareholders for the registration statement to
be filed in the near future.
(c) All fees, disbursements and out-of-pocket expenses (other
than the Warrantholder's brokerage fees and commissions and legal fees of
counsel to the Warrantholder, if any) in connection with the filing of any
Registration Statement or maintaining the currency and effectiveness of the
Current Registration Statement (or obtaining the opinion of counsel and any no-
action position of the commission with respect to sales under Rule 144) and in
complying with applicable federal securities and state securities and blue sky
laws shall be borne by the Company. The Company at its expense shall supply any
holder of the Securities with copies of such Registration Statement and the
prospectus included therein and other related documents and any opinions and no-
action letters in such quantities as may be reasonably requested by such holder
of the Securities.
(d) The Company shall not be required by this Section 11 to
file such Registration Statement if, in the opinion of counsel for the
Underwriters, which counsel shall be reasonably satisfactory to the Company, or
in the opinion of another counsel experienced in securities law matters
acceptable to counsel for such holders, the proposed public offering or other
transfer as to which such Registration Statement is requested is exempt from
applicable federal securities and state securities and blue sky laws and would
result in all purchasers or transferees obtaining securities which are not
"restricted securities," as defined in Rule 144 under the Act.
(e) The provisions of this Section 11 and of Section 12 hereof
shall apply to the extent provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
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(f) Notwithstanding the other provisions of this Section 11,
the Company may, in full satisfaction of its obligations under this Section 11,
register the Securities with the Commission pursuant to the Act on any form then
available to it so as to allow the unrestricted sale of the Securities to the
public from time to time commencing at 9:00 a.m. Pacific time on June 27, 1997
and ending at 5:00 p.m. Pacific time on June 27, 2001 (the "Registration
Period"). If the Company elects to so satisfy its obligations under this
Section 11, the Company shall also file such applications and other documents
necessary to permit the sale of the Securities to the public during the
Registration Period in those states in which the Securities was qualified for
sale in the offering or such other states as the holders of the Securities
reasonably request. In order to comply with the provisions of this Section
11.3(f), the Company may, but is not required to, file more than one
Registration Statement. The Company shall file such post-effective amendments
and supplements as may be necessary to maintain the currency of such
Registration Statement(s) during the period of its (their) use. In addition, if
the holders of the Securities participating in such registration are advised by
counsel that such Registration Statement, in their opinion, is deficient in any
material respect, the Company shall use its best efforts to cause such
Registration Statement to be amended to eliminate the concerns raised.
(g) The Company agrees that until all the Securities have been
sold under a Registration Statement or pursuant to Rule 144 under the Act, it
shall keep current in filing all materials required to be filed with the
Commission in order to permit the holders of such securities to sell the same
under Rule 144.
(h) In the event any holder of Securities timely elects to
participate in an offering by including Securities in a Registration Statement
pursuant to Section 11.3 hereof, the Company shall use its reasonable best
efforts to effect such registration to permit the sale of Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto, the Company shall, as expeditiously as possible:
(i) Prepare and file with the Commission a
Registration Statement or Registration Statements on a form available for the
sale of the Securities, and to cause any such Registration Statement filed under
the Act pursuant to Section 11.3 hereof to become effective at the earliest
possible date after the filing thereof and remain effective as provided herein
and to comply with all applicable rules and regulations of the Commission (the
"Rules and Regulations") in connection therewith, provided, however, that before
filing a Registration Statement or prospectus or any amendments or supplements
thereto, including documents which would be incorporated or deemed to be
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incorporated by reference in the Registration Statement after the initial filing
of any Registration Statement, the Company will furnish to the Underwriters and
the holders of the Securities, their respective counsel, and the underwriters,
if any, to be engaged in connection with the offering and sale by the Company
(for purposes of this Section 11.3(f), the "Public Underwriter"), copies of all
such documents proposed to be filed, which documents will he subject to the
review of the Underwriters and such holders of the Securities, their respective
counsel and the Public Underwriter, if any, and the Company will not file any
Registration Statement, amendment thereto, any prospectus or any supplement
