<PAGE>
As filed with the Securities and Exchange Commission on March __, 1997
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SOUND SOURCE INTERACTIVE, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7372 95-4264046
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
26115 Mureau Road, Suite B
Calabasas, California 91302-3126
(818) 878-0505
(Address and Telephone Number of
Principal Executive Offices)
Vincent J. Bitetti
Chief Executive Officer
26115 Mureau Road, Suite B
Calabasas, California 91302-3126
(818) 878-0505
(Name, Address and Telephone Number
of Agent for Service)
-----------
Copy to:
Sean P. McGuinness, Esq.
McDermott, Will & Emery
1850 K Street, N.W.
Suite 500
Washington, D.C. 20006
(202) 887-8000
Fax: (202) 778-8087
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]
-----------
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus
contained herein is a combined Prospectus relating to securities registered
hereby and under Registration Statement No. 33-80827.
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)
================================================================================
<PAGE>
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to Offering Price Aggregate Registration
Securities to be Registered be Registered Per Security(1) Offering Price(1) Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value ("Common
Stock")(3).............................. 200,000 (sh) $1.50 $ 300,000.00 $ 90.91
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants(3)...........
4,016,657 (wt) $0.34 $1,365,663.38 $413.84
- ---------------------------------------------------------------------------------------------------------------------------
Total Registration Fee...................... $504.75
===========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Computed in accordance with Rule 457(c) on the basis of the last trade
prices for the Common Stock and Redeemable Warrants as reported by the
Nasdaq SmallCap Market on March 27, 1997.
(2) 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.
(3) An additional 11,318,097 shares of Common Stock to be issued by the Company
pursuant to outstanding warrants (including the warrants being registered
hereby), and an additional 490,338 outstanding shares of Common Stock and
1,041,650 warrants to be sold by security holders, have been registered
under an earlier Registration Statement on Form SB-2 (File No. 33-80827)
which was declared effective by the Securities and Exchange Commission on
July 1, 1996, and which is being amended by the filing of this Registration
Statement pursuant to Rule 429. Accordingly, both Registration Statements
use the Prospectus that is a part of this Registration Statement.
<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
- --------------------------------- ------------------------
<S> <C> <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
4. Use of Proceeds................................................ Use of Proceeds
5. Determination of Offering Price................................ Outside Front Cover Page; Risk Factors
6. Dilution....................................................... Dilution
7. Selling Security Holders....................................... Selling Security Holders
8. Plan of Distribution........................................... Outside Front Cover Page; Plan of
Distribution
9. Legal Proceedings.............................................. Business - Legal Matters
10. Directors, Executive Officers, Promoters and Control
Persons........................................................ Management - Executive Officers and
Directors; Principal Stockholders
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................................. Management - Limitation of Liability and
Indemnification of Directors
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;
Market Price of Securities
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>
PROSPECTUS
11,318,097 Shares of Common Stock Issuable Upon Exercise of Warrants
690,338 Shares of Common Stock for Selling Security Holders
5,058,307 Redeemable Warrants for Selling Security Holders
This Prospectus relates to the sale by Sound Source Interactive, Inc., a
Delaware corporation (the "Company"), and certain selling security holders
(the "Selling Security Holders") of the following: (i) 11,078,097 shares of
the Company's common stock, par value $.001 (the "Common Stock"), underlying
11,078,097 outstanding Common Stock purchase warrants (the "Redeemable
Warrants"); (ii) 240,000 shares of Common Stock underlying outstanding
Underwriters' Warrants (as hereinafter defined); (iii) 5,058,307 outstanding
Redeemable Warrants being offered by the Selling Security Holders, including
4,816,657 Redeemable Warrants being offered by ASSI, Inc. (the "ASSI
Warrants"), an affiliated Selling Security Holder; and (iv) 690,338
outstanding shares of Common Stock being offered by the Selling Security
Holders, including 200,000 shares being offered by Vincent J. Bitetti, the
Company's Chairman of the Board and Chief Executive Officer, and 392,838
shares being offered by Eric H. Winston, an affiliated Selling Security
Holder. See "Selling Security Holders" and "Plan of Distribution." 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 Company will not receive any proceeds from the sale of the
Selling Security Holders' Securities.
Each Redeemable Warrant entitles the holder to purchase one share of
Common Stock for $4.40 during the period from July 1, 1997, to January 1,
2002. The Redeemable Warrants (other than the ASSI Warrants, while held by
ASSI, Inc.) are subject to redemption by the Company, at any time commencing
July 2, 1997, at a price of $.25 per Redeemable Warrant, if the average
closing bid price of the Common Stock equals or exceeds $5.60 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. See
"Description of Securities -Redeemable Warrants."
Upon the completion of the Company's initial public offering (the "IPO")
in July 1996, the Company sold to The Boston Group, L.P. and Joseph Stevens &
Company, L.P., the underwriters of such offering (the "Underwriters")
warrants (the "Underwriters' Warrants") to purchase 240,000 shares of Common
Stock for $5.80 per share during the period from July 2, 1997 to July 1,
2001. The Underwriters' Warrants are subject to certain separate registration
rights. See "Certain Transactions - Agreements with the Underwriters."
The Company's publicly traded Common Stock and Redeemable Warrants are
currently listed separately on the automated quotation system of the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "SSII" and "SSIIW,"
respectively. On March 27, 1997, the last trade prices for the Common Stock
and the Redeemable Warrants reported on Nasdaq were $1.50 per share, and
$0.34 per Redeemable Warrant, respectively.
Investors in the securities offered hereby who reside in the State of
California shall be required to have a minimum annual gross income of $30,000
and a net worth of $30,000 or, in the alternative, a minimum net worth of
$75,000, determined exclusive of home, home furnishings and automobiles.
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" COMMENCING
ON PAGES 8 AND 22, 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 ________, 1997
<PAGE>
The Company previously issued the ASSI Warrants to ASSI, Inc. in a series
of private transactions. Upon completion of the IPO, the ASSI Warrants were,
in accordance with their terms, automatically converted into Redeemable
Warrants. However, as so long as such warrants are held by ASSI, Inc. or
any affiliate thereof, their terms will differ from those of the Redeemable
Warrants in the following respects: (i) they became exercisable October 1, 1996;
(ii) they are not mandatorily redeemable by the Company; and (iii) they are
subject to certain separate registration rights. See "Certain Transactions -
Agreements With ASSI, Inc."
Pursuant to agreements with the Underwriters, without the prior
consent of such Underwriters, prior to January 2, 1998, Vincent J. Bitetti may
not sell any of the 200,000 shares of Common Stock which he is offering hereby,
and Eric H. Winston may not sell more than 10,000 of the 392,838 shares of
Common Stock which he is offering hereby. See "Certain Transaction - Agreements
With the Underwriters."
The various exercise prices of each of the Redeemable Warrants and
Underwriters' Warrants are all subject to adjustment pursuant to the
anti-dilution provisions thereof. The Company will receive proceeds from
the exercise of the Redeemable Warrants and the Underwriters' Warrants, if
any are exercised, but will not receive any proceeds from the resale thereof.
The Company will not receive any of the proceeds from sales of the Selling
Securityholders' Securities by the Selling Securityholders. See "Use of
Proceeds." All costs, expenses and fees in connection with the registration
of the Selling Security Holders' Securities will be borne by the Company. The
Company has agreed to indemnify the Selling Security Holders against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
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.
The exercise of the Redeemable Warrants may be prohibited in certain
states. See "Risk Factors - Current Prospectus and State Registration to
Exercise Warrants." Although the Redeemable Warrants were initially sold in
jurisdictions in which the Redeemable Warrants and underlying shares of
Common Stock were qualified for sale, purchasers who reside in or may move to
jurisdictions in which the Redeemable Warrants or underlying shares are not
registered for sale or otherwise qualified may have purchased such Redeemable
Warrants in the aftermarket during the period when the Redeemable Warrants
are exercisable. In this event the Company would be unable to issue shares to
such persons desiring to exercise their Redeemable Warrants unless and until
the shares could be qualified for sale in the jurisdictions in which such
purchasers reside, or unless an exemption to such qualification exists. The
exercise prices and other terms of the Redeemable Warrants were originally
determined by negotiation between the Company and the Underwriters,
and such terms were not necessarily related to the Company's asset
value, net worth or any other established criteria of value. See "Risk
Factors," "Selling Security Holders" and "Plan of Distribution."
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports and other
information filed by the Company can be inspected and copied at the public
reference facilities of the SEC at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of each such document may be obtained at prescribed rates
from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In
addition, all reports filed via the SEC's Electronic Data Gathering and
Retrieval System ("EDGAR") can be obtained from the SEC's Internet web site
located at www.sec.gov.
The Company has filed with the SEC two Registration Statements on Form
SB-2 (Nos. 33-80827 and 333-_________) (collectively with any amendments
thereto, the "Registration Statement") under the Securities Act with respect
to the securities being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and
the schedules and exhibits thereto. For further information with respect to
the Company, and the Common Stock and Redeemable Warrants, reference is
hereby made to the Registration Statement and to the exhibits filed as a part
thereof. The statements contained in this Prospectus as to the contents of
any contract or other document identified as an exhibit in this Prospectus
are not necessarily complete and, in each instance, reference is made to a
copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respects by such
reference. The Registration Statement, including exhibits, may be inspected
without charge at the principal reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained upon payment of fees prescribed by the SEC from the
Public Reference Section of the SEC at its principal office in Washington,
D.C. set forth above.
The Company's Common Stock and Redeemable Warrants are quoted on the Nasdaq
SmallCap Market under the symbols SSII and SSIIW, respectively. All of the
reports required to be filed by the Company with National Association of
Securities Dealers, Inc., if any, and other information concerning the Company
can be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and all
documents referred to above that have been incorporated into this Prospectus by
reference. Written or oral requests for such copies should be directed to:
Secretary, Sound Source Interactive, Inc., 26115 Mureau Road, Suite B,
Calabasas, California 91302-3126, telephone (818) 878-0505.
1
<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., a Delaware corporation (the "Company," as
previously defined), is engaged primarily in developing, publishing and
marketing educational, interactive computer software for children. The Company's
major software products are Interactive MovieBooks(TM), which combine animation
text, photos, sound clips and actual film footage of well recognized family
films and cartoon series. 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(R) and other content based on licensed entertainment properties.
The new entertainment utilities are marketed as limited edition serialized
collector editions. The Company has developed another line of children's
products which it refers to as Creativity Centers(TM). This product line
combines learning activities such as painting, drawing, matching, puzzles and
mazes within a framework of three distinct skill levels. In July 1996, the
Company created a "games" division, and in August 1996 it signed an agreement
with Twentieth Century Fox Licensing and Merchandising to produce a game sequel
to the 1989 theatrical release The Abyss(TM).
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.),
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), Free Willy 2(TM), The Secret
Garden(TM), Star Trek(TM), The Twilight Zone(TM), I Love Lucy(TM) and other
popular titles. The Company also holds licenses for new products based on Star
Trek: Deep Space 9(TM), Star Trek: Voyager(TM), All Dogs Go to Heaven II(TM),
The Land Before Time(TM), DragonHeart(TM), I Love Lucy(TM) and Free Willy 3(TM).
The Company is continuing the negotiation of additional licenses for its
children's titles, entertainment utilities and games. 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. Data from industry sources
indicates 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, animation, sound quality
and quality duplication of motion picture footage.
2
<PAGE>
The Company believes that as of February 28, 1997, 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, Etc., Kmart, Barnes & Noble, Sam's Club, Musicland and
others.
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 distribution agreement, SSIDS provides
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 within the
assigned territory 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 also has
entered into separate agreements providing for the distribution of its products
internationally. See "Business-Product Distribution."
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) develop alternative distribution channels,
including bundling with home video and other products, (vi) leverage its
licensed content to develop products intended for the game market, and (vii)
pursue strategic alliances and acquisitions of products and/or companies. See
"Business - Business Strategy."
The Company is located at 26115 Mureau Road, Suite B, Calabasas, California
91302-3126. Its telephone number is (818) 878-0505. Its facsimile number is
(818) 878-0007, and its Internet web site is located at www.cris.com/~ssi.
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 the fiscal year ended June 30, 1996,
the Company had negative working capital of $(5,373,974) and cash and cash
equivalents of $181,985.
The Company utilized a portion of the $8,285,784 in net proceeds of its
IPO to repay certain notes payable aggregating $4,987,500 plus accrued
interest of $373,573. Contemporaneous with the initial closing of the IPO,
the Company issued 2,016,657 Redeemable Warrants in connection with the
conversion of a note payable to ASSI, Inc. which was in the principal amount
of $500,000, plus accrued interest of $4,164. See "Certain Transactions -
Agreements With ASSI, Inc." As a result of these transactions, the Company
was able to eliminate its long term debt and substantially reduce its trade
payables, to renew favorable terms with its vendors, to make required royalty
payments under its various license agreements and to increase its investments.
3
<PAGE>
As of December 31, 1996, the Company had working capital of $2,555,381
in comparison with ($5,373,974) at June 30, 1996, an increase of $7,929,355.
Cash and cash equivalents increased $1,505,448 as a result, in part, of the
Company's IPO. Accounts receivable increased $443,283 due to increased sales
of products to the Company's North American distributor, its international
distributors and other direct sales, partially offset by the collection of
$512,134 (net of a short-term advance of $400,000) from the Company's former
distributor. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
The Company has experienced a significant increase in growth during the
six-month period ended December 31, 1996, as compared to the same period of
time in the prior fiscal year. The Company continues to search for new
opportunities to obtain licenses, develop and sell products, and to purchase
products that are at or near completion of development. Additionally, the
Company is seeking new and innovative ways to deliver its products to
consumers, some of which may require large up-front cash resources. If the
Company enters into agreements to pursue such business opportunities in the
future, the Company may require additional financing to fund its growth. See
"Risk Factors - Possible Need for Additional Financing."
4
<PAGE>
The Offering
Securities Offered ............. 11,078,097 shares of Common Stock issuable by
the Company upon exercise of the Redeemable
Warrants (including the 4,816,657 ASSI
Warrants).
240,000 shares of Common Stock issuable by
the Company upon exercise of the
Underwriters' Warrants.
690,338 shares of Common Stock being offered
by the Selling Security Holders (including
200,000 shares being offered by Vincent J.
Bitetti, the Company's Chairman of the Board
and Chief Executive Officer, 392,838 shares
being offered by Eric H. Winston, an
affiliate, and 40,000 shares being offered
by ASSI, Inc., an affiliate).
5,058,307 Redeemable Warrants being offered
by the Selling Security Holders (including
4,816,657 Redeemable Warrants being offered
by ASSI, Inc., an affiliate).
Terms of the Redeemable
Warrants ................... Each Redeemable Warrant entitles the holder
to purchase one share of Common Stock at a
price of $4.40, subject to adjustment, during
the period from July 1, 1997, until January
1, 2002.
The Redeemable Warrants (other than the ASSI
Warrants, while held by ASSI, Inc.) are
subject to redemption by the Company, at any
time commencing July 1, 1997, at a price of
$.25 per Redeemable Warrant, if the average
closing bid price of the Common Stock equals
or exceeds $5.60 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. In the event that the Redeemable
Warrants are called for redemption, they will
be exercisable for 30 days preceding the
applicable redemption date. See "Description
of Securities - Redeemable Warrants."
References herein to the Redeemable Warrants
include the ASSI Warrants, except as
expressly set forth herein. The terms of the
ASSI Warrants are identical to those of the
other Redeemable Warrants, except that for
so long as they are held by ASSI, Inc. or any
affiliate thereof their terms will differ
from those of the other Redeemable Warrants
in the following respects: (i) they became
exercisable on October 1, 1996; (ii) they are
not mandatorily redeemable by the Company;
and (iii) they are subject to separate
registration rights. See "Certain
Transactions - Agreements With ASSI, Inc."
5
<PAGE>
Shares of Common Stock
Outstanding as of
February 28, 1997 .......... 4,409,099 shares.
Common Stock Issuable Upon
Exercise of Redeemable
Warrants ................... 11,078,097 shares.
Common Stock Issuable
Upon Exercise of
Underwriters' Warrants ..... 240,000 shares.
Use of Proceeds ................ The net proceeds from the exercise of the
Redeemable Warrants and Underwriters'
Warrants, if any are exercised, will be used
for working capital and general corporate
purposes. The Company will not receive any of
the proceeds from the resale of any
Redeemable Warrants or Common Stock by the
Selling Security Holders as described herein.
See "Use of Proceeds."
Nasdaq Symbols:
Common Stock ............... SSII
Redeemable Warrants ........ SSIIW
Risk Factors ................... An investment in the Common Stock and
Redeemable Warrants involves a high degree of
risk and immediate substantial dilution. See
"Risk Factors" and "Dilution."
