<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1996
Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-28604
SOUND SOURCE INTERACTIVE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-426046
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2985 E. HILLCREST DRIVE, SUITE A, WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of Principal Executive Offices)
(805) 494-9996
(Issuer's Telephone Number, Including Area Code)
- -----------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be file by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No
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The number of shares outstanding of the issuer's common stock as of
October 31, 1996 was 4,367,824
Transitional Small Business Disclosure Format (check one):
Yes No XXX
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 1996 3
Condensed Consolidated Statements of Operations - Three month
periods ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows - Three month
periods ended September 30, 1996 and 1995 5
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 5 Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
Signature Page 11
Financial Data Schedule 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 2,570,653
Accounts receivable - net 764,908
Inventory - net 235,693
Prepaid royalties 636,585
Prepaid expenses 129,698
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Total current assets 4,337,537
Property and equipment - net 401,713
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TOTAL ASSETS $ 4,739,250
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 604,419
Accrued compensation and related taxes 122,608
Accrued royalties 659,873
Current portion of capital lease obligations 23,999
Deferred revenues 84,360
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Total current liabilities 1,495,259
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Capital lease obligations, net of current portion 10,308
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Stockholder's Equity:
Common stock - $.001 par value, 20,000,000
shares authorized, 4,367,824 shares issued
and outstanding 4,368
Warrants 1,104,925
Additional paid-in capital 13,159,692
Accumulated deficit (11,035,302)
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Total stockholders' equity 3,233,683
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,739,250
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See notes to condensed consolidated financial statements.
3
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SOUND SOURCE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
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Net revenues $ 919,856 $ 496,273
Cost of sales 392,615 302,500
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Gross profit 527,241 193,773
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Operating costs and expenses:
Marketing and sales 279,703 196,000
Compensation in connection with
common stock and common stock
options issued for services
rendered 89,303
Other general and administrative 350,824 449,964
Research and development 267,422 83,600
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Total operating costs and expenses 987,252 729,564
Operating loss (460,011) (535,791)
Other income (expense) 12,260 (12,983)
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Loss before provision for income taxes (447,751) (548,774)
Provision for income taxes 400
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Net loss $ (447,751) $ (549,174)
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Net loss per common share $ (0.10) $ (0.30)
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Weighted average number of common
shares outstanding 4,265,215 1,859,182
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See notes to condensed consolidated financial statements.
4
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (447,751) $ (549,174)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 19,445 7,435
Allowance for sales returns 144,960 31,098
Allowance for bad debt reserves (37,996)
Allowance for inventories 18,683
Common stock and common stock options
issued for services rendered 89,303
Changes in operating assets and liabilities:
Accounts receivable 3,036 (222,077)
Inventories 8,281 (174,180)
Prepaid royalties (7,908) (113,091)
Prepaid expenses and other (100,933) (1,092)
Accounts payable and accrued expenses (408,227) 236,252
Accrued compensation and related taxes 47,707 (48,512)
Accrued interest (367,695)
Commissions payable (25,774)
Accrued royalties 117,069 (38,158)
Deferred revenues 5,000
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Net cash used by operating activities (884,030) (930,269)
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Cash flows from investing activities-
Purchases of property and equipment (244,091) (44,592)
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Cash flows from financing activities:
Proceeds from issuance of common stock 7,948,372
Proceeds from issuance of warrant 341,575
Repayment of notes payable (4,987,500) (319,200)
Issuance of notes payable 2,420,000
Repayment of notes payable to officer (13,500)
Deferred offering costs 620,904
Deferred financing costs (459,450)
Payments on capital lease obligations (6,562) (3,865)
Repayment of short term advance (400,000)
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Net cash provided by financing activities 3,516,789 1,623,985
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Net change in cash and cash equivalents 2,388,668 649,124
Cash and cash equivalents, beginning of period 181,985 213,730
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Cash and cash equivalents, end of period $ 2,570,653 $ 862,854
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5
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
1996 1995
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Supplement disclosure of cash flow information -
Cash paid during the period for:
Interest $ 375,748 $ 13,120
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Income taxes $ $ 1,600
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Supplemental disclosure of noncash investing
and financing activities:
During the three-month period ended September 30, 1995, the Company purchased
property and equipment valued at $34,150 through the issuance of capital leases.