thereto (including such documents incorporated or deemed to be incorporated by
reference) to which the Underwriters or the Public Underwriter, if any, shall
reasonably object;
(ii) Prepare and promptly file with the Commission such
amendments and post-effective amendments to a Registration Statement as may be
necessary to keep such Registration Statement continuously effective for a
period of twelve (12) months; cause the related prospectus to be supplemented,
by any required prospectus supplement, and as so supplemented, to be filed
pursuant to Rule 424 under the Act; and comply with the provisions of the Act
with respect to the disposition of all Securities covered by such Registration
Statement during the applicable period in accordance with the intended methods
of disposition as set forth in such Registration Statement or supplement to such
prospectus; the Company shall not be deemed to have used its reasonable best
efforts to keep a Registration Statement effective during the applicable period
if it intentionally or voluntarily takes any action that would result in the
Underwriters or such Warrantholders not being able to sell such Securities;
(iii) As soon as the Company is advised or obtains
knowledge thereof, advise the Underwriters and confirm the same in writing (1)
when the Registration Statement, as amended, becomes effective and when any
post-effective amendment to the Registration Statement becomes effective, (2) of
the issuance by the Commission or any State or other regulatory body of any stop
order or other order, or of the initiation or the threat or contemplation of any
proceeding, the outcome of which may result in the suspension of the
effectiveness of the Registration Statement or the issuance of any order
preventing or suspending the use of any preliminary prospectus or the
prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (3) of the issuance by the Commission or any State
or other regulatory body of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation or the threat or contemplation of any proceeding for that
purpose, (4) of the receipt of any comments from the Commission and (5) of any
request by the Commission for any amendment to the Registration
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<PAGE>
Statement or any amendment or supplement to the prospectus related thereto or
for additional information; if the commission or any State or other regulatory
body shall enter a stop order or other order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of any preliminary
prospectus or the prospectus, or any amendment or supplement thereto, or suspend
such qualification at any time, make every effort to obtain promptly the lifting
of such order or suspension;
(iv) If requested by the Public Underwriter, if any, or
the Underwriters, or any holder of Securities (1) immediately incorporate in a
prospectus supplement or post-effective amendment such information as the
Underwriters or such Warrantholder and the Public Underwriter, if any, agree
should be included therein relating to such sale and distribution of the
Securities, including, without limitation, information with respect to the
number of Securities being sold to such Public Underwriter, the purchase price
being paid therefor by such Public Underwriter and with respect to any other
terms of the underwritten offering of the Securities to be sold in such
offering; (2) make all required filings of such prospectus supplement or post-
effective amendment as soon as notified of the matters to be so incorporated in
such prospectus supplement or post-effective amendment; and (3) supplement or
amend any Registration Statement if requested by the Underwriters, the holders
of Securities or any underwriter of Securities;
(v) Furnish to the Underwriters, each of the holders
of Securities and their respective counsel, without charge and at such place as
the Underwriters may designate, copies of each preliminary prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which will be signed and will include all financial statements
and exhibits, one for the Underwriters and one for the Underwriters' Counsel),
the Prospectus, and all amendments and supplements thereto, including any
prospectus prepared after the effective date of the Registration Statement and
any term sheet, in each case as soon as available and in such quantities as the
Underwriters and each holder of the Securities may request;
(vi) During the time when a prospectus is required to
be delivered under the Act, shall comply with all requirements imposed upon it
by the Act and the Exchange Act, 1934, as amended (the "Exchange Act"), as now
and hereafter amended, and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the prospectus, or
any amendments or supplements thereto; if at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any
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event shall have occurred as a result of which, in the opinion of the Company or
counsel for the Company or the Underwriters or counsel for the Underwriters, the
prospectus, as then amended or supplemented, would include an untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or if it is necessary at
any time to amend or supplement the Prospectus to comply with the Act, notify
the underwriter and prepare and file, at the Company's expense, with the
Commission an appropriate amendment or supplement to the Registration Statement