6
<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>
Six Months Ended
Year Ended June 30, December 31,
------------------------------- -------------------------------
Statement of Operations Data 1995 1996 1995 1996
- ------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Retail software sales .................... $ 1,255,230 $ 2,161,351 $ 1,077,547 $ 2,362,542
OEM sales ................................ 479,675 70,895 21,466 0
Development agreement revenues ........... 343,250 0 0 12,000
Royalties ................................ 76,771 32,387 21,678 55,704
------------ ------------ ------------ ------------
Net sales from continuing operations . 2,154,926 2,264,633 1,120,691 2,430,246
Gross profit ............................. 1,082,235 881,634 438,181 1,477,244
Noncash compensation expense recorded in
connection with Common Stock and
Common Stock options issued for
services ............................. 733,165 0 0 178,607
Other expenses ........................... 1,940,124 5,356,610 2,448,553 2,240,273
Loss from continuing operations .......... (1,591,054) (4,474,976) (2,010,372) (941,636)
Loss from discontinued operations ........ (143,106) 0 0 0
Net loss ................................. (1,734,160) (4,474,976) (2,010,372) (941,636)
Loss per common share from continuing
operations ........................... $ (0.85) $ (2.44) $ (1.08) $ (0.22)
Loss per common share from
discontinued operations .................. (0.08) 0 0 0
------------ ------------ ------------ ------------
Net loss per common share ................ $ (0.93) (2.44) (1.08) $ (0.22)
Weighted average number of common shares
outstanding .......................... 1,862,908 1,837,759 1,868,145 4,318,096
</TABLE>
Balance Sheet Data December 31, 1996
- ------------------ -----------------
Actual As Adjusted(1)
------ --------------
Working capital ............................ $ 2,555,381 $ 48,811,826
Total assets ............................... 4,559,193 50,815,638
Current liabilities ........................ 1,604,890 1,604,890
Long term debt ............................. 124,602 124,602
Stockholders' equity ....................... 2,829,701 49,086,146
- --------------------
(1) As adjusted to reflect the issuance of 11,078,097 shares of Common Stock
upon exercise of the 11,078,097 Redeemable Warrants at an exercise price of
$4.40 per share, net of the expenses of this offering (estimated at $50,000
for costs and $2,437,181 for the five percent warrant exercise fee payable
to the Underwriters). Does not reflect the exercise of any other
outstanding warrants or options.
7
<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. This Prospectus
contains and incorporates by reference forward-looking statements within the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the discussion set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein. Such statements are based on current expectations that
involve a number of uncertanties including those set forth in the risk
factors below. Actual results could differ materially from those projected in
the forward-looking statements.
Product Distribution. On June 1, 1996 the Company entered into a
Distribution Services Agreement with SSIDS. Pursuant to this distribution
agreement, SSIDS provides 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 within the assigned territory 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 also has entered into separate agreements providing
for the distribution of its products internationally. See "Business - Product
Distribution."
The Distribution Services Agreement is for a term of two years. The
Company is substantially dependent upon SSIDS for the distribution of its
products throughout the United States and Canada 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.
Product Returns; Collection of Accounts Receivable; Credit Risk. Under
the SSIDS distribution agreement, SSIDS is responsible for collection of
accounts and the Company is responsible for product returns. The Company
intends to maintain an appropriate reserve for product returns which, based
upon its prior experience and current market conditions, 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."
Past Operating Losses; No Assurance of Future Profitability. The Company
sustained net losses of $1,734,160 and $4,474,976 for the fiscal years ended
June 30, 1995, and 1996, respectively, and a net loss of $941,636 for the six
months ended December 31, 1996. There can be no assurance as to when, if
ever, the Company will achieve profitability. 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.
Limited History of Business Operations. The Company has a limited
operating history. The Company conducted substantially no business prior to
its acquisition of Sound Source Interactive, Inc., a California corporation
(the "Subsidiary") 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 Apple Macintosh and IBM-compatible
computers incorporating content licensed from major motion picture studios.
See generally "The Company" and "Business."
New Business Risks for 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
8
<PAGE>
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.
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, toy manufacturers 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.
The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), 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 divisions may begin to vie for their studios' 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. 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
9
<PAGE>
Company and has signed an employment agreement with a term ending on
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 $5,000,000 life
insurance policy on Vincent J. Bitetti, Chairman of the Board and Chief
Executive Officer, and a $500,000 life insurance policy on Ulrich E.
Gottschling, President, Chief Operating Officer, Chief Financial Officer,
Treasurer and Secretary, but does not currently maintain life insurance on
any of its other employees. See "Management - Directors and Executive
Officers" and "Employment Agreements."
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(R)-Windows(R)-based software. More
recently, consumer demand has been shifting from disk-based software to software
on CD-ROM. In addition, the introduction of the Windows '95(R) 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(R) 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(R) 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
10
<PAGE>
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 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 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 release of 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
competitors' products or for any other reason. Retailers compete in a volatile
industry that is subject to rapid change,
11
<PAGE>
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 purchase
terms, 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 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 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 was not discovered until the product was shipped, it could result in
the Company's liability for returned merchandise and a loss of its reputation
for high quality products. Although the Company would attempt to recoup from
the supplier of defective product any expenses incurred, there can be no
assurance that the Company 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. The failure to do so, or to
otherwise effectively manage potential future growth, could have a material
adverse effect on the Company's business, operating results and financial
condition. 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 of its 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
12
<PAGE>
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.
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."
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.
Licenses Terminable Upon Change in Ownership, Control or Management. 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 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), Free Willy 3(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.
The completion of the Company's IPO may have resulted, and any future
change in ownership or control of the Company (including exercise of the
Redeemable Warrants) 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.
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 the license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next 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.
13
<PAGE>
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 all material licenses will be renewed even
if such requirements are satisfied. See "Business - Proprietary Rights and
Licenses."
Possible Need for Additional Financing. The Company heretofore has been
substantially dependent on the net proceeds of its securities offerings,
including the IPO, to fund its working capital requirements. As of December
31, 1996, the Company had working capital of $2,555,381 and cash and cash
equivalents of $1,687,433. The Company has experienced a significant increase
in growth during the six-month period ended December 31, 1996, as compared to
the same period of time in the prior fiscal year. The Company continues to
search for new opportunities to obtain licenses, develop and sell products,
and to purchase products that are at or near completion of development.
Additionally, the Company is seeking new and innovative ways to deliver its
products to consumers, some of which may require large up-front cash
resources. If the Company enters into agreements to pursue such business
opportunities in the future, the Company may require additional financing to
fund its growth. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Broad Discretion in Use of Proceeds. The net proceeds from the exercise of
the Redeemable Warrants and Underwriters' Warrants, if any are exercised, will
be used for working capital and general corporate purposes. The Company will
have broad discretion in the use of funds allocated to working capital. The
Company will not receive any proceeds from the resale of any Redeemable Warrants
or Common Stock by the Selling Security Holders as described herein. See "Use of
Proceeds."
Risk of Limitation of Use of Net Operating Loss Carryforwards. As of June
30, 1996, the Company had net operating loss carryforwards of approximately
$5,742,000 for federal income tax purposes, which may be utilized from 1997 to
2012 (subject to certain limitations). The consummation of the IPO resulted 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. Consequently, the Company's use of its net operating loss
carryforwards to offset taxable income in any post-change period is subject to
certain specified annual limitations. 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. As of
February 28, 1997, the Company had 4,409,099 outstanding shares of Common
Stock. Vincent J. Bitetti, who is the Company's largest stockholder, owned of
record 1,234,684 shares (27.9 percent) of the outstanding Common Stock; and
ASSI, Inc. owned of record 40,000 shares of Common Stock and presently
exercisable ASSI Warrants to purchase an additional 4,816,657 shares of
Common Stock. Therefore, ASSI, Inc. beneficially owns 4,856,657 shares of
Common Stock, representing approximately 52.5 percent of the outstanding
Common Stock assuming exercise in full of the ASSI Warrants but no other
outstanding warrants and options (31.3 percent assuming exercise in full of
all the other Redeemable Warrants, but no other outstanding warrants and
options). Louis Habash of Las Vegas, Nevada, has advised the Company that he
owns all of the voting equity securities of ASSI, Inc., and thus is the
ultimate beneficial owner of all of the Common Stock and ASSI Warrants owned
by ASSI, Inc. See "Principal Stockholders" and "Certain Transactions -
Agreements with ASSI, Inc."
14
<PAGE>
If the holders of all of the Redeemable Warrants other than the ASSI
Warrants were to exercise such Warrants, but no other outstanding warrants or
options were exercised, the voting power of Vincent J. Bitetti would be reduced
to approximately 11.6 percent. If ASSI, Inc. were to exercise all of the ASSI
Warrants beneficially owned by it as described above, but no other outstanding
warrants or options were exercised, the voting power of Vincent J. Bitetti would
be reduced to approximately 13.4 percent, and would be further reduced to
approximately 8.0 percent assuming exercise in full of all of the other
Redeemable Warrants but no other outstanding warrants and options). ASSI, Inc.
has indicated to the Company that it acquired the ASSI Warrants and Common Stock
beneficially owned by it as an investment with a view to long-term appreciation.
See "Certain Transactions - Agreements with ASSI, Inc.
The Company has granted each of the Underwriters and ASSI, Inc. the
right to nominate from time to time one director (or to have a designee
attend all Board meetings as a nonvoting advisor). In addition, Vincent J.
Bitetti, the Company's Chairman of the Board and Chief Executive Officer, and
Eric H. Winston, its former President and Chief Operating Officer, have
entered into voting agreements with each of the Underwriters 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 Underwriters
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 at least 20 percent of the 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 outstanding Common
Stock. Pursuant to these arrangements, Vincent J. Bitetti has designated
himself and Ulrich E. Gottschling as his director nominees, and ASSI, Inc.
has nominated Mark A. James as a director. The Underwriters have not
exercised their director nomination rights. See "Management - Directors and
Executive Officers" and "Certain Transactions - Agreements With ASSI, Inc."
and "- Agreements With the Underwriters."
The Company is 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, if cumulative voting
is exercised (and without regard to the various voting agreements described
herein), the Company's stockholders other than Vincent J. Bitetti will have
sufficient votes to elect four of its six directors assuming no exercise of the
Redeemable Warrants, and to elect five of its six directors assuming exercise of
the Redeemable Warrants in full.
Immediate Substantial Dilution. If all 6,261,440 of the outstanding
Redeemable Warrants other than the ASSI Warrants are exercised, such exercise
will result in dilution to the exercising investors of $1.67 per share
(38.2 percent) between the Warrant exercise price ($4.40 per share) and the
pro forma net tangible book value per share of Common Stock upon completion
of such Warrant exercise. If all 11,078,097 of the outstanding Redeemable
Warrants (including the ASSI Warrants) are exercised, such exercise will
result in dilution to the exercising investors of $1.22 per share (27.7
percent) between the exercise price ($4.40 per share) thereof and the pro
forma net tangible book value per share of Common Stock upon completion of
the exercise of such Warrants. The exercise of the 240,000 Underwriters'
Warrants, which have an exercise price of $5.80 per share, will be
anti-dilutive to investors who exercise Redeemable Warrants and/or ASSI
Warrants. See "Dilution."
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<PAGE>
Underwriters' Potential Influence on the Market. The Underwriters have
advised the Company that a significant amount of the shares of Common Stock
and the Redeemable Warrants sold in the IPO were sold to customers of the
Underwriters. Although the Underwriters are, as of the date of this
Prospectus, making a market in the Common Stock and Redeemable Warrants, they
have no legal obligation to do so. It should be noted that one of the
Underwriters, The Boston Group, L.P., suspended making a market in the Common
Stock and the Redeemable Warrants from March 13, 1997, to March 21, 1997,
while it arranged for new financing. There presently are seven market makers
for the Common Stock and the Redeemable Warrants, in addition to the
Underwriters. Nevertheless, the Underwriters have been and may remain a
dominating influence in the market for the Common Stock and the Redeemable
Warrants. The prices and the liquidity of the Common Stock and the Redeemable
Warrants may be significantly affected by the degree, if any, of the
Underwriters' participation in the market. No assurance can be given that any
market making activities of the Underwriters will be continued.
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 Redeemable
Warrants attempts to exercise such 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.
Although the Redeemable Warrants were not knowingly sold in the IPO to
purchasers in jurisdictions in which the Redeemable Warrants were 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 of
Common Stock 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."
Adverse Effect to Holders of Possible Redemption of Redeemable Warrants.
The Redeemable Warrants (other than the ASSI Warrants) are subject to
redemption by the Company, at any time commencing July 1, 1997, at a price of
$.25 per Redeemable Warrant, if the average closing bid price for the Common
Stock equals or exceeds $5.60 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, if any, 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
16
<PAGE>
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."
Securities Eligible for Future Sale. As of February 28, 1997, a total of
4,409,099 shares of Common Stock and 11,078,097 Redeemable Warrants (including
the 4,816,657 ASSI Warrants) were issued and outstanding. An additional
12,433,272 shares of Common Stock were issuable pursuant to the following
outstanding options and warrants: (a) 342,337 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 have been or may be granted
pursuant to the Company's 1995 Stock Option Plan; (c) 282,838 shares of Common
Stock underlying options granted to a Selling Security Holder; and (d) an
aggregate of 11,318,097 shares of Common Stock issuable upon the exercise of (i)
the Redeemable Warrants (11,078,097 shares) and (ii) the Underwriters' Warrants
(240,000 shares).
Of the 4,409,099 shares of Common Stock and 11,078,097 Redeemable Warrants
issued and outstanding as of February 28, 1997 (subject to the assumptions in
the preceding paragraph), 3,012,469 shares and 6,019,790 Redeemable Warrants are
freely tradeable without further registration under the Securities Act (except
for any such securities held by an "affiliate" of the Company), and the
remaining 1,396,630 outstanding shares and 5,058,307 Redeemable Warrants are
"restricted securities" 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. Of such restricted securities, 407,500 shares of
Common Stock and all 5,058,307 Redeemable Warrants may be sold pursuant to this
Prospectus, and upon such sale will become freely tradeable (except for any such
shares or Redeemable Warrants held by an "affiliate" the Company). See "Selling
Security Holders." Further, the 11,318,097 shares of Common Stock issuable by
the Company upon exercise of the Redeemable Warrants and Underwriters' Warrants
and the 282,838 shares issuable by the Company upon exercise of an option held
by a Selling Security Holder may likewise be sold pursuant to this Prospectus
and upon such sale will become freely tradeable (except for any such shares held
by an "affiliate" of the Company).
As of February 28, 1997, options for the purchase of 342,337 shares of
Common Stock were issued 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 342,337 options granted under the 1992 Stock Option Plan, 258,668 are
presently exercisable, 41,834 will become exercisable later 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. As
of February 28, 1997, the Company had granted options for the purchase of
404,607 shares of Common Stock pursuant to the 1995 Stock Option Plan, of which
5,054 are presently exercisable, 3,401 will become exercisable later in fiscal
1997, 148,652 will become exercisable in fiscal 1998, 147,000 will become
exercisable in fiscal 1999, 100,250 will become exercisable in fiscal 2000 and
250 will become exercisable in fiscal 2001. The Company has filed separate
registration statements pertaining to all of the Common Stock issuable upon
exercise of options granted or to be granted pursuant to the 1992 Stock Option
Plan and the 1995 Stock Option Plan. All Common Stock issuable upon exercise of
the options will be freely tradeable (except for any such shares held by an
"affiliate" of the Company). See "Management - 1995 Stock Option Plan" and "-
1992 Stock Option Plan."
17
<PAGE>
Certain of the Company's security holders are entitled to registration
rights as described under "Management - Employment Agreements" (as to Vincent
J. Bitetti and Eric H. Winston), "Certain Transactions - 1995 Bridge
Financing" (as to holders of Redeemable Warrants issued upon conversion of
the Bridge Warrants (as hereinafter defined) and the Common Stock underlying
such Redeemable Warrants), "Certain Transactions - 1995 Private Placement"
(as to holders of Redeemable Warrants issued upon conversion of the Private
Warrants (as hereinafter defined) and the Common Stock underlying such
Redeemable Warrants, and Common Stock issued in the Concurrent Private
Placement (as hereinafter defined)), "Certain Transactions - Agreements with
ASSI, Inc." (as to the ASSI Warrants and the Common Stock underlying such
ASSI Warrants), and "Certain Transactions -Agreements with the Underwriters"
(as to the Underwriters' Warrants and underlying Common Stock). Sales of any
or all such securities described in the preceding paragraphs may depress the
price of the Common Stock or the Redeemable Warrants. See "Securities
Eligible for Future Sale."
An additional 3,157,629 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, 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 the Delaware GCL and, as a
quasi-California corporation, to the more restrictive provisions of the
California GCL. 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 the Delaware GCL, 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. The California GCL 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 were 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."
18
<PAGE>
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 currently are listed on the Nasdaq SmallCap Market
under these rules. 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 of Common
Stock. In late January 1997 the Boards of the Nasdaq Stock Market and the
National Association of Securities Dealers proposed substantial changes to
Nasdaq's listing qualification standards which, if adopted by the Securities
and Exchange Commission, would impose more stringent criteria for continued
listing of securities on Nasdaq.
The Company expects to maintain its listing on Nasdaq; however, in the
event the Company experiences losses from operations or material adverse
trading conditions, the Common Stock and Redeemable Warrants could be subject
to delisting from Nasdaq under either the current or, if adopted, the
proposed listing standards. It is anticipated that if the Common Stock and
Redeemable Warrants are delisted from Nasdaq, trading, if any, therein 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 the Company's securities would be 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 Common Stock and Redeemable Warrants.
In addition, if the Common Stock and Redeemable Warrants 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 SEC 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 Common Stock and Redeemable Warrants
will not be defined as a penny stock due to their anticipated continued listing
on Nasdaq, in the event they subsequently become characterized as a penny stock,
the market liquidity therefor could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Common Stock and Redeemable Warrants and, thus, the ability of
purchasers in this offering to sell their Common Stock and Redeemable Warrants
in the secondary market.