During the three-month period ended September 30, 1996, the Company issued
2,016,657 warrants in connection with the conversion of a note payable to
related party in the amount of $500,000 and accrued interest thereon in the
amount of $4,164.
See notes to condensed consolidated financial statements.
6
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its
wholly-owned subsidiary (collectively referred to as the Company). The
operating results for interim periods are unaudited and are not necessarily an
indication of the results to be expected for the full fiscal year. In the
opinion of management, the results of operations as reported for the interim
period reflect all adjustments which are necessary for a fair presentation of
operating results.
NOTE B - INITIAL PUBLIC OFFERING (IPO)
On July 1, 1996, the Company issued 2,400,000 shares of common stock at $4.00
per share and 1,200,000 redeemable warrants at $.25 per warrant. Net proceeds
totalled $7,973,305, net of offering costs of $1,926,695. On August 14, 1996,
the underwriters exercised a portion of their "overallotment" option, pursuant
to the underwriting agreement, which resulted in the Company issuing an
additional 160,000 shares of common stock at $4.00 per share and 171,775
redeemable warrants at $.25 per warrant. Net proceeds totalled $594,161, net
of offering costs of $88,783.
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTY
On July 7, 1996, in connection with the IPO, the Company repaid notes payable
issued during fiscal 1996 aggregating $4,987,500 plus accrued interest of
$373,753.
On July 7, 1996, in connection with the IPO, the Company issued 2,016,657
redeemable warrants in connection with the conversion of a note payable to
related party of $500,000, plus accrued interest of $4,164.
NOTE D - ACCOUNTS RECEIVABLE AND SHORT TERM ADVANCE
In June, 1995, the Company entered into a sales and distribution agreement with
a subsidiary of Acclaim Entertainment, Inc. (Acclaim). 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. Effective April 1, 1996,
such agreement was terminated.
In July, 1996, Acclaim submitted certain information to the Company together
with payment of $256,067 and a promissory note with a principal amount of
$256,067, maturing August 26, 1996 and bearing interest at 10% per annum. Such
represented the balances of all amounts due to the Company under the
distribution agreement, as determined by Acclaim. Included in the information
provided by Acclaim, it was noted that the Company was not obligated to repay a
short-term advance totaling $400,000 previously made by Acclaim to the Company.
On August 28, 1996, the Company received $256,067 plus accrued interest of
$2,175 pursuant to the terms of the promissory note. As of September 30, 1996,
the Company has recorded additional amounts which it believes are due from
Acclaim. Such amounts are fully reserved, due to disputes and discrepancies in
the information as reported by Acclaim.
7
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As of September 30, 1996, $735,438 of the accounts receivable balance is due
from 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 a distribution agreement between the
Company and SSIDS, SSIDS will provide distribution, warehousing and order
fulfillment services for all of the Company's products throughout the United
States and Canada.
NOTE E - CASH AND CASH EQUIVALENTS
The Company invests all excess cash in working capital asset management accounts
with Merrill Lynch. All such amounts are 100% federally insured at all times.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET SALES. Net sales increased by 85.4 percent from $496,273 for the three
months ended September 30, 1995 to $919,856 for the three months ended September
30, 1996. This increase is primarily attributable to the Company's introduction
of four new products during the three months ended September 30, 1996: The
Dragonheart Medieval Creativity Center, the Land Before Time Animated Moviebook,
and the Terminator 2 and Star Trek Deep Space Nine Limited Edition Entertainment
Utilities. Additionally, the Company continues to receive orders for its Star
Wars Trilogy and Babylon 5 Limited Edition Entertainment Utility products and
its Babe A Little Pig Goes A Long Way Interactive Moviebook product. During the
three months ended September 30, 1995, the Company only introduced three new
products and did not have large continuing revenues from previously released
products.
COST OF SALES. Cost of sales increased by 29.8 percent from $302,500 for the
three months ended September 30, 1995 to $392,615 for the three months ended
September 30, 1996. However, cost of sales as a percentage of sales decreased
from 61.0 percent to 41.7 percent during these respective periods. The increase
in total cost of sales is due to the above noted 85.4 percent increase in
revenues offset by reduced replication and royalty costs, and decreased
inventory write-downs.