or an amendment or supplement to the prospectus which will correct such
statement or omission, or effect such compliance, each such amendment or
supplement to be reasonably satisfactory to the Underwriters and the counsel for
the Underwriters; and furnish to the Underwriters copies of such amendment or
supplement as soon as available and in such quantities as the Underwriters may
request;
(vii) As soon as practicable, but in any event not later
than forty-five (45) days after the end of the twelve (12) month period
beginning after the effective date of the Registration Statement occurs, make
generally available to its security holders, in the manner specified in Rule
158(b) promulgated under the Act, and to the Underwriters, an earnings statement
which will comply with the provisions of Section 11(a) of the Act and Rule
158(a) promulgated under the Act;
(viii) Deliver to the Underwriters and each of the
holders of Securities, their respective counsel and the Public Underwriter, if
any, without charge, as many copies of the prospectus or prospectuses (including
each preliminary prospectus) and any amendment or supplement thereto as such
persons may reasonably request; the Company consents to the use of any such
prospectus or any amendment or supplement thereto by the Underwriters, the
holders of Securities and the Public Underwriter, if any, in connection with the
offering and sale of the Securities covered by such prospectus or any amendment
or supplement thereto;
(ix) Prior to any public offering of Securities, use
its best efforts, at or prior to the time the Registration Statement becomes
effective, to qualify the Shares for offering and sale under the securities or
"blue sky" laws of such jurisdictions as the Underwriters may reasonably
designate to permit the continuance of sales and dealings therein for as long as
may be necessary to complete the distribution, and make such applications, file
such documents and furnish such information as may be required for such purpose;
provided, however, the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to
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service of process in any such jurisdiction; in each jurisdiction where such
qualification shall be effected, use its best efforts to file and make such
statements or reports at such times as are or may be required by the laws of
such jurisdiction to continue such qualification;
(x) Cooperate with the Underwriters, the holders of
the Securities and the Public Underwriter, if any, to facilitate the timely
preparation and delivery of certificates representing Securities to be sold,
which certificates shall not bear any restrictive legends; and enable such
Securities to be in such denominations and registered in such names as the
Public Underwriter, if any, may request at least two (2) business days prior to
any sale of Securities;
(xi) Use its reasonable best efforts to cause the
Securities covered by the Registration Statement to be registered with or
approved by such other governmental bodies, agencies or authorities as may be
necessary to enable the Underwriters, the holders of the Securities or the
Public Underwriter, if any, to consummate the disposition of such Securities;
(xii) Make every reasonable effort to cause all
Securities covered by such Registration Statement to be (1) listed on each
securities exchange, if any, in which equity securities issued by the Company
are then listed or (2) authorized to be quoted on the NNM if the Company's
Common Stock is then authorized to be quoted on the NNM;
(xiii) Enter into such agreements (including, without
limitation, if applicable, an underwriting agreement, in form, scope and
substance as is customary in underwritten offerings) and take all such other
actions in connection therewith in order to expedite or facilitate the
disposition of such Securities and, in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration is an
underwritten registration, (1) make such representations and warranties to the
Underwriters and the holders of the Securities with respect to the business of
the Company and its subsidiaries and the Public Underwriter, if any, the
Registration Statement, the prospectus, the prospectus supplement (if any) and
documents, if any, incorporated or deemed to be incorporated by reference in the
Registration Statement, in each case in such form, substance and scope as are
customarily made by issuers to underwriters in underwritten offerings and
confirm the same if and when requested; (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 Underwriters and the holders
of the Securities), addressed to the Underwriters and the holders of the
Securities with respect to the matters referred to in the preceding clause in
such form, scope and substance as are
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customarily rendered to underwriters in underwritten offerings and such other
matters as may be reasonably requested by counsel to the Underwriters, the
holders of the Securities or the Public Underwriter, if any; (3) obtain "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement) addressed to the
Underwriters, the holders of the Securities and each of the Public Underwriters,
if any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters to underwriters in connection with
underwritten offerings; (4) if an underwriting agreement is entered into, the