19
<PAGE>
USE OF PROCEEDS
The net proceeds from the exercise of the Redeemable Warrants and
Underwriters' Warrants, if any are exercised, will be used for working capital
and general corporate purposes. The proceeds to the Company from the exercise of
all the Redeemable Warrants net of the expenses of this offering (estimated at
$50,000 for costs and $2,437,181 for the five percent warrant exercise fee
payable to the Underwriters) would be approximately $46,256,446. The Company
will not receive any of the proceeds from the resale of any Redeemable Warrants
or Common Stock by the Selling Security Holders as described herein. See "Risk
Factors - Broad Discretion in Use of Proceeds."
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 Delaware GCL, which is the corporation law of 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 the Delaware GCL, 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. The California GCL 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 were 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" and "Description of Securities - Application of California GCL."
20
<PAGE>
MARKET PRICE OF SECURITIES
The Common Stock and Redeemable Warrants have been listed for trading on
the Nasdaq SmallCap Market since July 1, 1996. The following table sets forth
the range of the bid prices for the Common Stock and Redeemable Warrants during
the periods indicated, and represents interdealer prices, without retail
mark-ups, mark-downs or commissions to the broker-dealer, and may not represent
actual transactions.
Nasdaq
Symbol High Low
------ ---- ---
Common Stock SSII
1996
Third Quarter $6.25 $4.00
Fourth Quarter $5.75 $4.00
1997
First Quarter (1/1/97-3/26/97) $4.31 $1.38
Redeemable Warrants SSIIW
1996
Third Quarter $2.38 $1.00
Fourth Quarter $1.88 $1.00
1997
First Quarter (1/1/97-3/26/97) $1.00 $0.31
See the cover page of this Prospectus for a recent last sale price of the
Common Stock and Redeemable Warrants on the Nasdaq SmallCap Market.
As of February 28, 1997, there were approximately 150 holders of record of
the Common Stock and 20 holders of the record of the Redeemable Warrants. Most
such securities are held in street name by nominees who hold stock certificates
for an unknown number of beneficial owners.
21
<PAGE>
DILUTION
The following discussion and tables reflect the potential dilution to
holders who exercise their Redeemable Warrants at $4.40 per share. The
difference between the exercise price per Warrant and the pro forma net tangible
book value per share of Common Stock after such exercise constitutes the
resulting dilution 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. At
December 31, 1996, the Company had 4,377,824 shares of Common Stock outstanding
and at such date the net tangible book value of the Company was $2,829,701 or
approximately $.65 per share of Common Stock. See "Risk Factors - Immediate
Substantial Dilution."
After giving effect to the exercise of all Redeemable Warrants other than
the ASSI Warrants (and assuming the exercise of no other warrants or options) to
purchase 6,261,440 shares of Common Stock net of the related expenses of this
offering (estimated at $50,000 for costs and $1,377,517 for the five percent
warrant exercise fee payable to the Underwriters), the pro forma net tangible
book value of the Company at December 31, 1996, would have been $29,052,520 or
$2.73 per share, representing an immediate increase in net tangible book value
of $2.08 per share to existing stockholders and an immediate dilution of $1.67
per share (38.2 percent) to purchasers of shares of Common Stock upon the
exercise of such Warrants.
The following table illustrates the dilution to new investors on a per
share basis assuming exercise of all 6,261,440 Redeemable Warrants other than
the ASSI Warrants (and assuming the exercise of no other warrants or options):
Description Amount Amount
- ----------- ------ ------
Exercise price per share of Common
Stock under Redeemable Warrants $ 4.40
Pro forma net tangible book value per share
of Common Stock before exercise of
Redeemable Warrants $ 0.65
Increase in net tangible book value per
share of Common Stock attributable to the
sale of 6,262,440 shares of Common
Stock upon exercise of Redeemable Warrants 2.08
------
Pro forma net tangible book value per share
of Common Stock after exercise of
Redeemable Warrants 2.73
------
Dilution per share of Common Stock to new
investors upon exercise of Redeemable Warrants $ 1.67
======
After giving effect to the exercise of all Redeemable Warrants (including
the ASSI Warrants and assuming the exercise of no other warrants or options) to
purchase 11,078,097 shares of Common Stock net of the related expenses of this
offering (estimated at $50,000 for costs and $2,437,181 for the five percent
warrant exercise fee payable to the Underwriters), the pro forma net tangible
book value of the Company at December 31, 1996, would have been $49,086,146, or
$3.18 per share, representing an immediate increase in net tangible book value
of $2.53 per share to existing stockholders and an
22
<PAGE>
immediate dilution of $1.22 per share (27.7 percent) to purchasers of Common
Stock upon the exercise of such Warrants.
The following table illustrates the dilution to new investors on a per
share basis assuming exercise of all 11,078,097 Redeemable Warrants (including
the ASSI Warrants and assuming the exercise of other warrants or options):
Description Amount Amount
- ----------- ------ ------
Exercise price per share of Common
Stock under Redeemable Warrants $ 4.40
Pro forma net tangible book value per share
of Common Stock before exercise of
Redeemable Warrants $ 0.65
Increase in net tangible book value per
share of Common Stock attributable to the
sale of 11,078,097 shares of Common Stock
upon exercise of Redeemable Warrants 2.53
------
Pro forma net tangible book value per
share of Common Stock after exercise
of all Redeemable Warrants 3.18
------
Dilution per share of Common Stock
to new investors upon exercise of
Redeemable Warrants $ 1.22
======
The foregoing computations assume the exercise of no warrants or stock
options after December 31, 1996. See "Risk Factors - Securities Available for
Future Sale" and "Securities Eligible for Future Sale."
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the capitalization
of the Company on an actual basis and as adjusted to give effect to the exercise
of the Redeemable Warrants to purchase a total of 11,078,097 shares of Common
Stock at $4.40 per share, 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>
December 31, 1996
---------------------------------
Actual As Adjusted(1)
------------ --------------
<S> <C> <C>
Long-Term Debt ....................................... $ 124,602 $ 124,602
Stockholder's equity (deficit)
Common Stock, $.001 par value; 20,000,000 shares
authorized;4,377,824 shares issued and outstanding
(actual); 15,455,921 outstanding (as adjusted) ... 4,378 15,456
Warrants ......................................... 1,104,925 50
Additional paid capital .............................. 13,249,586 60,599,828
Accumulated deficit .................................. (11,529,188) (11,529,188)
------------ ------------
Total stockholders' equity ........................... 2,829,701 49,086,146
------------ ------------
Total Capitalization ............................. $ 2,954,303 $ 49,210,748
============ ============
</TABLE>
- ---------------------
(1) As adjusted to reflect the issuance of 11,078,097 shares of Common Stock
upon exercise of the 11,078,097 Redeemable Warrants at an exercise price of
$4.40 per share, net of the expenses of this offering (estimated at $50,000
for costs and $2,437,181 for the five percent warrant exercise fee payable
to the Underwriters). Does not reflect the exercise of any other
outstanding warrants or options.
24
<PAGE>
SELECTED FINANCIAL DATA
The following table of selected financial data 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, 1995 and 1996 has been derived from audited financial
statements prepared by Corbin & Wertz, certified public accountants, who are the
Company's independent auditors. The financial data for the six-month periods
ended December 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 six-month period are not necessarily indicative of the
results that may be expected for the entire year ending June 30, 1997. 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>
Six Months Ended
Year Ended June 30, December 31,
----------------------------- -----------------------------
Statement of Operations Data 1995 1996 1995 1996
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Retail software sales .................... $ 1,255,230 $ 2,161,351 $ 1,077,547 $ 2,362,542
OEM sales ................................ 479,675 70,895 21,466 0
Development agreement revenues ........... 343,250 0 0 12,000
Royalties ................................ 76,771 32,387 21,678 55,704
----------- ----------- ----------- -----------
Net sales from continuing operations ... 2,154,926 2,264,633 1,120,691 2,430,246
Gross profit ............................. 1,082,235 881,634 438,181 1,477,244
Compensation in connection with
Common Stock and Common
Stock options issued for services ...... 733,165 0 0 178,607
Other expenses ........................... 1,940,124 5,356,610 2,448,553 2,240,273
Loss from continuing operations .......... (1,591,054) (4,474,976) (2,010,372) (941,636)
Loss from discontinued operations ........ (143,106) $ 0 $ 0 $ 0
Net loss ................................. (1,734,160) (4,474,976) (2,010,372) (941,636)
Loss per common share from continuing
operations ............................. $ (0.85) $ (2.44) $ (1.08) $ (0.22)
Loss per common share from discontinued
operations ............................. $ (0.08) $ 0 $ 0 $ 0
Net loss per common share ................ $ (0.93) $ (2.44) $ (1.08) $ (0.22)
Weighted average number of common shares
outstanding ............................ 1,862,908 1,837,759 1,868,145 4,318,096
</TABLE>
Balance Sheet Data December 31, 1996
- ------------------ -----------------
As
Actual Adjusted(1)
------ -----------
Working capital ............................ $ 2,555,381 $ 48,811,826
Total assets ............................... 4,559,193 50,815,638
Current liabilities ........................ 1,604,890 1,604,890
Long term debt ............................. 124,602 124,602
Stockholders' equity ....................... 2,829,701 49,086,146
(1) As adjusted to reflect the issuance of 11,078,097 shares of Common Stock
upon exercise of the 11,078,097 Redeemable Warrants at an exercise price of
$4.40 per share, net of the expenses of this offering (estimated at $50,000
for costs and $2,437,181 for the five percent warrant exercise fee payable
to the Underwriters). Does not reflect the exercise of any other
outstanding warrants or options.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements.
Prospective investors are cautioned that such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual events or results may differ materially from those discussed in
such statments as a result of various factors, including, without limitation,
those discussed in the "Risk Factors" section of this Prospectus and the
matters set forth in this Prospectus generally.
Overview
The Company derives substantially all of its revenues from sales of its
retail consumer software. The Company designs, develops, markets and supports a
broad line of consumer software products. The Company focuses primarily on
nonviolent, family-oriented products with educational and/or entertainment
value, which are easy to use and install, using popular movies, television
series and comic book characters.
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 the fiscal year ended June 30, 1995. During the fiscal year ended June
30, 1996, of the Company's net sales of $2,264,633, a total of $1,889,750
(83.4%) were generated by Acclaim. Under the terms of the Sales and
Distribution 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 terminated the distribution agreement as of
April 1, 1996. See "Business - Legal Proceedings."
Effective June 1, 1996 the Company entered into a Distribution Services
Agreement with Simon and Schuster Interactive Distribution Services, Inc.
("SSIDS"). Pursuant to the Distribution Services Agreement, SSIDS provides
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 within
the assigned territory 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. For the
six months ended December 31, 1996, of the Company's net revenues of
$2,430,246, a total of $1,185,664 (48.8%) were generated by SSIDS. The
Company also has entered into separate agreements providing for the
distribution of its products internationally. See "Risk Factors - Product
Distribution" and "Business - Product Distribution."
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. See "Risk Factors-Product Returns."
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,
primarily
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comprised of software sales. The Company sustained losses from its
discontinued synthesizer operations of $143,106 in fiscal 1995, including an
estimated loss of $32,000 during the phase-out period. No additional losses from
the discontinued operations were recorded during fiscal 1996.
Results of Operations
Six Months Ended December 31, 1995 Compared to Six Months Ended December
31, 1996
Net Sales. Net sales increased by 116.9 percent from $1,120,691 for the
six months ended December 31, 1995, to $2,430,246 for the six months ended
December 31, 1996. The increase is primarily attributable to increased
distribution by SSIDS, the Company's North American distributor, sales by the
Company to its foreign distributors and other direct sales in North America.
Sales to international distributors for the six months ended December 31,
1996 were approximately $435,131, as compared to no international sales
during the same period in 1995. Sales to SSIDS for the six-month period ended
December 31, 1996, were $1,185,664. No sales during the
comparable period in 1995 were to SSIDS. During the six months ended December
31, 1995, the Company recorded sales to its former distributor, Acclaim, in
the amount of $819,619.
Cost of Sales. Cost of sales increased by 39.6 percent from $682,510 for
the six months ended December 31, 1995, to $953,002 for the six months ended
December 31, 1996. However, cost of sales as a percentage of net sales
decreased from 60.9 percent to 39.2 percent during these respective periods.
The increase in total cost of sales is due to the above noted 116.9 percent
increase in net sales. The decrease in cost of sales as a percentage of net
sales is primarily due to changes in product mix to higher priced items and
the sale of certain end-of-life inventory which had been previously
written-off as slow-moving. During the six months ended December 31, 1995,
the Company recorded reserves related to guaranteed royalties and slow-moving
inventories which also resulted in the higher percentage of cost of sales for
such period.
Marketing and Sales. Marketing and sales expenses increase by 20.9
percent from $572,778 for the six months ended December 31, 1995, to $692,752
for the six months ended December 31, 1996, and decreased as a percentage of
net sales from 51.1 percent to 28.5 percent, respectively. The change in
dollar amount is principally related to increased marketing and sales efforts
to support new product releases during the six month period ended December
31, 1996, and increased salaries due to additional sales personnel. The
decrease as a percentage of net sales is due to the above noted 116.9 percent
increase in net sales, particularly international sales for which a smaller
percentage of marketing effort is required by the Company as many of those
functions are primarily performed by the individual distributors.
Research and Development. Research and development costs increased 113.7
percent from $266,153 during the six months ended December 31, 1995, to
$568,874 for the six months ended December 31, 1996, and decreased as a
percentage of net sales from 23.7 percent to 23.4 percent, respectively. The
increase in costs is primarily associated with (i) the Company hiring
programmers to bring all product development in-house, (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. The Company anticipates that research and development
costs will continue to increase as the Company hires additional personnel to
support an increase in the number of products under development and to
perform all development activities internally.
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General and Administrative. General and administrative expenses
decreased by 16.0 percent from $1,208,838 during the six months ended
December 31, 1995, to $1,014,853 for the six months ended December 31, 1996,
and decreased as a percentage of net sales from 107.9 percent to 41.8
percent, respectively. Included in general and administrative expenses for
the six months ended December 31, 1996, is a one-time charge of $307,028
related to the departure of the Company's former president/chief operating
officer. Additionally, during the six months ended December 31, 1996, the
Company recorded expenses associated with being a publicly held company,
principally printing, mailing and legal fees associated with the Company's
annual report and stockholder meeting. During the six month period ended
December 31, 1995, the Company recorded an allowance for doubtful accounts
receivable from its former distributor, Acclaim, in the amount of $422,310.
Compensation in Connection with Common Stock and Common Stock Options
Issued for Services Rendered. Expenses recorded by the Company in connection
with Common Stock and Common Stock options issued for services rendered
amounted to $178,607 for the six months ended December 31, 1996, and relate
to the vesting of Common Stock options issued during fiscal 1994. No such
expense was recorded for the six month period ended December 31, 1995, as no
vesting occurred during this period.
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1996
Net Sales. Net Sales from continuing operations increased by 5.1 percent
from $2,154,926 for the fiscal year ended June 30, 1995 (fiscal 1995) to
$2,264,633 for the fiscal year ended June 30, 1996 (fiscal 1996). In fiscal
1996, 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 by 72.2 percent from
$1,255,230 in fiscal 1995 to $2,161,351 in fiscal 1996. However, the Company
had no development revenues during fiscal 1996 as compared with $343,250 for
fiscal 1995. Revenues from OEM sales declined from $479,675 for fiscal 1995
to $70,895 for fiscal 1996, reflecting a one-time agreement with Acer that
produced significant revenues in calendar 1994 but not in calendar 1995. In
addition, the Company's royalty fees declined from $76,771 for fiscal 1995 to
$32,387 for fiscal 1996. The higher royalty revenues for fiscal 1995
resulted primarily from product introductions incorporating content
sublicensed by the Company that were not repeated in fiscal 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 fiscal 1996, of the Company's net sales of $2,264,633, a total of
$1,889,750 (83.4%) were generated by Acclaim. None of the Company's net sales of
$2,154,926 during the fiscal 1995 were generated by Acclaim. As described above,
the Company terminated its exclusive distribution agreement with Acclaim as of
April 30, 1996, and entered into a new distribution agreement with SSIDS as of
June 1, 1996.
Cost of Sales. Cost of Sales increased by 28.9 percent from $1,072,691
for fiscal 1995 to $1,382,999 for fiscal 1996, representing 49.8 percent and
61.1 percent of net sales, respectively, and 85.5 percent and 64.0 percent of
product sales, respectively. This decrease in cost of sales as a percentage
of product sales is attributable to the above noted 72.2 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 per unit costs due to larger quantity
purchases, decreased royalty costs, and diminishing inventory writedowns and
writeoffs.
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Marketing and Sales. Marketing and sales expenses increased by 104.0
percent from $516,886 for fiscal 1995 to $1,054,602 for fiscal 1996, and
increased as a percentage of net sales from 24.0 percent to 46.7 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.
Research and Development. Research and development costs increased by
89.7 percent from $378,471 for fiscal 1995 to $717,994 for fiscal year 1996,
and increased as a percentage of net sales from 17.6 percent to 31.7 percent,
respectively. These increases were primarily attributable to costs related to
product upgrades and new product development activities. The Company believes
that research and development expenses will increase in dollar amount in the
future as the Company continues to expand its development activities.