MARKETING AND SALES. Marketing and sales expenses increased by 42.7 percent
from $196,000 for the three months ended September 30, 1995 to $279,703 for
the three months ended September 30, 1996, and decreased as a percentage of
sales from 39.5 percent to 30.4 percent, respectively. The change in dollar
amount is principally related to increased marketing and sales efforts to
support the four new product releases during the quarter as well as increased
salaries due to the addition of a vice president of sales joining the Company
in August, 1996. The decrease as a percentage of sales is due to the above
noted 85.4 percent increase in sales. Due to changes in the manner in which
products are sold to retailers, the Company anticipates that certain of the
marketing and sales costs associated with the introduction of new products
will result in sales of performing products continuing beyond the initial
launch period.
RESEARCH AND DEVELOPMENT. Research and Development costs increased 219.9
percent from $83,600 during the three months ended September 30, 1995 to
$267,422 for the three months ended September 3, 1996, and increased as a
percentage of sales from 16.8 percent to 29.1 percent, respectively. These
increases were primarily attributable to: (i) new product development activites
for the four products released during the quarter ended September 30, 1996, and
the three products anticipated to be released during the quarter ended December
31, 1996, (ii) increased personnel and hardware/software costs associated with
the development of the Company's first interactive video game and, (iii) the
enhancement of its current product lines.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
2.2 percent from $449,964 during the three months ended September 30, 1995 to
$440,127 for the three months ended September 30, 1996, and decreased as a
percentage of sales from 90.7 percent to 47.8 percent, respectively. These
decreases were primarily due to reduced costs associated with debt financings
(including commissions, legal and accounting fees) and factoring expenses.
Included in general and administrative expenses for the three months ended
September 30, 1996 is $89,303 related to compensation expense in connection with
common stock and common stock options issued for services rendered. No such
expense was recorded in the three months ended September 30, 1995.
Additionally, during the three months ended September 30, 1996, the Company
recorded increased expenses associated with being a publically held company.
9
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $2,842,278 in
comparison with ($5,373,974) at June 30, 1996, an increase of $8,216,252. Cash
and cash equivalents increased $2,388,668 directly as a result of the Company's
IPO on July 1, 1996. Accounts receivable decreased $147,996 due to the
collection of $912,134 from Acclaim Entertainment, Inc. during the three months
ended September 30, 1996.
During the three months ended September 30, 1996, current liabilities decreased
by $6,501,705, from $7,996,964 at June 30, 1996 to $1,495,259 at September 30,
1996. This decrease is primarily attributable to the repayment of notes
payable, notes payable to related party and a short-term advance, as well as
accrued interest thereon, aggregating $6,255,968 at June 30, 1996.
The Company expects to meet its cash requirements out of its cash reserves and
cash flows from operations during the foreseeable future.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors are, 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.
ITEM 5. OTHER INFORMATION
Effective November 1, 1996, the Company's president and chief operating officer,
Mr. Eric H. Winston, resigned from the Company as an officer and a director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
None.
10
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/Vincent Bitetti Date: NOVEMBER 7, 1996
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Vincent Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ulrich E. Gottschling Date: NOVEMBER 7, 1996
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Ulrich E. Gottschling
Chief Financial Officer, Treasurer and
Corporate Secretary
(Chief Financial Officer)
11
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,570,653
<SECURITIES> 0
<RECEIVABLES> 1,613,289
<ALLOWANCES> (848,381)
<INVENTORY> 235,693
<CURRENT-ASSETS> 4,337,537
<PP&E> 551,112
<DEPRECIATION> (149,399)
<TOTAL-ASSETS> 4,739,250
<CURRENT-LIABILITIES> 1,495,259
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0
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<COMMON> 4,368
<OTHER-SE> 1,104,925
<TOTAL-LIABILITY-AND-EQUITY> 4,739,250
<SALES> 919,856
<TOTAL-REVENUES> 919,856
<CGS> 392,615
<TOTAL-COSTS> 1,379,867
<OTHER-EXPENSES> (24,477)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,217
<INCOME-PRETAX> (447,751)
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