same shall set forth in full the indemnification and contribution provisions and
procedures of Section 12 hereof (or such other provisions and procedures as
shall be acceptable to the Underwriters, the holders of the Securities and to
the Public Underwriter of such underwritten offering) with respect to all
parties to be indemnified pursuant to said section; and (5) deliver such
documents and certificates as may be reasonably requested by the Underwriters,
the holders of the Securities and the Public Underwriter, if any, to evidence
the continued validity of the representations and warranties made pursuant to
clause (1) above and to evidence compliance 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 or as and to the extent required thereunder;
(xiv) Make available for inspection by a representative
of the Underwriters or the holders of the Securities or any Public Underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney or accountant retained by the Underwriters or the holders of the
Securities or such Public Underwriter, all financial and other records,
pertinent corporate documents and properties and assets of the Company and its
subsidiaries and cause the officers, directors, agents and employees of the
Company and its subsidiaries to supply all information reasonably requested by
any such representative, Public Underwriter, attorney or accountant in
connection with any registration of the Securities; provided, however, that any
records, information or documents that are designated by, the Company in writing
at the time of delivery of such records, information or documents as
confidential shall be kept confidential by such persons unless (1) disclosure of
such records, information or documents is required by court or administrative
order or is necessary to respond to inquiries of governmental or regulatory
bodies, agencies or authorities, (2) disclosure of such records, information or
documents is, in the opinion of counsel to the Underwriters or the holders of
the
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Securities or to any Public Underwriter, required by law regulations or legal
process, (3) such records, information or documents are otherwise publicly
available or (4) such records, information or documents become available to such
person from a source other than the Company, and such source is not bound by a
confidentiality agreement;
(xv) If the Company, in the exercise of its reasonable
judgment, objects to any change reasonably requested by the Underwriters, the
holders of the Securities or the Public Underwriter, if any, to any Registration
Statement or prospectus or any amendments or supplements thereto (including
documents incorporated or deemed to be incorporated therein by reference) as
provided for in this Section 11.3(h), the Company shall not be obligated to make
any such change and the Underwriters or the holders of the Securities may
withdraw Securities from such registration, in which event the Company shall pay
all registration expenses (including, without limitations, attorneys' fees and
expenses) incurred by the Underwriters and the holders of the Securities in
connection with such Registration Statement or prospectus or any amendment
thereto or supplement thereof; provided, that if the Company provides the
Underwriters and the holders of the Securities, as applicable, with a written
opinion of independent counsel (which counsel may be the Company's regular
outside counsel), upon which the Underwriters and such holders of the Securities
may rely, that the change so requested is not required in order that the
Registration Statement comply with all applicable securities laws (including any
rules and regulations promulgated thereunder), the Underwriters and such holders
of the Securities may withdraw Securities from such registration but the Company
shall not be obligated to pay any registration expenses incurred by the
Underwriters and the holders of the Securities; and
(xvi) Pay all costs and expenses incident to the
performance of or compliance with the Company's obligations under Section 11.2
hereof and under this Section 11.3 (collectively, "Registration Expenses")
whether or not any Registration Statement is filed or becomes effective,
including, without limitation, the fees and disbursements of the Company's
auditors, legal counsel, special legal counsel, legal counsel responsible for
qualifying the Securities under blue sky laws, all filing fees and printing
expenses, all expenses in connection with the transfer and delivery of the
Securities, and all expenses in connection with the qualification of the
Securities under applicable blue sky laws; provided, however, that the Company
shall not bear the Public Underwriter's discount or commission with respect to,
or any transfer taxes imposed on, the Securities or the fees and expenses of
counsel to the Underwriters or the holders of the Securities; provided, further,
however, that the Underwriters shall not be responsible in any way for any fees
or expenses of
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the Company's counsel, except, in each case, as provided in this Section 11.3.
(xvii) For purposes of this Section 11, a holder of
Securities shall include any holder of the Securities which have not been
offered in the public.
SECTION 12. INDEMNIFICATION AND CONTRIBUTION.