General and Administrative. General and administrative expenses
increased by 23.0 percent from $1,783,023 for fiscal 1995 to $2,193,855 for
fiscal 1996, and increased as a percentage of net sales from 82.7 percent to
96.9 percent, respectively. This increase is primarily attributable to costs
incurred by the Company during fiscal year 1996 related to the Company's IPO
and two private placements, as well as increases in executive salaries
related to the addition of a Chief Financial Officer. A total of $733,165 of
the general and administrative expenses for fiscal 1995 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 of
such options on the date of grant and the exercise price thereof. No such
charge was incurred during fiscal year 1996. In addition, the Company
recorded an allowance for doubtful accounts of $40,000 during fiscal 1995
compared to an allowance for doubtful accounts related to a claim of $663,421
during fiscal 1996.
Tax Provision. The current period income tax provision is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision
for Federal income taxes as the Company had a loss in each of fiscal 1995 and
1996.
Other. Other income (expense) increased from $6,691 for fiscal 1995 to
$(1,388,559) for fiscal 1996, and increased as a percentage of net sales from .3
percent to (61.3) percent, respectively. This increase is primarily comprised of
amortization of deferred loan costs of $1,035,200 and interest expense of
$374,175, both of which relate to private placements of the Company's debt
securities.
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 the fiscal year ended June 30, 1994 (fiscal 1994) to
$2,154,296 for the fiscal year ended June 30, 1995 (fiscal 1995). Retail
software sales decreased by 5 percent from $1,313,890 for fiscal 1994 to
$1,255,230 for fiscal 1995 due principally to discounting and pricing
declines for the Company's software products. Development revenues increased
by 205 percent from $112,520 for fiscal 1994 to $343,250 for fiscal 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 fiscal 1994 to $479,675 for fiscal 1995. This increase in OEM
sales resulted principally from sales pursuant to a software bundling
agreement with a PC manufacturer. Royalty revenues decreased by 70 percent
from $253,961 for fiscal 1994 to $76,771 for fiscal 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.
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The Company has 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. The decrease in cost
of sales 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 under an OEM bundling agreement
in the first 6 months of 1995, partially offset by a change in the product
mix to higher priced items and a decrease in OEM sales.
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 products and brand name, and an increase in personnel.
Research and Development. Research and development costs 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.
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 in general and administrative expenses
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 fiscal 1994 general and
administrative expenses and $733,165 of the fiscal 1995 general and
administrative expenses related 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.
Tax Provision. The income tax provision for fiscal 1994 and fiscal 1995
is comprised of minimum State of California Franchise Taxes of $1,600. There
is no provision for Federal income taxes for fiscal 1994 or fiscal 1995 as
the Company had a current year loss and a net operating loss carryforward for
both such years.
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. See "Risk Factors - Fluctuations in Operating
Results; Seasonality."
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Seasonality
The consumer software business traditionally has been seasonal.
Typically, net sales are the highest during the fourth calendar quarter and
decline 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 and during television ratings "sweep" periods. 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 the fiscal year ended June 30,
1996, the Company had negative working capital of $(5,373,974) and cash and
cash equivalents of $181,985.
Pursuant to its IPO, the Company issued a total of 2,560,000 shares of
Common Stock at $4.00 per share and 1,371,775 Redeemable Warrants at $.25 per
Redeemable Warrant. Net proceeds totalled $8,285,784 net of offering costs of
$2,297,408. In connection with the IPO, Vincent J. Bitetti, who is the Company's
Chairman of the Board and Chief Executive Officer and its largest stockholder,
sold 20,000 shares of Common Stock for net proceeds of $69,600.
The Company utilized a portion of the net proceeds of the IPO to repay
certain notes payable aggregating $4,987,500, plus accrued interest of $373,573.
Contemporaneous with the initial closing of the IPO, the Company issued
2,016,657 Redeemable Warrants, effectively at the IPO price of $0.25 per
Redeemable Warrant, in connection with the conversion of a note
payable to ASSI, Inc. which was in the principal amount of $500,000, plus
accrued interest of $4,164. See "Certain Transactions - Agreements with ASSI,
Inc." As a result of these transactions, the Company was able to eliminate its
long term debt and substantially reduce its trade payables, to renew favorable
terms with its vendors, to make required royalty payments under its various
license agreements and to increase its investments.
The Company invested approximately $47,855 during the fiscal year ended
June 30, 1995, approximately $129,456 during the fiscal year ended June
30, 1996, and approximately $266,308 during the six months ended December 31,
1996, for capital equipment to expand into new product lines and to address
potential capacity constraints created by the Company's growing unit sales
volumes.
As of December 31, 1996, the Company had working capital of $2,555,381
in comparison with ($5,373,974) at June 30, 1996, an increase of $7,929,355.
Cash and cash equivalents increased $1,505,448 as a result, in part, of the
Company's IPO. Accounts receivable increased $443,283 due to increased sales
of products to the Company's North American distributor, its international
distributors and other direct sales, partially off-set by the collection of
$512,134 (net of a short-term advance of $400,000) from Acclaim.
During the six months ended December 31, 1996, current liabilities
decreased by $6,392,074, from $7,996,964 at June 30, 1996, to $1,604,890 at
December 31, 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 $6,255,195 at June 30, 1996.
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The Company has experienced a significant increase in growth during the
six-month period ended December 31, 1996, as compared to the same period of
time in the prior fiscal year. The Company continues to search for new
opportunities to obtain licenses, develop and sell products, and to purchase
products that are at or near completion of development. Additionally, the
Company is seeking new and innovative ways to deliver its products to
consumers, some of which may require large up-front cash resources. If the
Company enters into agreements to pursue such business opportunities in the
future, the Company may require additional financing to fund its growth. See
"Risk Factors - 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 the 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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BUSINESS
General
The Company is engaged primarily in developing, publishing and marketing
educational, interactive computer software for children. Interactive
MovieBooks(TM), which combine animation 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 CD-ROM for 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(R) and other content based on licensed
entertainment properties. The new entertainment utilities are marketed as
limited edition serialized collector editions. The Company has developed another
line of children's 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. In July
1996, the Company created a "games" division, and in August 1996 signed an
agreement with Twentieth Century Fox Licensing and Merchandising to produce a
game sequel to the 1989 theatrical release The Abyss(TM).
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.),
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), Free Willy 2(TM), The Secret
Garden(TM), Star Trek(TM), The Twilight Zone(TM), I Love Lucy(TM) and other
popular titles. The Company also holds licenses for new products based on Star
Trek: Deep Space 9(TM), Star Trek: Voyager(TM), All Dogs Go to Heaven II(TM),
The Land Before Time(TM), DragonHeart(TM), I Love Lucy(TM) and Free Willy 3(TM).
The Company is continuing the negotiation of additional licenses for its
children's titles, entertainment utilities and games. 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. Data from industry sources
indicates 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, animation, sound quality,
three-dimensional sound effects and quality duplication of motion picture
footage.
The Company believes that as of February 28, 1997, 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, Etc., Kmart, Barnes & Noble, Sam's Club, Musicland and
others.
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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
the Distribution Services 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 within the assigned territory
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 also has
entered into separate agreements providing for the distribution of its
products internationally. See "Business - Product Distribution."
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/or 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) develop alternative distribution channels,
including bundling with home video and other products, (vi) leverage its
licensed content to develop products intended for the game market, and (vii)
pursue strategic alliances and acquisitions of products and/or companies.
"Business - Strategy."
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(R) Windows(R) operating system, and the recent
release of the Windows '95(R) 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 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.
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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 as well as purchasing titles and products from third parties. The
Company believes that it may achieve its objectives utilizing the following
strategies:
o 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.
o 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 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.
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o 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.
o 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.
o 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.
o Pursue Alternative Distribution Channels. The Company is pursuing a
number of alternative distribution channels for its products. For
example, the Company recently entered into a license and distribution
arrangement with Universal Pictures. Pursuant to such arrangement
the Company's Land Before Time(TM) activity center will be bundled
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with the home video release of that motion picture. Buyers will have
the option to use the activity center product on a trial basis before
purchasing it. If they elect to purchase, they will do so by calling a
toll-free number whereby they will make the purchase and be granted an
access code that will permit them to use the entire product.
o 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.
o Acquisitions. The Company intends to pursue acquisitions of
entertainment software companies and selected titles within existing
or new product categories. The Company believes that acquisitions may
provide diversification of revenues and enhanced revenue 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 ten 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), The Adventures of Batman and
Robin(TM), The Land Before Time(TM) and All Dogs Go to Heaven II(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, Broadway Video's 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.
The Company released The Land Before Time(TM) (MCA/Universal) in August 1996 and
All Dogs Go to Heaven II(TM) (MGM) in November 1996. All products are Windows
'95(R) 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.
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<PAGE>
The Company intends to introduce four to five new children's titles
annually in the future. Each is expected to experience its highest sales
prices and volumes within the six to nine months following its introduction.
Although the products may continue to be sold after such period, they
typically will be sold on a discounted basis.
The Company has begun development of a game sequel to the 1989 theatrical
release The Abyss(TM), under a license from Twentieth Century Fox Licensing and
Merchandising. The Company acquired a three-dimensional "game engine" and
purchased four Windows NT(R) workstations equipped with SoftImage(R)
three-dimensional rendering graphics software to produce the product. The game,
tentatively titled Return to the Abyss, will have a development cycle of 12 to
18 months.
The following is a listing of the Company's Interactive MovieBook(TM)
products, all of which are on CD-ROM and are compatible with the Windows(R)
and Windows '95(R) formats:
MovieBook(TM) Title Licensor Release Date
------------------- -------- ------------
The Secret Garden(TM) Warner Bros. August 1994
Black Beauty(TM) Warner Bros. November 1994
Lassie(TM) Broadway Video December 1994
The Little Rascals(TM) Universal Pictures June 1995
Free Willy 2(TM) Warner Bros. July 1995
Babe(TM) Universal Pictures November 1995
ExoSquad(TM) Universal Pictures November 1995
The Adventures of DC Comics November 1995
Batman and Robin(TM)
The Land Before Time(TM) Universal Pictures August 1996
All Dogs Go to Heaven II(TM) MGM October 1996
The Company has developed a second line of interactive CD-ROM based
products which it refers to as Creativity Centers(TM). This product line
combines learning activities such as painting, drawing, matching, puzzles and
images within a framework of three distinct skill levels. The Company introduced
its first Creativity Center(TM) product in June 1996, and plans to introduce two
or three new Creativity Centers(TM) annually thereafter.
The following Creativity Center(TM) type products have been released or
are planned for release, all of which are or, when released, will be on
CD-ROM and compatible with the MacIntosh(R), Windows(TM) and Windows and
'95(R) formats:
Creativity Center Title Licensor Release Date
----------------------- -------- ------------
DragonHeart(TM) Universal Pictures June 1996
The Land Before Time(TM) Universal Pictures May 1997
Hercules and Xena (TM) Universal Picture May 1997
Free Willy 3(TM) Warner Bros. October 1997
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<PAGE>
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(R) 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(R) 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(R), screen savers
based on animation, video and still images, and wallpaper, VisualClips(R),
jigsaw puzzles and other content as applicable.
o Limited Edition Entertainment Utilities. The Company's new
entertainment computer software utilities incorporate screen
savers, AudioClips(R)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, desktop art and
AudioClips(R). Limited edition products are serialized and retail
at approximately $30 each. The limited edition products replaced
stand alone screen savers and Audioclips(R)for Christmas of 1996.
The Company plans to release two to four limited edition
entertainment utilities in 1997. The Company currently sells or
plans to sell the following limited edition entertainment
utilities, all of which are or, when released, will be on CD-ROM
and compatible with the Windows(R)and Windows '95(R)formats:
Title Licensor Release Date
----- -------- ------------
Babylon 5(TM) Warner Bros. November 1995
Terminator 2; Carolco Pictures July 1996
Judgment Day(TM)
Star Trek: Deep Space Paramount/ August 1996
Nine(TM) Viacom
Star Trek: Voyager(TM) Paramount/ November 1996
Viacom
I Love Lucy(TM) CBS November 1996
Babylon 5(TM), Vol. 2 Warner Bros. May 1997
Product Distribution
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 provides distribution, warehousing and order fulfillment
services for all of the Company's products throughout the United States and
Canada. The Company's relationship with SSIDS is exclusive within the assigned
territory 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.
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<PAGE>
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 calendar month. Under the Distribution Services Agreement, SSIDS
will be responsible for collection of accounts, while 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 against which credits for actual returns will be
applied.
The Company has entered into seven separate agreements providing for the
distribution of its products internationally. These agreements provide for
distribution in Australia, New Zealand, South Africa, the United Kingdom and
throughout Scandinavia and Southeast Asia.
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 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 may 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 Distribution Services Agreement, the Company's direct retail
accounts are serviced by the SSIDS sales force with direction and assistance
from the Company. The Company works closely with SSIDS to assure that
wholesale and retail accounts are adequately serviced, inventory
levels are adequate, and merchandising programs are properly executed.
See "Business - Product Distribution."
Development
The Company seeks to develop 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
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<PAGE>
certain 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 has recently decided to develop fully some of its
products in-house.
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.
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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 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. The Company has multiple sources for all components, with
assembly and shipping currently performed by two independent fulfillment houses.
To date, the Company has not experienced any material difficulties or delays in
the production and assembly of its products.
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. See "Risk Factors -
Competition."
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, The Learning Company, Hasbro, Mattel, Disney, Maxis, Davidson, GT
Interactive Software Corp., 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 offers 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 to date received over $300,000 in earnings from this
sublicense, which terminates on August 31, 1997.
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For the fiscal year ended June 30, 1996, $9,213 was
received by the Company in earnings from this sub-license.
The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), 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
divisions. As these types of software become better known in the marketplace,
these divisions may begin to vie for their studio's product. Management
believes that Disney, Lucasfilm, Fox and Paramount/Viacom are currently the
most active studios in publishing their own product to create software
packages. Universal Pictures, Sony Pictures and Warner Bros. each have
announced the formation of divisions to publish software products using their
own license content.
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. During the fiscal year ended June 30, 1996, the Company was
unaware of any of its products' unauthorized copying.
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. 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. See "Risk Factors - Limited Time Period
of Licenses."
Employees
As of February 28, 1997, the Company had 35 full-time employees, including
seven employees in sales and marketing, 18 employees in development and customer
support, five employees in administration and finance, three employees in
licensing and two employees in production and shipping. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement.
Facilities
Effective March 31, 1997, the Company relocated to a facility in Calabasas,
California, where it leases approximately 8,613 square feet of office and
warehousing space. The lease is for a 62-month term, and the current monthly
base rent is $12,058. The Company believes such space is adequate for its
existing and foreseeable requirements.
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Legal Matters
To date, the Company has received a payment of $512,134 (net of a
short-term advance of $400,000) from Acclaim pursuant to the Acclaim
distribution agreement. Nevertheless, the Company believes that further
amounts are due from Acclaim. Because the Company and Acclaim were unable to
agree as to the balance due to the Company under the distribution agreement,
on December 13, 1996, the Company filed suit against Acclaim in the Superior
Court for Los Angeles County, California, seeking compensatory damages of
$2,124,259 and consequential damages of $20,000,000 arising out of Acclaim's
alleged breach of its exclusive distribution agreement with the Company and
other related matters. There can be no assurance as to the outcome of such
litigation.
The Company is, and in the future the Company and/or its officers and
directors may be, involved in other suits and actions incidental to the
Company's business. The Company does not believe that the resolution of any of
such current suits or actions will result in any material adverse effect on the
financial condition or operations of the Company.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company, their ages and their
positions with the Company are as follows:
Name Age Position
- ---- --- --------
Vincent J. Bitetti 42 Chairman of the Board, Chief
Executive Officer and Director
Ulrich E. Gottschling 38 President, Chief Operating Officer,
Chief Financial Officer, Treasurer,
Secretary and Director
Robert S. Burke 44 Director
Dr. Ronald W. Hart 54 Director
Mark A. James 37 Director
Ernest T. Klinger 61 Director
Vincent J. Bitetti founded 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 Creativity Centers(TM), Interactive MovieBooks(TM), AudioClips(TM) and
VisualClips(TM) products. Mr. Bitetti has been a director of the Company since
May 1994.
Ulrich E. Gottschling was appointed as Chief Financial Officer, Treasurer
and director of the Company in October 1995, as Secretary of the Company in
November 1995 and as President and Chief Operating Officer of the Company in
February 1997. 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. Mr. Gottschling has been a director of the
Company since October 1995.
Robert S. Burke is a principal of Robertson, Stephens & Co., an
investment banking concern, by whom he has been employed since 1996. Prior to
joining Robertson, Stephens & Co., Mr. Burke was President of Gordon Biersch
Brewing Company during 1995. From 1989 through 1995 Mr. Burke was President
of Westminster Holdings, a division of Bedford Properties, Inc., a diverse
portfolio of operating companies including hotels, restaurants and radio
stations. Mr. Burke has been a director of the Company since February 1997.
Dr. Ronald W. Hart has held the position of Distinguished Scientist in
Residence for the Food and Drug Administration, U.S. Public Health Service,
since 1992. From 1980 to 1992, he was the Director of the National Center for
Toxicological Research, Food and Drug Administration, Public Health Service,
Department of Health and Human Services. Dr. Hart served on the board of
directors of First Commercial Bank Corporation of Little Rock, Arkansas, from
1987 to 1993. He also is a director of Telescan, Inc. and CyberAction, Ltd. Dr.
Hart has been a director of the Company since July 1996.