12.1 INDEMNIFICATION OF WARRANTHOLDERS. The Company agrees to
indemnify and hold harmless the Warrantholders and any Holder of Securities (for
purposes of this Section 12, "Holder" shall include such individuals and the
officers, directors, partners, employees, agents and counsel of a Warrantholder
or a holder of Securities), and each person, if any, who controls a Holder
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses (including, without limitation, reasonable attorneys' fees and
expenses) or liabilities and all actions, suits, proceedings, injuries,
arbitrations, investigations, litigation or governmental or other proceedings
(in this Section 12, collectively, "actions") in respect thereof, whatsoever
(including, without limitation, any and all expenses whatsoever reasonably
incurred in investigating preparing or defending against any action, commenced
or threatened, or any claim whatsoever), as such are incurred, to which a Holder
or such controlling person may become subject under the Act, the Exchange Act or
any other statute or at common law or otherwise, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any preliminary prospectus, the Current Registration Statement, the
Registration Statement or any prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Warrants; or (iii) in any
application or other document or written communication (in this Section 12,
collectively, "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with the
Commission, any state securities commission or agency, the National Association
of Securities Dealers, Inc. (the "NASD") or the NNM or any other securities
exchange; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (in the case of any prospectus, in light of the circumstances in
which they were made), unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company with
respect to a Holder by or on behalf of such Holder expressly for use in any
preliminary prospectus, the registration statement or any prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be.
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In addition to its other obligations under this Section 12.1, the Company agrees
that, as an interim measure during the pendency of any action arising out of or
based upon any untrue statement or omission, or alleged untrue statement or
alleged omission as described in this Section 12.1, it shall reimburse the
Holders (and, to the extent applicable, each controlling person) on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such action notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligations to reimburse the Holders (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to the Company, the Holders (and, to the extent applicable, each
controlling person) shall promptly return it to the Company, together with
interest compounded daily, based on the "reference rate" announced from time to
time by Bank of America NTSA (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the applicable Holder within thirty (30) days of
a request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
The indemnity agreement in this subsection 12.1 shall be in
addition to any liability which the Company may have at common law or otherwise.
12.2 INDEMNIFICATION OF COMPANY. Each Holder severally agrees to
indemnify and hold harmless the Company (for purposes of this Section 12,
"Company" shall include the officers, directors, partners, employees, agents and
counsel of the Company) and each other person, if any, who controls the Company
("controlling person") within the meaning of the Act, to the same extent as the
foregoing indemnity from the Company to the Holders, but only with respect to
statements or omissions, if any, made in any preliminary prospectus, the Current
Registration Statement, the Registration Statement or any prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to such Holder by or on behalf of such Holder expressly for
use in any preliminary prospectus, the Current Registration Statement, the
Registration Statement or any prospectus or any amendment thereof or supplement
thereto or in any application, provided that such written information or
omissions only pertain to disclosures in any preliminary prospectus, the Current
Registration Statement, the Registration Statement or any prospectus directly
relating to the transactions in connection with the offering contemplated
hereby. In addition to its other obligations under this Section 12.2, each
Holder severally agrees that, as an interim measure during the pendency of any
action arising out of or based upon any untrue statement or omission, or alleged
untrue statement or alleged omission as described in this Section 12.2, it shall
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reimburse the Company (and, to the extent applicable, each controlling person)
on a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any action with respect to such
Holder notwithstanding the absence of a judicial determination as to the
propriety and enforceability of such Holder's obligations to reimburse the
Company (and, to the extent applicable, each controlling person) for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement is so held to have been improper as to such Holder, the
Company (and, to the extent applicable, each controlling person) shall promptly
return it to such Holder, together with interest compounded daily, based on the
Prime Rate. Any such interim reimbursement payments which are not made to the
company within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. Notwithstanding the
provisions of this Section 12.2, in connection with a registration that includes
Securities pursuant to Section 11.3(a) hereof, no such Holder shall be required
to indemnify or hold harmless the Company or any controlling person for any
amounts in excess of the net proceeds (before deducting expenses) applicable to
the Securities sold by such Holder pursuant to the Registration Statement.