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Mark A. James is a founding member of the law firm of James, Driggs & Walch
in Las Vegas, Nevada, where he has been a partner since April 1996. From 1991
until the founding of James, Driggs & Walch, he was a partner in the Las Vegas
firm of Jolley, Urga, Wirth & Woodbury. In 1992, Mr. James was elected to the
Nevada State Senate. He was reelected in 1994, and continues to serve as
Chairman of the Senate Committee on Judiciary, and on the Natural Resources and
Legislative Affairs and Operations committees. Mr. James is a director of ASSI,
Inc. Mr. James has been a director of the Company since July 1996.
Ernest T. Klinger has been the Chief Financial Officer and Vice President,
Finance and Administration of Arden Group, Inc. since 1983. He has held various
finance and operating positions at Arden Group, Inc. since 1980. Mr. Klinger has
been a director of the Company since July 1996.
The term of all of the Company's directors expires at its 1997 annual
meeting of stockholders.
During the fiscal year ended June 30, 1996, the Board of Directors took
action by unanimous written consent on 22 occasions.
The Company has granted each of the Underwriters and ASSI, Inc. the
right to nominate from time to time one director of the Company or to have a
designated individual attend all Board meetings as a nonvoting advisor. In
addition, Vincent J. Bitetti and Eric H. Winston have entered into voting
agreements with each of the Underwriters and ASSI, Inc. Pursuant to these
agreements, Messrs. Bitetti and Winston have agreed to vote all of their
Common Stock for the director nominees of the Underwriters 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 at least 20
percent of the 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 outstanding Common Stock. Messrs. Bitetti and Gottschling have
granted irrevocable proxies to ASSI, Inc. and ASSI, Inc. has granted an
irrevocable proxy to Mr. Bitetti, consistent with their voting agreement. The
voting agreement with the Underwriters will terminate July 8, 2001. The
voting agreement with ASSI, Inc. will terminate when Messrs. Bitetti and
Winston together cease to own at least ten percent of the outstanding Common
Stock. See "Risk Factors-Control of The Company by Officers and Directors and
ASSI, Inc." and "Certain Transactions-Agreements With ASSI, Inc." and "-
Agreements With the Underwriters."
Pursuant to the arrangements described in the preceding paragraph, Vincent
J. Bitetti has designated himself and Ulrich E. Gottschling as his director
nominees, and ASSI, Inc. has designated Mark A. James as its director nominee.
Neither of the Underwriters has exercised its right to nominate a director or
to appoint a nonvoting advisor to the Board.
Board Committees
The Board of Directors has appointed two standing committees: the Audit
Committee and the Compensation Committee. Each of these committees was
established in July 1996, and therefore neither held any meetings during the
fiscal year ended June 30, 1996.
The Audit Committee consists of Dr. Ronald W. Hart, Mark A. James and
Ernest T. Klinger. Its purpose is to recommend the appointment of an independent
auditor for the Company, review the scope of the audit, examine the auditor's
reports, make appropriate recommendations to the Board of
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Directors as a result of such review and examination and make inquiries into the
effectiveness of the financial and accounting functions and controls of the
Company.
The Compensation Committee consists of Dr. Ronald W. Hart, Mark A. James
and Ernest T. Klinger. It is responsible for reviewing and setting the
compensation of executive officers of the Company and for administering the
Company's stock option plans.
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 in excess of
$100,000 for the fiscal year ended June 30, 1996 (the "Named Executives"). No
other executive officer's compensation exceeded $100,000 during fiscal year
1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Summary Annual
Compensation Long-Term Compensation
------------ ----------------------
Stock All
Options Other
Name and Principal Position Year Salary Bonus(1) (Shares) Compensation(2)
- --------------------------- ---- ------ -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti, Chairman of 1996 $187,500 $ 31,874 0 $ 19,018
the Board and Chief Executive 1995 150,000 75,000 0 6,200
Officer
Eric H. Winston, President and 1996 $168,750 $ 31,874 0 $ 21,141
Chief Operating Officer (3) 1995 150,000 75,000 0(4) 9,600
</TABLE>
- --------------------
(1) The bonuses accrued for fiscal 1995 were fully paid in December 1995.
(2) The amounts in this column consist of the following: (a) personal use of
Company car (50 percent of payment for car expenses): Mr. Bitetti - $9,576
(1996), $4,800 (1995), Mr. Winston - $9,302 (1996), $4,800 (1995); (b) life
insurance premiums: Mr. Bitetti - $4,311 (1996), $1,400 (1995), Mr. Winston
- $4,750 (1996); and (c) medical insurance premiums: Mr. Bitetti - $5,131
(1996), Mr. Winston - $7,089 (1996), $4,800 (1995).
(3) Mr. Winston resigned as an officer and director of the Company effective
November 1, 1996.
(4) Does not include an option to purchase 100,000 shares granted to Mr.
Winston by Mr. Bitetti in April 1995.
47
<PAGE>
Option Grants
The Company did not grant any options to any of the Named Executives during
its fiscal year ended June 30, 1996.
Option Exercises and Holdings
The following table sets forth information concerning each exercise of a
stock option during the fiscal year ended June 30, 1996, 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, 1996.
Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of Number of Shares Value of Unexercised in-
Shares Underlying Unexercised the-Money Options at
Acquired on Value Options at 6/30/96 6/30/96(1)
Name Exercise 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 offering price of the Common Stock in the IPO ($4.00 per
share), which commenced on July 1, 1996, 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. Mr. Winston resigned as an officer and director of the Company
effective as of November 1, 1996.
Compensation of Directors
Prior to June 30, 1996, all of the Company's directors were employees and
received no compensation for their services as directors. In fiscal 1997, the
Company's employee directors will continue to receive no compensation for their
services as directors. However, the Company will pay each director who is not an
employee of the Company a director's fee of $15,000 per year, and reimburse them
for out-of-pocket expenses incurred in connection with their attendance at
meetings. In addition, the 1995 Stock Option Plan provides for the grant of
stock options to nonemployee directors of the Company without any action on the
part of the Board of Directors or the Compensation Committee, upon the terms and
conditions set forth in the 1995 Stock Option Plan. Each nonemployee director
shall automatically receive nonqualified stock options to acquire 10,000 shares
of Common Stock upon appointment as a director, and shall receive nonqualified
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 granted to a nonemployee director shall vest and 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 as to the remaining 50 percent on
the second anniversary date of the grant, and will expire on the earliest of ten
years from the date the option was granted, upon expiration of the 1995 Stock
Option Plan,
48
<PAGE>
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.
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, commencing
September 15, 1995, Mr. Bitetti was entitled to receive annual base
compensation of $200,000. The employment agreement was amended to provide
that effective July 2, 1996, Mr. Bitetti's base compensation was reduced to
$160,000 per annum, subject to an increase by $40,000 per annum at such time
as the Company realized net sales (gross sales less returns and allowances)
of $1,500,000 or more for any three consecutive calendar months. The
Company's net sales for the quarter ended December 31, 1996, exceeded
$1,500,000, and consequently Mr. Bitetti's salary has been increased by
$40,000 retroactive to October 1, 1996. Mr. Bitetti's annual base
compensation 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 employment agreement entitles Mr. Bitetti to receive a bonus in the
following amounts if the following gross revenues are attained for the fiscal
year ending June 30, 1997:
Gross Revenues Cumulative Cash Bonus
-------------- ---------------------
$ 12,000,000 $ 25,000
16,000,000 75,000
24,000,000 125,000
The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year of Mr. Bitettis' employment pursuant to the
employment agreement will be increased by 60 percent annually.
The employment agreement entitles Mr. Bitetti to receive a bonus in the
following amounts if the following levels of gross profits (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, 1997:
Gross Profits Cumulative Cash Bonus
------------- ---------------------
$ 3,200,000 $ 50,000
3,600,000 $ 75,000
4,000,000 100,000
The gross profit levels required to receive each bonus level for each
subsequent fiscal year of Mr. Bitetti's employment pursuant to the employment
agreement will be increased by 60 percent annually.
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<PAGE>
The employment agreement entitles Mr. Bitetti to the following amounts if
the following levels of pre-tax profitability (defined as annual earnings before
interest, taxes, depreciation and amortization divided by gross revenues) are
attained for each fiscal year during the term of Mr. Bitetti's employment
agreement:
Profitability Cumulative Cash Bonus
------------- ---------------------
10% $ 50,000
15% $ 100,000
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 has
agreed not to sell any shares of his Common Stock during the 18-month period
beginning July 2, 1996 (except for 20,000 shares sold by Mr. Bitetti pursuant
to the over-allotment option granted to the Underwriters in connection with
the IPO) except with the consent of the Underwriters. See "Certain
Transactions - Agreements the Underwriters." Mr. Bitetti's employment
agreement further provides that if the Company employs a new Chief Executive
Officer, Mr. Bitetti's salary may not be less than that of such new Chief
Executive Officer, up to a maximum of $300,000.
The Company has entered into an agreement with Ulrich E. Gottschling,
President, Chief Operating Officer, Chief Financial Officer, Treasurer and
Secretary, for a term ending February 2, 1999. The employment agreement entitles
Mr. Gottschling to receive annual cash compensation of $130,000, subject to an
increase by $20,000 per annum commencing April 1, 1997. Mr. Gottschling's annual
base salary also is subject to escalation annually in accordance with the CPI.
Mr. Gottschling also is entitled during the term of his employment pursuant to
his employment agreement to receive bonuses in accordance with the same
provisions governing Mr. Bitetti's bonuses, except that the bonuses payable to
Mr. Gottschling are equal to 80 percent of the bonuses payable to Mr. Bitetti.
Pursuant to a prior 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. 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
Company's 1992 Stock Option Plan. The Company granted this option to Mr.
Gottschling on April 30, 1996. The option was 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.
The Company entered into an employment agreement with Eric H. Winston,
formerly its President and Chief Operating Officer, for a term ending on
September 15, 1998. Pursuant to that employment agreement, Mr. Winston was
entitled to receive an annual salary of $140,000, and to receive bonuses in
accordance with the same provisions governing Mr. Bitetti's bonuses. On
October 25, 1996, the Company entered into a Separation and Release Agreement
with Mr. Winston, which became effective on November 1, 1996. Pursuant to
that agreement, until September 15, 1998, Mr. Winston remains entitled to
receive compensation at the same level as his salary under his employment
agreement. He is
50
<PAGE>
also entitled to continue to receive certain other benefits as previously
provided pursuant to his employment agreement, but is no longer entitled to
receive any bonuses.
Pursuant to a prior employment agreement, Mr. Winston holds presently
exercisable options to purchase 292,838 shares of Common Stock at an exercise
price of $0.06 per share. 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. One of such registration rights
has been satisfied by the inclusion of all Common Stock subject to purchase upon
exercise of the options held by Mr. Winston in this Prospectus. 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. Mr. Winston has
agreed not to sell more than 10,000 shares of this Common Stock during the
18-month period ending January 2, 1998, except with the consent of the
Underwriters.
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 refusal 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, Mr. Winston is
free to sell to the third party on terms no less favorable than offered to Mr.
Bitetti.
1995 Stock Option Plan
General
The Board of Directors adopted the Company's Amended and Restated 1995
Stock Option Plan on May 15, 1996. The Amended and Restated 1995 Stock Option
Plan, as amended (the "1995 Stock Option Plan") was approved by the Company's
stockholders on December 9, 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 incorporated by reference in the Registration Statement of
which this Prospectus is a part.
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 eligible participants 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.
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 Exchange Act. The Committee has the sole
51
<PAGE>
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
Incentive Stock Options may be granted only to persons who are employees
of the Company or its subsidiaries on the date of grant. Non-Qualified Stock
Options (as hereinafter defined) may be granted to any person. 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.
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. See "Securities
Eligible for Future Sale." For purposes 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.
52
<PAGE>
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
Under the 1995 Stock Option Plan Options designated as incentive stock
options ("Incentive Stock Options"), within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code" as previously defined),
may be granted to eligible participants in respect of up to the Plan Maximum.
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 exceeds $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 ("Non-Qualified Stock Options") may be
granted to eligible participants in respect of up to the Plan Maximum for
such number of shares of Common Stock and will be exercisable for such period
or periods of exercisability 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 Stock Options to acquire 10,000 shares of Common Stock upon
appointment, and shall receive Non-Qualified Stock 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
earliest 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.
53
<PAGE>
Option Exercise Prices
The exercise price of any Option granted under the 1995 Stock Option
Plan shall be at least 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 as quoted by the Nasdaq
SmallCap Market, or is 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.
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. As of February 28, 1997, options to
purchase a total of 342,337 shares of Common Stock were issued pursuant to
the 1992 Stock Option Plan. See "Securities Eligible for Future Sale."
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 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.
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<PAGE>
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 such director is also an officer) or arising out of any other capacity in
which such director 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 SEC 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. See "Risk Factors - Limitation on
Directors' Liability; Indemnification."
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 has purchased a directors' and
officers' liability policy insuring its directors and officers. 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 SEC, such indemnification is against public policy as
55
<PAGE>
expressed in the Securities Act and is therefore unenforceable. See "Risk
Factors - Limitations on Directors' Liability; Indemnification."
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
ownership of the Common Stock as of February 28, 1997, by the following: (i)
each person or group who is known to the Company to own, of record or
beneficially, more than five percent of the Common Stock; (ii) the Company's
Chief Executive Officer and the other Named Executive; (iii) each of the
Company's directors; and (iv) all directors and executive officers of the
Company as a group. 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.
Name and Address(1) Number of Shares(2) Percent (2)
- ------------------- ------------------- -----------
Vincent J. Bitetti (3) ....................... 1,407,007 32.0%
Ulrich E. Gottschling(4) ..................... 100,000 2.2
Robert S. Burke .............................. 0 0.0
Ronald W. Hart ............................... 0 0.0
Mark A. James ................................ 0 0.0
Ernest T. Klinger ............................ 0 0.0
ASSI, Inc. (5) ............................... 4,856,657 52.7
Eric H. Winston (6) .......................... 392,838 8.4
All directors and executive officers
as a group (3) (4) ......................... 1,507,007 33.4
- --------------------
(1) The address of each of Messrs. Bitetti, Burke, Gottschling, Hart, James and
Klinger is c/o the Company, 26115 Mureau Road, Suite B, Calabasas,
California 91302-3126. The address of Mr. Winston is 5567 Springhill Ct.,
Westlake Village, California 91362. The address of ASSI, Inc. is 375 East
Harmon Avenue, Las Vegas, Nevada 89109.
(2) In accordance with Rule 13d-3 under the Exchange Act, a person or group is
deemed to beneficially own outstanding securities plus, for each person or
group, any securities that person or group has the right to acquire within
60 days pursuant to options, warrants or other rights.
(3) Includes: all 1,234,684 shares of Common Stock of which Mr. Bitetti is the
record owner (including 100,000 shares of Common Stock which Eric H.
Winston is entitled to acquire from Mr. Bitetti pursuant to a presently
exercisable option (see "Certain Transactions - Sales by Controlling
Stockholder"), and as to which shares, when issued, Mr. Bitetti will have a
right of first refusal (see "Management - Employment Agreements")); 10,000
and 122,323 shares of Common Stock owned of record by Martin H. Meyer and
Mark Lane, respectively, for which Mr. Bitetti holds an irrevocable voting
proxy (see "Certain Transactions - 1994 Acquisition"); 10,000 shares of
Common stock owned of record by Mr. Winston, as to which Mr. Bitetti has a
right of first refusal (see "Management - Employment Agreements"); and
40,000 shares of Common Stock owned of record by ASSI, Inc., as to which
Mr. Bitetti has shared voting rights (see "Management - Directors and
Executive Officers" and "Certain Transactions - Agreements With ASSI,
Inc."). Excludes 282,838 shares of Common Stock that may be acquired by Mr.
Winston from the Company pursuant to a presently exercisable option, as to
which shares,
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<PAGE>
when issued, Mr. Bitetti will have a right of first refusal (see
"Management - Employment Agreements"); and 4,816,657 shares of Common Stock
that may be acquired by ASSI, Inc. pursuant to presently exercisable ASSI
Warrants, as to which shares, when issued, Mr. Bitetti will have shared
voting rights (see "Certain Transactions - Agreements With ASSI, Inc.").
(4) Includes 100,000 shares of Common Stock issuable to Mr. Gottschling under a
presently exercisable option granted by the Company. See "Management -
Employment Agreements."
(5) Includes: all 40,000 shares of Common Stock of which ASSI, Inc. is the
record owner; and 4,816,657 shares of Common Stock issuable to ASSI, Inc.
under the presently exercisable ASSI Warrants. Excludes any Company
securities owned by Vincent J. Bitetti or Eric H. Winston, as to which
ASSI, Inc. holds an irrevocable proxy as described under "Management -
Directors and Executive Officers." ASSI, Inc. has advised the Company that
all of its equity securities are beneficially owned by Louis Habash, whose
address is 375 East Harmon Avenue, Las Vegas, Nevada 89122, who thus is the
ultimate beneficial owner of the Common Stock and ASSI Warrants owned by
ASSI, Inc. See "Certain Transactions - Agreements with ASSI, Inc."
(6) Includes 282,838 shares of Common Stock issuable under stock options
granted by the Company to Mr. Winston which are presently exercisable. See
"Management - Employment Agreements." 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."
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<PAGE>
SELLING SECURITY HOLDERS
An aggregate of 690,338 shares of Common Stock and 5,058,307 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 and Redeemable Warrants
by the Selling Security Holders or their respective transferees may depress the
price of the Common Stock and Redeemable Warrants. See "Risk Factors -
Securities Eligible for Future Sale" and "Securities Eligible for Future Sale."