Notwithstanding the provisions of this Section 12.2, in connection with a
registration that includes that Holder's Securities pursuant to Sections 11.2 or
11.3, no such Holder shall be required to indemnify and hold harmless the
Company or any controlling person for any amounts in excess of that portion of
all expenses as to which indemnification is properly claimed under this
Agreement equal to such Holder's relevant proportion of all net proceeds (before
deduction of expenses) applicable to all securities sold pursuant to the Current
Registration Statement or the Registration Statement, as applicable.
12.3 NOTICE OF CLAIM. Promptly after receipt by an indemnified party
under this Section 12 of notice of the commencement of any action, such
indemnified party shall notify each party against whom indemnification is to be
sought in writing of the commencement thereof (but the failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 12 except to the extent that it has been materially
prejudiced by such Failure). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties shall be entitled to
participate therein, and to the extent it or they may elect by written notice
delivered to the indemnified party or parties promptly after receiving the
aforesaid notice from such indemnified party or parties, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, an indemnified party shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such
-26-
<PAGE>
indemnified party unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party or parties in connection with
the defense of such action at the expense of the indemnifying party or parties,
(ii) the indemnifying party or parties shall not have employed counsel
reasonably satisfactory to such indemnified party to have charge of the defense
of such action within a reasonable time after notice of commencement of the
action or (iii) such indemnified party shall have reasonably concluded that
there may be one or more defenses available to it which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel (in addition to
appropriate local counsel) shall be borne by the indemnifying parties. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to appropriate local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 12 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
12.4 CONTRIBUTION. In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes a claim for
indemnification pursuant to this Section 12, but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 12 provide for indemnification in
such case or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or
-27-
<PAGE>
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of each of the contributing parties, on the one
hand, and the party to be indemnified, on the other hand, in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by such Holder, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to in the first sentence of this Section 12.4 shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 12.4, in a
registration that includes a Holder's Securities pursuant to Sections 11.2 or
11.3 hereof, no Holder shall be required to contribute any amount in excess of
the net proceeds (before deducting expenses) applicable to the Securities sold
by such Holder pursuant to such registration statement and prospectus. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act and the cases and promulgations thereunder) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such party in respect to
which a claim for contribution may be made against another party or parties
under this Section 12.4, notify such party or parties from whom contribution may
be sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Section 12.4 except to
the extent it has been materially prejudiced by such failure. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
SECTION 13. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed, delivered by hand or transmitted by any
standard form of telecommunication. Notices to the Warrantholders or a holder
of Securities shall be directed to The Boston Group, L.P. at 1999 Avenue of the
Stars, Suite 2550, Los Angeles, California 90067, Attention: Mr. Robert A.
DiMinico, with a copy to Jeffer, Mangels, Butler & Marmaro LLP, 2121 Avenue of
the Stars, 10th Floor, Los Angeles, California 90067, Attention: Steven J.
Insel, Esq. Notices to the Company shall be directed to the Company at 2985
East Hillcrest Drive, Suite A, Westlake Village, California 91362, Attention:
Mr. Vincent J. Bitetti and Mr. Eric H. Winston, with a copy to McDermott, Will &
Emery, 1850 K Street N.W., Suite 500, Washington, D.C. 20006, Attention: Robert
Kalik, Esq.
SECTION 14. PARTIES. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriters, the Company and the Warrantholders
and the holders of Securities and the controlling persons, officers, directors
and others referred to in Section 12 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
-28-
<PAGE>
SECTION 15. MERGER OR CONSOLIDATION OF THE COMPANY. The Company shall not
merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.4 hereof are complied with.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Underwriting Agreement, any schedule, exhibit, certificate or
other instrument delivered by or on behalf of the parties hereto, or in
connection with the transactions contemplated by this Agreement, shall be deemed
to be representations and warranties hereunder. Notwithstanding any
investigations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
or pursuant hereto shall survive the termination of this Agreement and the
issuance, sale and delivery of the Warrant and the Securities.
SECTION 17. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
SECTION 19. ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the
Underwriting Agreement constitute the entire agreement of the parties hereto
concerning the subject matter hereof and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended, modified or altered except in a
writing signed by the Underwriters and the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
SOUND SOURCE INTERACTIVE, INC.
By:
----------------------------
Name:
Title:
THE BOSTON GROUP, L.P.
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<PAGE>
By:
----------------------------
Name:
Title:
JOSEPH STEVENS & COMPANY, L.P.
By:
----------------------------
Name:
Title:
-30-
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 1.3
OF THE Underwriters' WARRANT AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
WARRANT CERTIFICATE NO. __
WARRANT TO PURCHASE _______
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON JUNE 27, 2001
SOUND SOURCE INTERACTIVE, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, THE BOSTON GROUP, L.P., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from SOUND SOURCE INTERACTIVE, INC. (the "Company"), at any time during
the period commencing at 9:00 am., Pacific time, on June 27, 1997, and before
5:00 p.m., Pacific time, on June 27, 2001, at the purchase price per share of
Common Stock of $5.80 (the "Purchase Price"), _______ shares of Common Stock of
the Company (the "Warrant Stock"). The number of shares of Common Stock of the
Company purchasable upon exercise of each Warrant or exercise price of such
shares evidenced hereby shall be subject to adjustment from time to time as set
forth in the Underwriters' Warrant Agreement, dated as of June 27, 1996, by and
between the Company and the Underwriters (the "Underwriters' Warrant
Agreement").
The Warrants evidenced hereby are issued under and in accordance with the
Underwriters' Warrant Agreement and are subject to the terms and provisions
contained in the Underwriters' Warrant Agreement, to all of which the
Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Purchase Price at the principal office of the Company. Payment
of such price shall be made at the option of
<PAGE>
the Warrantholder in any manner allowed in the Underwriters' Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the shares of Warrant Stock as to which the Warrants evidenced hereby shall not
have been exercised. These Warrants may be exchanged at the office of the
Company by surrender of this Warrant Certificate properly endorsed for one or
more new Warrants of the same aggregate number of shares of Warrant Stock as
evidenced by the Warrant or Warrants exchanged. No fractional securities shall
be issued upon the exercise of rights to purchase hereunder, but the Company
shall pay the cash value of any fraction upon the exercise of one or more
Warrants. These Warrants are transferable at the office of the Company in the
manner and subject to the limitations set forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a shareholder of the Company.
SOUND SOURCE INTERACTIVE, INC.
By:
----------------------------
Vincent J. Bitetti
Chairman of the Board and
Chief Executive Officer
Dated: , 1996
-------------
ATTEST: [Seal]
- -----------------------------
Ulrich Gottschling
Chief Financial Officer
and Secretary
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
PURCHASE FORM
SOUND SOURCE INTERACTIVE, INC. (the "Company")
2985 E. Hillcrest Drive, Suite A
Westlake Village, CA 91362
Attention: President
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
_____ shares of common stock of the Company (the "Warrant Stock") provided for
therein, and requests that certificates for the Warrant Stock be issued in the
name of:
------------------------------------------
(Please print or Type Name, Address and Social Security Number)
------------------------------------------
------------------------------------------
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Stock purchasable under the within Warrant Certificate be registered
in the name of the undersigned Warrantholder or his Assignee as below indicated
and delivered to the address stated below.
Dated:
-----------------
Name of Warrantholder
or Assignee:
-------------------------
(Please Print)
Address:
-------------------------
-------------------------
Signature:
-------------------------
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
-----------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase _____ shares of Warrant Stock represented by the within
Warrant Certificate unto, and requests that a certificate for such Warrant be
issued in the name of:
-------------------------------------
(Name and Address of Assignee Must be Printed or Typewritten)
-------------------------------------
-------------------------------------
hereby irrevocably constituting and appointing _______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of warrant Stock shall not be
all of the Securities purchasable under the within Warrant Certificate, that a
new Warrant Certificate for the balance of the Securities purchasable under the
within Warrant Certificate be registered in the name of the undersigned
Warrantholder and delivered to such Warrantholder's address as then set forth on
the Company's books.