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 the following: (i) ASSI, Inc., which has served as a consultant to
the Company (see "Certain Transactions - Agreements With ASSI, Inc."); (ii) Eric
H. Winston, who served as the President and Chief Operating Officer of the
Company from May 1994 until November 1, 1996 (see "Management" and "Principal
Stockholders"); (iii) Vincent J. Bitetti, the Company's Chairman of the Board
and Chief Executive Officer and its largest stockholder (see "Management" and
"Principal Stockholders"); and (iv) Paradox Holdings, which is an affiliate of
Financial West Group, Inc., the dealer manager for the Company's 1995 Bridge
Financing and 1995 Private Placement (each as hereinafter defined).
Number of Number of
Shares/Warrants Shares/Warrants
Name of Selling Security Holder(1) Owned Before Offering Being Registered(2)
- ---------------------------------- --------------------- -------------------
Lester C. Arzh 5,000(3) 5,000(sh)
ASSI, Inc. 800,000(4) 800,000(Awt)
2,000,000(5) 2,000,000(Awt)
2,016,657(6) 2,016,657(Awt)
40,000(3) 40,000(sh)
Harvey Bibicoff 5,000(3) 5,000(sh)
Vincent J. Bitetti 1,234,684(7) 200,000(sh)
Arlene Colman-Schwimmer, 5,000(3) 5,000(sh)
Grantor and Trustee for Arlene
Colman-Schwimmer APC Profit
Sharing Plan and Trust
David B. Coward and Linda J. 2,500(3) 2,500(sh)
Coward, Grantors and Trustees for
David B. and Linda J. Coward Trust
Robert Gault and Thelma Gault, 25,000(3) 25,000(sh)
Joint Tenants with Right of
Survivorship
Gabriel Kaplan 10,000(3) 10,000(sh)
David A. Mulkey, Trustee of the 5,000(3) 5,000(sh)
David A. Mulkey 1987 Living Trust
Paradox Holdings 237,550(8) 237,550(wt)
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David H. Smith 4,000(9) 4,100(wt)
Eric H. Winston 392,838(10) 392,838(sh)
- ----------
(1) Information set forth in the table regarding the Selling Security Holders'
Securities is provided to the best knowledge of the Company based on
information furnished to the Company by such respective Selling Security
Holders and/or available to the Company through its stock ledgers or
inquiries to brokers.
(2) Since the Selling Security Holders may offer all or part of the Common
Stock and/or Redeemable Warrants held thereby (subject to the
limitations contained in agreements with the Underwriters with respect
to the shares of Common Stock being offered by Messrs. Bitetti and
Winston), and since this offering is not being underwritten on a firm
commitment basis, no estimate can be given as to the amount of Common
Stock and/or Redeemable Warrants to be offered for sale by the Selling
Security Holders or as to the amount of Common Stock and/or Redeemable
Warrants that will be held by the Selling Security Holders upon
termination of this offering.
(3) Represents Common Stock privately acquired in the Concurrent Private
Placement. See "Certain Transactions - Sales by Controlling Stockholder."
(4) Represents Warrants privately acquired pursuant to the 1995 Private
Placement. See "Certain Transactions - 1995 Private Placement."
(5) Represents Warrants privately acquired in consideration for consulting
services. See "Certain Transactions - Agreements With ASSI, Inc."
(6) Represents Warrants privately acquired upon conversion of the ASSI
Convertible Note (as hereinafter defined). See "Certain Transactions -
Agreements with ASSI, Inc.
(7) Represents Common Stock privately acquired in connection with the 1994
Acquisition (as hereinafter defined). See "Certain Transactions - 1994
Acquisition."
(8) Represents Warrants privately issued to the dealer manager in connection
with the 1995 Bridge Financing and 1995 Private Placement. See "Certain
Transactions - 1995 Bridge Financing "and" - 1995 Private Placement."
(9) Represents Warrants privately acquired pursuant to the 1995 Bridge
Financing. See "Certain Transactions - 1995 Bridge Financing."
(10) Includes 100,000 shares of Common Stock as to which Mr. Winston holds a
presently exercisable purchase option from Vincent J. Bitetti, and 282,838
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.
(Awt) ASSI Warrants, each Warrant to purchase one share of Common Stock.
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CERTAIN TRANSACTIONS
1994 Acquisition
On May 16, 1994, the Company consummated the 1994 Acquisition, whereby
the Company acquired all of 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 officer and director as of June 29, 1994. Mr. Meyer resigned
as a director as of August 5, 1994. Mr. Winston resigned as an officer and
director as of November 1, 1996. 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. All such shares so acquired by
Mr. Bitetti have been included in this Prospectus and comprise a portion of
the Selling Security Holders' Securities. See "Selling Security Holders."
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, which Mr. Winston waived in 1996 subsequent to the IPO. 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 Vincent J. Bitetti, Chairman of the Board and 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 the 1994
Private Placement 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. See "Selling Security
Holders."
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
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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. 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 Financing. Subsequent to the completion of the 1995 Bridge
Financing, 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, became identical to those of the Private Warrants as
described below. See "Certain Transactions - 1995 Private Placement." The Bridge
Warrants, in accordance with their terms, were automatically converted into
Redeemable Warrants to purchase an aggregate of 39,665 shares of Common Stock
upon completion of the Company's IPO. The holders of the Bridge Warrants and
Common Stock issued or issuable upon the conversion of the Bridge Warrants are
entitled to one demand registration right and unlimited piggyback registration
rights during the five-year period commencing July 1, 1996, and ending June 30,
2001. Pursuant to such registration rights, the unsold portion of the Redeemable
Warrants into which the Bridge Warrants were converted and the underlying shares
of Common Stock have been included in this Prospectus. See "Selling Security
Holders." The Company has agreed to maintain the effectiveness of the
Registration Statement of which this Prospectus is a part as described under
"Certain Transactions - Agreements with the Underwriters."
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 were
repaid in full out of the proceeds of the IPO. Such repayment was in the
amount of $5,361,253.
Pursuant to the 1995 Private Placement, the Company also 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, in accordance with their
terms, were automatically converted into Redeemable Warrants to purchase an
aggregate of 5,250,000 shares of Common Stock upon completion of the Company's
IPO, and such Redeemable Warrants, as well as the underlying shares of Common
Stock, have been included in this Prospectus, and comprise a portion of the
Selling Security Holders' Securities. See "Selling Security Holders." The
holders of the Private Warrants and Common Stock issued or issuable upon the
conversion of the Private Warrants are entitled to one demand registration right
and unlimited piggyback registration rights during the five-year period
commencing July 1, 1996, and ending June 30, 2001. Pursuant to such registration
rights, the unsold portion of the Redeemable Warrants into which the Private
Warrants were converted and the underlying shares of Common Stock have been
included in this Prospectus. See "Selling Security Holders." The Company has
agreed to maintain the effectiveness of the Registration Statement of which this
Prospectus is a part as described under "Certain Transactions - Agreements with
the Underwriters."
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Sales by Controlling Stockholder
Contemporaneously with the 1995 Private Placement, Vincent J. Bitetti, the
Company's Chairman of the Board and Chief Executive Officer, privately sold
107,500 shares of Common Stock for total cash consideration of $537,500 (the
"Concurrent Private Placement"). The holders of the Common Stock sold in the
Concurrent Private Placement are entitled to the same registration rights as the
holders of the Private Warrants, as described under "Certain Transactions - 1995
Private Placement." The unsold portion of the shares of Common Stock issued in
the Concurrent Private Placement have been included in this Prospectus, and
comprise a portion of the Selling Security Holders' Securities. See "Selling
Security Holders."
On April 3, 1995, Vincent J. Bitetti, for nominal consideration, granted
Eric H. Winston, who was then 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 of the
Common Stock by management. Such shares have been included in this
Prospectus, and comprise a portion of the Selling Security Holders'
Securities. Mr. Winston is entitled to certain registration rights in respect
of such shares as described under "Management - Employment Agreements." See
"Selling Security Holders."
Pursuant to the over-allotment option granted to the Underwriters in
connection with the IPO, Vincent J. Bitetti sold 20,000 shares of Common Stock
for net proceeds of $69,000.
Agreements With ASSI, Inc.
The Company entered into a Consulting Agreement with ASSI, Inc. dated
April 30, 1996. Pursuant to the Consulting Agreement, ASSI, Inc. has provided
certain consulting services to the Company, including advising the Company
regarding executive recruiting. In consideration of the services to be
provided by ASSI, Inc. under 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. 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 on the earlier of July 8, 2001, or the date 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"). The ASSI Convertible Loan bore interest at the rate of eight
percent per annum. The principal of and all accrued interest on the ASSI
Convertible Loan were due in full on the earlier of September 1, 1996, or the
closing date of the Company's IPO. Upon the closing of the IPO, ASSI, Inc. was
entitled to convert all or any part of the ASSI Convertible Loan into warrants
to purchase Common Stock at a conversion price of $.25 per warrant. ASSI, Inc.
exercised such conversion option, and on July 7, 1996, the Company
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issued 2,016,657 warrants in connection with the conversion of the ASSI
Convertible Loan of $500,000 plus accrued interest of $4,164 as of the
conversion date. Upon the completion of the IPO, the terms of all of the
warrants then held by ASSI, Inc. (including 1,100,000 Private Warrants acquired
pursuant to the 1995 Private Placement, 2,000,000 warrants acquired pursuant to
the Consulting Agreement, and 2,016,657 warrants acquired pursuant to conversion
of the ASSI Convertible Note) were automatically conformed to the terms of the
Redeemable Warrants, subject to the following exceptions: (i) they became
exercisable October 1, 1996; (ii) they are not mandatorily redeemable by the
Company; and (iii) they are subject to separate registration rights, including
one demand registration right and unlimited piggyback registration rights. Upon
transfer by ASSI, Inc. of any of the ASSI Warrants or to any nonaffiliate of
ASSI, Inc., the terms of such transferred ASSI Warrants will become identical to
those of the Redeemable Warrants. Until and unless exercised, the holders of the
ASSI Warrants will have no voting, dividend or other rights as stockholders of
the Company.
On October 10, 1996, ASSI, Inc. sold 300,000 warrants it initially acquired
pursuant to the 1995 Private Placement at a price of $1.125 per warrant in an
off-market, negotiated transaction. The remaining 4,816,657 warrants owned by
ASSI, Inc. are herein referred to as the "ASSI Warrants" (as previously
defined).
The ASSI Warrants and underlying Common Stock have been included in this
Prospectus and comprise a portion of the Selling Security Holders' Securities.
See "Selling Security Holders."
Agreements With the Underwriters
In connection with the IPO, the Company, Vincent J. Bitetti, Ulrich E.
Gottschling and Eric H. Winston entered into an Underwriting Agreement with the
Underwriters. Pursuant to the Underwriting Agreement, the Company granted each
of the Underwriters the right to nominate from time to time one director of the
Company or to have an individual designated thereby attend all Board meetings as
a nonvoting advisor, and Vincent J. Bitetti and Eric H. Winston agreed to vote
all of their Common Stock for such director nominees. See "Management -
Directors and Executive Officers." The Company also agreed to indemnify and hold
harmless such directors or advisors to the maximum extent permitted by law in
connection with such individuals' services as a director or advisor.
Upon completion of the IPO, the Company sold the Underwriters for an
aggregate of $50 the Underwriters' Warrants to purchase up to 240,000 shares of
Common Stock at an exercise price of $5.80 per share of Common Stock. The
Underwriters' Warrants may not be transferred prior to July 2, 1997, except
basically to officers or partners of the Underwriters, any member of the NASD
participating in the offering hereunder, officers or partners of such member or
any successor of any of the foregoing, and are exercisable during the four-year
period commencing July 2, 1997, and ending July 1, 2001 (the "Underwriters'
Warrant Exercise Term"). The Company has granted one demand registration right
and unlimited piggyback registration rights to the holders of the Underwriters'
Warrants. The demand registration right requires the Company to file a
registration statement pertaining to the Underwriters' securities and to
maintain the effectiveness of such registration statement for the period
commencing July 2, 1997, and continuing until the earlier of the sale of all the
registered securities or July 1, 2001. The piggyback registration rights are
applicable during the five-year period commencing July 2, 1997. The Common Stock
underlying the Underwriters' Warrants has been included in this Prospectus and
comprises a portion of the Selling Security Holders' Securities. See "Selling
Security Holders."
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The Company has agreed, in connection with the exercise of Redeemable
Warrants pursuant to solicitation by the Underwriters (commencing July 2,
1997), to pay to the Underwriters a fee of five percent ($.22) for each
Redeemable Warrant exercised; provided, however, that the Underwriters will
not be entitled to receive such compensation for any Redeemable Warrant
exercise transactions in which (i) the market price of the Common Stock 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 Warrants 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 SEC from Rule
10b-6, before the solicitation of the exercise of any Redeemable Warrant and
until the later of (i) the termination of such solicitation activity, or (ii)
the termination by waiver or otherwise of any right the Underwriters may have
to receive a fee for the exercise of the Redeemable Warrants following such
solicitations. The Company has agreed not to solicit the exercise of
Redeemable Warrants other than through the Underwriters.
Vincent J. Bitetti, Ulrich E. Gottschling and Eric H. Winston 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 (either pursuant to Rule 144 or otherwise) any shares of
Common Stock owned by them during the 18-month period ending January 2, 1998,
without the prior written consent of the Company and Underwriters (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 Underwriters).
The Company has agreed with the Underwriters to undertake its best efforts
to maintain the effectiveness of the Registration Statement of which this
Prospectus is a part until the earlier of June 30, 2001, and the date on which
all Redeemable Warrants sold in the IPO have been exercised or redeemed and all
of the warrants, underlying Common Stock, and Common Stock issued in the 1995
Bridge Financing, the 1995 Private Placement and the Concurrent Private
Placement have been sold.
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DESCRIPTION OF SECURITIES
General
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 February 28, 1997, the Company had 4,409,099 shares of Common Stock
outstanding which were held of record by approximately 150 persons, and had
11,078,097 Redeemable Warrants outstanding which were held of record by
approximately 20 persons (including for such purpose all 4,816,657 ASSI Warrants
held by ASSI, Inc.).
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, if cumulative voting is exercised
(and without regard to the various voting agreements described herein), the
Company's stockholders other than its current officers and directors have
sufficient votes to elect four of its six directors assuming no exercise of the
Redeemable Warrants, and to elect five of its six 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 July 1, 1997, one share of Common
Stock at a price of $4.40 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 July 1, 1997, at a price of $.25 per Redeemable Warrant if the
average closing bid price of the Common
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Stock equals or exceeds $ 5.60 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.
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 January 1, 2002 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 SEC 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. See "Risk Factors - Current
Prospectus and State Registration to Exercise Warrants" and "Certain
Transactions - Agreements With the Underwriters."
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
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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 addresses in California. Section 2115 does not apply
to corporations with outstanding securities listed on the New York Stock
Exchange 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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<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
As of February 28, 1997, a total of 4,409,099 shares of Common Stock and
11,078,097 Redeemable Warrants (including the 4,816,657 ASSI Warrants) were
issued and outstanding. An additional 12,433,272 shares of Common Stock were
issuable pursuant to the following outstanding options and warrants: (a) 342,337
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
have been or may be granted pursuant to the Company's 1995 Stock Option Plan;
(c) 282,838 shares of Common Stock underlying options granted to a Selling
Security Holder; and (d) an aggregate of 11,318,097 shares of Common Stock
issuable upon the exercise of (i) the Redeemable Warrants (11,078,097 shares)
and (ii) the Underwriters' Warrants (240,000 shares).
Of the 4,409,099 shares of Common Stock and 11,078,097 Redeemable Warrants
issued and outstanding as of February 28, 1997 (subject to the assumptions in
the preceding paragraph), 3,012,469 shares and 6,019,790 Redeemable Warrants are
freely tradeable without further registration under the Securities Act (except
for any such shares of Common Stock held by an "affiliate" of the Company), and
the remaining 1,396,630 outstanding shares and 5,058,307 Redeemable Warrants are
"restricted securities" 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. Of such restricted securities, 407,500 shares of
Common Stock and all 5,058,307 Redeemable Warrants may be sold pursuant to this
Prospectus, and upon such sale will become freely tradeable (except for any such
shares or Redeemable Warrants held by an "affiliate" the Company). See "Selling
Security Holders." Further, the 11,318,097 shares of Common Stock issuable by
the Company upon exercise of the Redeemable Warrants and Underwriters' Warrants
and the 282,838 shares issuable by the Company upon exercise of an option held
by a Selling Security Holder may likewise be sold pursuant to this Prospectus
and upon such sale will become freely tradeable (except for any such shares held
by an "affiliate" of the Company).
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has satisfied a holding period of two years (one year
commencing April 29, 1997) 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 (two years
commencing April 29, 1997). 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 shares of
Common Stock owned by them during the 18-month period ending January 2, 1998,
without the prior written consent of the Underwriters (provided, that Eric H.
Winston may sell up to 10,000 shares of Common Stock during such period
without the consent of the Underwriters). See "Certain
Transactions-Agreements with the Underwriters." Thus, without the prior
consent of the Underwriters, prior to January 2, 1998, Vincent J. Bitetti may
not sell any of the 200,000 shares of Common Stock which he is offering
hereby, and Eric H. Winston may not sell more than 10,000 of the 392,838
shares of Common Stock which he is offering hereby. 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
69
<PAGE>
are released prior to the expiration of the term of such arrangement if such
announcement is required by the federal securities laws.
As of February 28, 1997, options for the purchase of 342,337 shares of
Common Stock were issued 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 342,337 options granted under the 1992 Stock Option Plan,
258,668 are presently exercisable, 41,834 will become exercisable later 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. As of February 28, 1997, the Company had granted options
for the purchase of 404,607 shares of Common Stock pursuant to the 1995 Stock
Option Plan, of which 5,054 are presently exercisable, 3,401 will become
exercisable later in fiscal 1997, 148,652 will become exercisable in fiscal
1998, 147,000 will become exercisable in fiscal 1999, 100,250 will become
exercisable in fiscal 2000 and 250 will become exercisable in fiscal 2001.
The Company has filed separate registration statements pertaining to all of
the Common Stock issuable upon exercise of options granted or to be granted
pursuant to the 1992 Stock Option Plan and the 1995 Stock Option Plan. All
Common Stock issuable upon exercise of the options will be freely tradeable
(except for any such shares held by an "affiliate" of the Company). See
"Management - 1995 Stock Option Plan" and "- 1992 Stock Option Plan."
Certain of the Company's security holders are entitled to registration
rights as described under "Management - Employment Agreements" (as to Vincent J.
Bitetti and Eric H. Winston), "Certain Transactions - 1995 Bridge Financing" (as
to holders of Redeemable Warrants issued upon conversion of the Bridge Warrants
and the underlying Common Stock), "Certain Transactions - 1995 Private
Placement" (as to holders of Redeemable Warrants issued upon conversion of the
Private Warrants and the underlying Common Stock, and Common Stock issued in the
Concurrent Private Placement), "Certain Transactions - Agreements with ASSI,
Inc. (as to the ASSI Warrants and underlying Common Stock), and "Certain
Transactions - Agreements with the Underwriters" (as to the Underwriters'
Warrants and underlying Common Stock).
An additional 3,157,629 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."
The Company is unable to predict the effect that any subsequent sales of
the Company's securities, under this Registration Statement, other registration
statements, 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 - Securities Eligible for Future Sale."
70
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock issuable upon the exercise of the Redeemable Warrants and
the Underwriters' Warrants will be distributed when and as such warrants are
exercised by the holders thereof. No such warrants have been exercised as of the
date of this Prospectus.
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 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 SEC 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 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.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Washington, D.C.
EXPERTS
The financial statements included in this Prospectus have been audited by
Corbin & Wertz, Irvine, California, 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.
71
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
with
INDEPENDENT AUDITORS' REPORT THEREON
F-1
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report......................................................... F-2
Consolidated Balance Sheets at June 30, 1996 and December 31, 1996 (unaudited)....... F-3
Consolidated Statements of Operations for each of the years in the two-year period
ended June 30, 1996 and for the six-month periods ended December 31, 1996
(unaudited) and 1995 (unaudited)................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the years in
the two-year period ended June 30, 1996 and for the six-month period ended December
31, 1996 (unaudited)............................................................... F-6
Consolidated Statements of Cash Flows for each of the years in the two-year period
ended June 30, 1996 and for the six-month periods ended December 31, 1996
(unaudited) and 1995 (unaudited)................................................... F-8
Notes to Consolidated Financial Statements for each of the years in the two-year
period ended June 30, 1996 and for the six-month periods ended December 31, 1996
(unaudited) and 1995 (unaudited)................................................... F-11
</TABLE>
F-2
<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, 1996, 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
audit.
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, 1996, 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.
See Note 1 to the consolidated financial statements regarding the Company's
historical losses and distributor relationships.
CORBIN & WERTZ
Irvine, California
September 16, 1996
F-3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 181,985 $ 1,687,433
Accounts receivable, net of allowance for doubtful accounts and sales returns of
$703,421 at June 30, 1996 and $847,871 at December 31, 1996 (unaudited)....... 912,904 1,356,187
Inventories, net of valuation allowance of $201,499 at June 30, 1996 and
$102,844 at December 31, 1996 (unaudited)..................................... 262,657 313,545
Prepaid royalties............................................................... 628,676 730,389
Deferred offering costs......................................................... 620,904 --
Prepaid expenses and other...................................................... 15,864 72,717
-------------- --------------
Total current assets........................................................ 2,622,990 4,160,271
Property and equipment, net of accumulated depreciation of $129,954 at June 30,
1996 and $174,407 at December 31, 1996 (unaudited).............................. 177,067 398,922
Other assets...................................................................... 12,900 --
-------------- --------------
$ 2,812,957 $ 4,559,193
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable................................................................... $ 4,987,500 $ --
Accrued interest................................................................ 367,695 --
Accounts payable and accrued expenses........................................... 664,936 584,869
Accrued legal fees.............................................................. 347,710 68,001
Accrued compensation and related taxes, current portion......................... 74,901 227,992
Note payable to related party................................................... 500,000 --
Accrued royalties............................................................... 542,804 686,905
Short-term advance.............................................................. 400,000 --
Deferred revenue................................................................ 84,360 16,655
Current portion of capital lease obligations.................................... 27,058 20,468
-------------- --------------
Total current liabilities................................................... 7,996,964 1,604,890
Capital lease obligations, net of current portion................................. 13,811 7,119
Accrued compensation, net of current portion...................................... -- 117,483
-------------- --------------
Total liabilities........................................................... 8,010,775 1,729,492
-------------- --------------
Commitments and contingencies
Stockholders' equity (deficit): Common stock, $.001 par value; 20,000,000 shares
authorized; 1,807,824 and 4,377,824 shares issued and outstanding at June 30,
1996 and December 31, 1996, respectively........................................ 1,808 4,378
Warrants........................................................................ 263,350 1,104,925
Additional paid-in capital...................................................... 5,124,576 13,249,586
Accumulated deficit............................................................. (10,587,552) (11,529,188)
-------------- --------------
Total stockholders' equity (deficit)........................................ (5,197,818) 2,829,701
-------------- --------------
$ 2,812,957 $ 4,559,193
-------------- --------------
-------------- --------------
</TABLE>
F-4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30, FOR THE SIX
MONTHS ENDED DECEMBER 31,
---------------------------- ----------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Product sales............................................. $ 1,255,230 $ 2,161,351 $ 1,077,547 $ 2,362,542
Development fees.......................................... 343,250 -- -- 12,000
Original equipment manufacturing.......................... 479,675 70,895 21,466 --
Royalties................................................. 76,771 32,387 21,678 55,704
------------- ------------- ------------- -------------
Net revenues.......................................... 2,154,926 2,264,633 1,120,691 2,430,246
Cost of sales............................................... 1,072,691 1,382,999 682,510 953,002
------------- ------------- ------------- -------------
Gross profit.......................................... 1,082,235 881,634 438,181 1,477,244
------------- ------------- ------------- -------------
Operating costs and expenses:
Marketing and sales....................................... 516,886 1,054,602 572,778 692,752
Compensation in connection with common stock and common
stock options issued for services rendered.............. 733,165 -- -- 178,607
Other general and administrative.......................... 1,009,858 1,530,434 826,528 1,014,854
Reserve for bad debts..................................... 40,000 663,421 382,310 --
Research and development.................................. 378,471 717,994 266,153 568,874
------------- ------------- ------------- -------------
Total operating costs and expenses.................... 2,678,380 3,966,451 2,047,769 2,455,087
------------- ------------- ------------- -------------
Operating loss........................................ (1,596,145) (3,084,817) (1,609,588) (977,843)
Interest income............................................. 16,994 35,430 22,172 54,871
Interest expense............................................ (7,045) (374,175) (118,176) (13,734)
Amortization of deferred loan costs......................... -- (1,035,200) (262,732) --
Other income (expense)...................................... (3,258) (14,614) (40,848) (4,130)
------------- ------------- ------------- -------------
Loss before provision for income taxes................ (1,589,454) (4,473,376) (2,009,172) (940,836)
Provision for income taxes.................................. 1,600 1,600 1,200 800
------------- ------------- ------------- -------------
Loss from continuing operations....................... (1,591,054) (4,474,976) (2,010,372) (941,636)
------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30, FOR THE SIX
MONTHS ENDED DECEMBER 31,
---------------------------- ----------------------------
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Discontinued operations:
Loss from operations of discontinued music division....... (111,106) -- -- --
Estimated operating loss and loss on disposal of
discontinued music division during phase-out period..... (32,000) -- -- --
------------- ------------- ------------- -------------
Loss from discontinued operations..................... (143,106) -- -- --
------------- ------------- ------------- -------------
Net loss.............................................. $ (1,734,160) $ (4,474,976) $ (2,010,372) $ (941,636)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per common share:
Loss from continuing operations........................... $ (0.85) $ (2.44) $ (1.08) $ (0.22)
Loss from discontinued operations......................... (0.08) -- -- --
------------- ------------- ------------- -------------
Net loss per common share............................. $ (0.93) $ (2.44) $ (1.08) $ (0.22)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding............................................... 1,862,908 1,837,759 1,868,145 4,318,096
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For Each Of The Years In The Two-Year Period Ended June 30, 1996
And For The Six-Month Period Ended December 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
--------- --------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1994........................... 1,753,533 $ 1,754 $ -- $ 3,685,108 $(4,378,416) $ (691,554)
Issuance of common stock in connection with
private offering, net of offering costs of
$61,759........................................ 59,238 59 -- 706,048 -- 706,107
Shares issued for services performed in
connection with private offering............... 42,227 42 -- 504,644 -- 504,686
Offering costs................................... -- -- -- (504,686) -- (504,686)
Issuance of stock options for services........... -- -- -- 733,165 -- 733,165
Issuance of common stock in connection with
exercise of options............................ 4,184 4 -- 246 -- 250
Net loss......................................... -- -- -- -- (1,734,160) (1,734,160)
--------- --------- ----------- ----------- ------------ ----------
Balances, June 30, 1995.......................... 1,859,182 1,859 -- 5,124,525 (6,112,576) (986,192)
Issuance of warrants in connection with private
offerings...................................... -- -- 263,350 -- -- 263,350
Cancellation of shares in connection with
settlement..................................... (15,120) (15) -- 15 -- --
Cancellation of shares for which the Company had
not received valid consideration............... (36,238) (36) -- 36 -- --
Net loss......................................... -- -- -- -- (4,474,976) (4,474,976)
--------- --------- ----------- ----------- ------------ ----------
Balances, June 30, 1996.......................... 1,807,824 1,808 263,350 5,124,576 (10,587,552) (5,197,818)
Issuance of common stock for cash at $4.00 per
share and warrants for cash at $0.25 per
warrant, in connection with initial public
offering, net of offering costs of
$2,297,408..................................... 2,560,000 2,560 337,411 7,945,813 -- 8,285,784
Issuance of warrants in connection with the
conversion of a note payable and accrued
interest to related party...................... -- -- 504,164 -- -- 504,164
Issuance of common stock in connection with the
exercise of stock options for cash at $0.06 per
share.......................................... 10,000 10 -- 590 -- 600
Issuance of stock options for services........... -- -- -- 178,607 -- 178,607
Net loss......................................... -- -- -- -- (941,636) (941,636)
--------- --------- ----------- ----------- ------------ ----------
Balances, December 31, 1996 (unaudited).......... 4,377,824 $ 4,378 $1,104,925 $13,249,586 ($11,529,188) $2,829,701
--------- --------- ----------- ----------- ------------ ----------
--------- --------- ----------- ----------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE FOR THE SIX
30, MONTHS ENDED DECEMBER 31,
--------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss from continuing operations........................ $ (1,591,054) $ (4,474,976) $ (2,010,372) $ (941,636)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................ 27,541 45,230 19,437 44,453
Allowance for sales returns.............................. (8,732) (64,250) (39,250) 144,450
Allowance for credit losses.............................. 40,000 663,421 382,310 --
Allowance for inventories................................ -- 201,499 35,648 (98,655)
Common stock and stock options issued for services
rendered............................................... 733,165 -- -- 178,607
Changes in operating assets and liabilities:
Accounts receivable.................................... (30,214) (1,451,247) (687,511) (987,733)
Inventories............................................ (99,576) (313,836) (342,560) 47,767
Prepaid royalties...................................... 1,537 (147,264) (192,091) (101,713)
Prepaid expenses and other............................. -- (15,864) (94,882) (56,853)
Other assets........................................... -- -- (9,340) 12,900
Accounts payable and accrued expenses.................. (206,037) 210,241 210,384 (80,067)
Accrued legal fees..................................... 80,351 267,359 -- (279,709)
Accrued compensation and related taxes................. 92,394 (169,138) (190,353) 270,574
Accrued interest....................................... -- 367,695 118,176 (363,531)
Commissions payable.................................... 114,786 (159,593) (124,038) --
Accrued royalties...................................... (20,697) 291 (105,389) 144,101
Deferred revenue....................................... (8,795) 20,360 2,000 (67,705)
------------ ------------- ------------- -------------
Net cash used by continuing operations....................... (875,331) (5,020,072) (3,027,831) (2,134,750)
------------ ------------- ------------- -------------
Net loss from discontinued operations........................ (143,106) -- -- --
Reserve for estimated loss on disposal....................... 32,000 -- -- --
Depreciation................................................. 8,878 -- -- --
Changes in operating assets and liabilities of discontinued
operations:
Accounts receivable........................................ (2,471) -- -- --
Inventories................................................ 1,351 -- -- --
Accounts payable and accrued expenses...................... 3,098 -- -- --
Accrued royalties.......................................... 3,415 -- -- --
Commissions payable........................................ 12,498 -- -- --
------------ ------------- ------------- -------------
Net cash used by discontinued operations..................... (84,337) -- -- --
------------ ------------- ------------- -------------
Cash flows from investing activities of continuing
operations:
Purchases of property and equipment........................ (38,876) (90,985) (81,152) (266,308)
Other assets............................................... -- (9,840) -- --
------------ ------------- ------------- -------------
Net cash used in investing activities........................ (38,876) (100,825) (81,152) (266,308)
------------ ------------- ------------- -------------
Cash flows from investing activities of discontinued
operations --
Purchases of property and equipment (6,665) -- -- --
------------ ------------- ------------- -------------
</TABLE>
F-8
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE FOR THE SIX
30, MONTHS ENDED DECEMBER 31,
--------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock..................... 684,107 -- -- 8,569,877
Proceeds from issuance of warrants......................... -- 263,350 263,350 337,411
Proceeds from issuance of notes payable.................... -- 5,306,700 4,987,500 --
Repayments of notes payable................................ -- (319,200) -- (4,987,500)
Notes payable to officers.................................. 13,500 (13,500) (13,500) --
Note payable to related party.............................. -- 500,000 -- --
Payments on note payable................................... (19,587) -- -- --
Deferred financing costs................................... -- -- (730,868) --
Deferred offering costs.................................... -- (620,904) (106,160) --
Payments on capital lease obligation....................... (13,678) (27,294) (12,562) (13,282)
Short-term advance......................................... 400,000 -- -- --
------------ ------------- ------------- -------------
Net cash provided by financing activities.................... 1,064,342 5,089,152 4,387,760 3,906,506
------------ ------------- ------------- -------------
Net change in cash........................................... 59,133 (31,745) 1,278,777 1,505,448
Cash, beginning of period.................................... 154,597 213,730 213,730 181,985
------------ ------------- ------------- -------------
Cash, end of period.......................................... $ 213,730 $ 181,985 $ 1,492,507 $ 1,687,433
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest................................................... $ 9,742 $ 6,480 $ -- $ 377,265
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Income taxes............................................... $ 1,600 $ 1,600 $ 1,600 $ 800
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See the accompanying notes to consolidated financial statements for supplemental
disclosure of noncash investing and financing activities.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sound Source Interactive, Inc., (a California corporation) was incorporated
on March 8, 1990, under the name Sound Source Unlimited, Inc.
("SSI-California"). On May 16, 1994, SSI-California consummated a
stock-for-stock exchange with Basic Science Associates, Inc. ("BSA"), a
publicly-held 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 10) in exchange for all of the outstanding shares of
SSI-California. The exchange has been accounted as a reverse acquisition because
stockholders of SSI-California 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-California, 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) ("SSI-Delaware").
SSI-Delaware, through its wholly-owned subsidiary, SSI-California
(collectively called the "Company"), is in the business of developing,
publishing and distributing entertainment software, specializing in interactive
educational software, entertainment computer software utilities and sound clips
for customers primarily in North America.
CONSOLIDATED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated financial statements have been
prepared without audit, and certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures herein are adequate to make
information presented not misleading. In the opinion of management, the
accompanying interim consolidated financial statements contain all adjustments
of a normal and recurring nature necessary for a fair presentation of the
Company's consolidated financial position as of December 31, 1996, and the
results of their operations and their cash flows for each of the six-month
periods ended December 31, 1995 and 1996. The consolidated results of operations
for the six-month period is not necessarily indicative of results for the full
year.
HISTORICAL LOSSES AND DISTRIBUTOR RELATIONSHIPS
As shown in the accompanying consolidated financial statements, the Company
has incurred net losses of $1,734,160 and $4,474,976 for the years ended June
30, 1995 and 1996, respectively, and net losses of $2,010,372 (unaudited) and
$941,636 (unaudited) for the six months ended December 31, 1995 and 1996,
respectively. The Company has not historically generated sufficient cash flows
to fund operations due in part to its problems with its former distributor,
Acclaim Entertainment, Inc. ("Acclaim") (see Notes 8 and 14). The Company
entered into a new distributor agreement effective June 1, 1996 (see Note 14).