Dated:
--------------- ----------------------------
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:_____________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 1.3
OF THE Underwriters' WARRANT AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
WARRANT CERTIFICATE NO. __
WARRANT TO PURCHASE _______
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON JUNE 27, 2001
SOUND SOURCE INTERACTIVE, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, JOSEPH STEVENS & COMPANY, L.P.,
the registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from SOUND SOURCE INTERACTIVE, INC. (the "Company"), at any time during
the period commencing at 9:00 am., Pacific time, on June 27, 1997, and before
5:00 p.m., Pacific time, on June 27, 2001, at the purchase price per share of
Common Stock of $5.80 (the "Purchase Price"), _______ shares of Common Stock of
the Company (the "Warrant Stock"). The number of shares of Common Stock of the
Company purchasable upon exercise of each Warrant or exercise price of such
shares evidenced hereby shall be subject to adjustment from time to time as set
forth in the Underwriters' Warrant Agreement, dated as of June 27, 1997, by and
between the Company and the Underwriters (the "Underwriters' Warrant
Agreement").
The Warrants evidenced hereby are issued under and in accordance with the
Underwriters' Warrant Agreement and are subject to the terms and provisions
contained in the Underwriters' Warrant Agreement, to all of which the
Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Purchase Price at the principal office of the Company. Payment
of such price shall be made at the option of
<PAGE>
the Warrantholder in any manner allowed in the Underwriters' Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the shares of Warrant Stock as to which the Warrants evidenced hereby shall not
have been exercised. These Warrants may be exchanged at the office of the
Company by surrender of this Warrant Certificate properly endorsed for one or
more new Warrants of the same aggregate number of shares of Warrant Stock as
evidenced by the Warrant or Warrants exchanged. No fractional securities shall
be issued upon the exercise of rights to purchase hereunder, but the Company
shall pay the cash value of any fraction upon the exercise of one or more
Warrants. These Warrants are transferable at the office of the Company in the
manner and subject to the limitations set forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a shareholder of the Company.
SOUND SOURCE INTERACTIVE, INC.
By:
----------------------------
Vincent J. Bitetti
Chairman of the Board and Chief
Executive Officer
Dated: June 27, 1996
ATTEST: [Seal]
- -----------------------------
Ulrich Gottschling
Chief Financial Officer
and Secretary
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
PURCHASE FORM
SOUND SOURCE INTERACTIVE, INC. (the "Company")
2985 E. Hillcrest Drive, Suite A
Westlake Village, CA 91362
Attention: President
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
_____ shares of common stock of the Company (the "Warrant Stock") provided for
therein, and requests that certificates for the Warrant Stock be issued in the
name of:
------------------------------------------
(Please print or Type Name, Address and Social Security Number)
------------------------------------------
------------------------------------------
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock Share purchasable hereunder, that a new Warrant Certificate for the
balance of the Warrant Stock purchasable under the within Warrant Certificate
be registered in the name of the undersigned Warrantholder or his Assignee as
below indicated and delivered to the address stated below.
Dated:
-----------------
Name of Warrantholder
or Assignee:
-------------------------
(Please Print)
Address:
-------------------------
-------------------------
Signature:
-------------------------
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:_____________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase _____ shares of Warrant Stock represented by the within
Warrant Certificate unto, and requests that a certificate for such Warrant be
issued in the name of:
-------------------------------------
(Name and Address of Assignee Must be Printed or Typewritten)
-------------------------------------
-------------------------------------
hereby irrevocably constituting and appointing _______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of warrant Stock shall not be
all of the Securities purchasable under the within Warrant Certificate, that a
new Warrant Certificate for the balance of the Securities purchasable under the
within Warrant Certificate be registered in the name of the undersigned
Warrantholder and delivered to such Warrantholder's address as then set forth on
the Company's books.
Dated:
--------------- ----------------------------
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
-----------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.
<PAGE>
EXHIBIT 23.1
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sound Source Interactive, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
June 25, 1996