The Company has historically had to rely on debt and equity financings to fund
operations. The Company effected an initial public offering on July 1, 1996 and
raised proceeds to repay certain of its debt and to fund its working capital
requirements (see Notes 4, 5 and 9). The future success of the Company is
largely
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
dependent upon its distributor relationship and the Company's ability to
generate revenues sufficient to fund operations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the SSI-Delaware and its wholly-owned subsidiary SSI-California. All significant
intercompany transactions and balances have been eliminated in consolidation.
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 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 both years presented.
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 periods
reported. Actual results could materially differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The consolidated financial statements contain financial instruments whereby
the fair value of the financial instruments could be different than those
recorded on a historical basis in the accompanying consolidated financial
statements. The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, notes payable, accounts payable, note payable
to related party and short-term advance. The carrying amounts of the Company's
financial instruments approximated their fair values at June 30, 1996 and
December 31, 1996 (unaudited).
CONCENTRATIONS OF CREDIT RISK
The Company at times maintains cash balances at certain financial
institutions in excess of the federally insured deposits.
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. Although the Company expects
to collect 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 which differ from
estimates.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
As of June 30, 1996, reserves for credit losses totaled $703,421. Reserves
for sales returns were not deemed necessary by management of the Company. Such
reserves relate solely to Acclaim (see Notes 6 and 14). As of December 31, 1996,
reserves for credit losses and sales returns amounted to $703,421 (unaudited)
and $144,450 (unaudited), respectively.
One customer accounted for 18% of consolidated total revenues for the year
ended June 30, 1995. Acclaim accounted for 83% of consolidated total revenues
for the year ended June 30, 1996. The Company's accounts receivable at June 30,
1996 are primarily from Acclaim (see Notes 6 and 14).
Three customers accounted for 49% (unaudited), 12% (unaudited) and 11%
(unaudited), respectively, of consolidated revenues for the six months ended
December 31, 1996. One customer accounted for 73% (unaudited) of consolidated
revenues for the six months ended December 31, 1995. Accounts receivable from
three customers accounted for 52% (unaudited), 19% (unaudited) and 19%
(unaudited), respectively, of consolidated accounts receivable as of December
31, 1996.
No one company accounted for more than 10% of consolidated purchases for the
year ended June 30, 1995. The Company purchased certain products from two
companies, which accounted for 49% and 37%, respectively, of consolidated
purchases for the year ending June 30, 1996. Accounts payable to two companies
accounted for 11% and 11%, respectively, of consolidated accounts payable as of
June 30, 1996.
The Company purchased certain products from one vendor which accounted for
10% (unaudited) of consolidated purchases for the six months ended December 31,
1996. Accounts payable to two companies accounted for 29% (unaudited) and 13%
(unaudited), respectively, of consolidated accounts payable as of December 31,
1996.
RISKS AND UNCERTAINTIES
TECHNOLOGICAL OBSOLESCENCE
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. Included in the accompanying consolidated balance sheets are
inventories at a carrying value of $262,657 and $313,545 (unaudited) as of June
30, 1996 and December 31, 1996, respectively, which represents management's
estimate of its net realizable value. Such value is based on forecasts for sales
of such inventories.
LICENSES
The Company's products are based upon the licensed content of major motion
pictures and television shows 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
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
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. Generally, the terms of a license agreement
state that, upon any bankruptcy or liquidation of the Company, licensing rights
revert to the license holder.
DISTRIBUTION
As discussed in Note 14, the Company entered into a distribution agreement
which is exclusive except for sales in the direct-to-the-customer programs, as
defined. The term of the agreement is for two years. The Company will be
substantially dependent upon such distributor for the marketing and selling of
its products throughout North America during the term of this agreement. The
distributor, 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 the distributor. Because the Company's
rights to market and sell its products are limited, the Company's ability to
realize cash flow necessary to fund its ongoing operations and to achieve
profitability will be largely dependent upon the success of the distributor in
marketing and selling the Company's products.
SEASONALITY
Traditionally, the consumer software business has been seasonal. Typically,
net revenues are highest during the fourth calendar quarter and decline
sequentially in the first three calendar quarters. The seasonal pattern is due
primarily to the increased demand for consumer software during the holiday
season. The Company expects its net sales and operating results to reflect such
seasonality.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of 90 days or less when purchased to be cash equivalents.
INVENTORIES
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market (estimated net
realizable value) with cost determined on a first-in, first-out (FIFO) basis.
Such net realizable value is based on forecasts for sales of the Company's
products in the ensuing years. The industry in which the Company operates 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 the Company's inventories could be substantially
less than the amount shown on the accompanying consolidated balance sheets.
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. Repairs and maintenance are charged to expense as incurred;
replacements and betterments are capitalized.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
Depreciation expense related to continuing operations totaled $27,541 and
$45,230 for the years ended June 30, 1995 and 1996, respectively, and $19,437
(unaudited) and $44,453 (unaudited) for the six months ended December 31, 1995
and 1996, respectively, and is included in other general and administrative
expense in the accompanying consolidated statements of operations.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs associated with the Company's
Initial Public Offering ("IPO"). Deferred offering costs have been reflected as
a reduction of proceeds in connection with the completion of the IPO (see Note
9).
REVENUE RECOGNITION
Direct-to-the-customer 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 and charged to cost
of sales in the accompanying consolidated statements of operations.
Through June 30, 1996, the Company recognized revenue, net of
distribution fees, for product shipped to Acclaim on the date that Acclaim
purchased such product and shipped it to its customers. Acclaim was obligated
to pay the Company on the earlier of the month following the date of receipt
of payment by Acclaim or 120 days following the end of the month that the
product was shipped. The Company was responsible for product returns through
June 30, 1996, and records a reserve for returns based on management's
evaluation of historical experience and current industry trends, as discussed
above (see Notes 6, 14 and 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. Royalty liabilities 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 by the license holders. Royalties for the
years ended June 30, 1995 and 1996 and the six months ended December 31, 1995
and 1996, amounted to $325,981 and $535,065, respectively, and $190,977
(unaudited) and $436,344 (unaudited), respectively, and are included in cost of
sales on the accompanying consolidated statements of operations.
The Company assesses the recoverability of royalty assets by determining
whether the amortization of the minimum guarantee will be recovered through
anticipated sales on a per unit basis. Any amounts not expected to be recovered
are charged to operations in the period assessed by management. For the years
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
ended June 30, 1995 and 1996, and the six months ended December 31, 1995 and
1996, management made such an assessment and charged $66,559 and $99,798, and
$80,000 (unaudited) and $61,123 (unaudited), respectively, to cost of sales on
the accompanying consolidated statements of operations.
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 December 31, 1996, all software development
costs have been expensed.
INCOME TAXES
The Company accounts for income taxes under Statement of 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 OPTIONS AND WARRANTS
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. The Company has
elected to account for its stock-based compensation to employees under APB 25.
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 4). The
accompanying consolidated financial statements have been adjusted to reflect the
reverse stock split for all periods presented.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED)
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 year
ended June 30, 1996 and the six months ended December 31, 1996, 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 4, 5, 9 and 11), except as discussed below.
Pursuant to Securities and Exchange Commission Staff Bulletin No. 83, common
shares issued for consideration below an assumed initial public offering price
($4.00 per share) and stock options granted (see Note 11) 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, which effect the computation of the weighted average common shares,
are vested options to purchase 100,000 shares granted at $3.40 per share (see
Note 11).
The computations of the weighted average common shares and equivalents
outstanding follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
---------------------- ------------------------
1995 1996 1995 1996
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding during the
period..................................................... 1,847,908 1,822,759 1,853,145 4,303,096
---------- ---------- ----------- -----------
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... 1,862,908 1,837,759 1,868,145 4,318,096
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 amounts to conform with
the 1996 presentation.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 2--INVENTORIES
INVENTORIES CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
<S> <C> <C>
(UNAUDITED)
Finished goods..................................................... $ 159,151 $ 212,166
Raw materials (components)......................................... 103,506 101,379
---------- ------------
................................................................... $ 262,657 $ 313,545
---------- ------------
---------- ------------
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
<S> <C> <C>
(UNAUDITED)
Studio computers and equipment..................................... $ 246,107 $ 508,973
Office furniture and equipment..................................... 60,914 64,356
---------- ------------
................................................................... 307,021 573,329
Less accumulated depreciation...................................... (129,954) (174,407)
---------- ------------
................................................................... $ 177,067 $ 398,922
---------- ------------
---------- ------------
</TABLE>
As of June 30, 1996 and December 31, 1996 (unaudited), the Company had a
total cost of $86,723 of assets under capital leases (see Note 8).
NOTE 4--NOTES PAYABLE
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 net 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. The dealer/manager received 20,918 Bridge
Warrants for $50 as partial consideration for services in connection with this
offering. Upon completion of the IPO, the Bridge Warrants were automatically
converted into Redeemable Warrants (see Note 9).
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 such default, the Bridge Note holders
were entitled to receive a penalty of two percent per month in addition to
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 4--NOTES PAYABLE (CONTINUED)
the interest otherwise payable on the Bridge Notes. These notes, plus accrued
interest, were repaid in full during September 1995 in connection with the 1995
Private Placement, discussed 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 (see below). As of June 30, 1996, the Company had sold
52.5 units for net proceeds of $4,256,400, of which $262,500 represents the
Private Warrants, net of costs of $993,600. Included in accrued interest on the
accompanying consolidated balance sheet as of June 30, 1996 is accrued interest
of $364,188 related to this private placement. In connection with this offering,
the Company issued 400,000 Private Warrants as partial consideration for
services provided by a dealer/manager (see below).
The obligations of the Company under the Private 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 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, discussed above. The
Private Notes, plus accrued interest totaling $373,573, were repaid in full
during July 1996 in connection with the Company's IPO (see Note 9).
Upon completion of the IPO, the Private Warrants were converted into
Redeemable Warrants (see Note 9).
NOTE 5--RELATED PARTY TRANSACTIONS
PRIOR 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 in 1995
due to an affiliate of a stockholder through issuance of shares. During the year
ended June 30, 1996, the Company repaid $13,500 of short-term non-interest
bearing advances to certain officers of the Company.
NOTE PAYABLE TO RELATED PARTY
On May 30, 1996, ASSI, Inc., a shareholder, loaned the Company $500,000 (the
"ASSI Convertible Loan"). The ASSI Convertible Loan bore interest at 8% per
annum, and principal and accrued interest was due on the earlier of September 1,
1996 or the completion of the Company's IPO. Upon the closing of the Company's
IPO, ASSI, Inc. had the option to convert all or part of the ASSI Convertible
Loan plus accrued interest into warrants to purchase common stock at a
conversion price of $.25 per warrant (the "ASSI Loan Warrants").
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
On July 7, 1996, in connection with the Company's IPO, ASSI, Inc. exercised
the conversion option to convert this note, plus accrued interest totalling
$4,164, into 2,016,657 warrants to purchase common stock at the conversion price
of $.25 per warrant. The ASSI Loan Warrants have the same terms as the
Redeemable Warrants, except as discussed below (see Note 9).
ASSI WARRANTS
On April 30, 1996, in consideration of certain financial and personnel
consulting services provided to the Company in 1996, including advising the
Company regarding capital raising alternatives and executive recruiting, the
Company 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").
The terms of the ASSI Warrants and the ASSI Loan Warrants are identical
to those of the Redeemable Warrants issued in connection with the IPO (see
Note 9), except that they became exercisable October 1, 1996, they are not
mandatorily redeemable by the Company and they are 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.
NOTE 6--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.
Effective April 1, 1996, such Agreement was terminated. In connection
therewith, the advance was deducted from the final amounts due the Company, as
reported by Acclaim (see Note 14).
NOTE 7--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, 1996, the Company had received $24,000 of
advances in excess of earnings and has therefore recorded such amount as
deferred revenue in the accompanying
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 7--DEFERRED REVENUE (CONTINUED)
consolidated balance sheet. As of December 31, 1996, the Company had $12,000
(unaudited) of such amounts 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, 1996, the Company received $48,360 of advances in excess of royalties
earned. As of December 31, 1996, such advances were earned in full (unaudited).
As of June 30, 1996, the Company received $12,000 of advance royalties in
connection with the licensing of the music division (see Note 12). Accordingly,
the Company has recorded such amounts as deferred revenues on the accompanying
June 30, 1996, consolidated balance sheet. As of December 31, 1996, the Company
has recorded $4,655 (unaudited) of such amounts as deferred revenues on the
accompanying consolidated balance sheet.
NOTE 8--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
September 1998 and provide for certain expense allowances.
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 March 1996 to change the number and vesting period of options previously
granted and to grant additional options (see Note 11).
Future minimum base salaries, by year and in the aggregate, after giving
effect to the modification of two of the contracts, consist of the following as
of June 30, 1996:
<TABLE>
<CAPTION>
YEARS ENDING
JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 508,625
1998.............................................................................. 332,083
1999.............................................................................. 62,500
----------
$ 903,208
----------
----------
</TABLE>
Certain of the employment contracts provided for commissions based on net
revenues. Commissions under employment contracts for the years ended June 30,
1995 and 1996, related to continuing operations amounted to $132,078 and
$66,067, respectively, and are included in marketing and sales costs in the
accompanying consolidated statements of operations. As of June 30, 1996, all
such amounts have been paid. Effective November 1995, commissions are no longer
paid under any of the employment contracts.
Effective November 1, 1996, the employment contract with an officer, as
modified, was terminated through mutual agreement. The agreement specifies
monthly payments beginning December 1996 through September 1998. As of December
31, 1996, the Company has recorded $278,649 (unaudited) under the
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
terms of this agreement. Such amounts are included in accrued compensation and
related taxes in the accompanying consolidated balance sheet.
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 lease payments as of June 30, 1996, due through June 30, 1997
under such leases total $56,273.
Rent expense under operating lease agreements totaled $94,006 and $89,192
for the years ended June 30, 1995 and 1996, respectively, and totaled $48,514
(unaudited) and $47,828 (unaudited) for the six months ended December 31, 1995
and 1996, respectively, and is included in other general and administrative
expenses on the accompanying consolidated statements of operations.
Subsequent to December 31, 1996, the Company entered into an operating lease
agreement for office space (see Note 15).
CAPITAL LEASES
The Company leases certain equipment and computers under capital lease
obligations with interest rates ranging from 14.19% to 35.08% per annum.
Aggregate monthly principal and interest payments total $3,306 as of June 30,
1996.
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 as of June 30, 1996:
<TABLE>
<CAPTION>
YEARS ENDING
JUNE 30,
- ------------------------------------------------------------------------------------
<S> <C>
1997................................................................................ $ 31,438
1998................................................................................ 14,068
1999................................................................................ 4,196
---------
49,702
Less amount representing interest................................................... (8,833)
---------
Present value of net minimum lease payments......................................... 40,869
Less current portion................................................................ (27,058)
---------
$ 13,811
---------
---------
</TABLE>
During the six months ended December 31, 1995, the Company acquired $34,150
of property and equipment under capital leases. Interest expense under capital
lease obligations amounted to $7,045 and $10,500 for the years ended June 30,
1995 and 1996, respectively, and was insignificant for the six months ended
December 31, 1995 (unaudited) and 1996 (unaudited).
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
On October 16, 1995, the Company entered into a one year binding letter of
intent with a consultant whereby for consulting services the Company would pay a
minimum $39,000 per year plus royalties up to 3%, as defined, on products as
specified. Through June 30, 1996, the Company paid a total of $73,340 under this
agreement. During the year ended June 30, 1996, $39,581 is included in marketing
and sales expense and $33,759 is included in cost of sales on the accompanying
consolidated statements of operations.
Insignificant amounts were paid under the terms of this agreement for the
six months ended December 31, 1995 (unaudited). For the six months ended
December 31, 1996, the Company paid $27,000 (unaudited) under this agreement.
During the six months ended December 31, 1996, such agreement was terminated and
the consultant became an employee of the Company.
DEVELOPMENT CONTRACTS
Periodically, the Company enters into certain agreements with software
developers whereby for specified development services, the Company will pay a
fixed fee and/or a percentage of sales of the product developed. As of June 30,
1996, the Company was party to two such contracts. No amounts were paid under
such agreements during the year ended June 30, 1995. For the year ended June 30,
1996, the Company paid a total of $146,416 under such agreements. Of such
amounts, $113,125 is included in research and development and $33,291 is
included in cost of sales in the accompanying consolidated statements of
operations.
For the six months ended December 31, 1995 (unaudited), the Company paid an
insignificant amount to outside developers. For the six months ended December
31, 1996, the Company paid $179,492 (unaudited) under such agreements. Such
amounts are included in research and development in the accompanying
consolidated statement of operations.
LICENSE AGREEMENT
In December 1996 (unaudited), the Company entered into an agreement for
license fees, as defined, whereby the counterparty has the exclusive right to
create localized language versions of certain of the Company's products for
distribution in certain specified territories. The agreement is for three years
beginning January 1, 1997, subject to termination, as defined.
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
9). 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
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 has been canceled (see Note 9). 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.
NOTE 9--COMMON STOCK
During the fiscal year 1994, the Company engaged an agent (the "Placement
Agent") to sell a private placement of up to 125,502 shares of its common stock
at $13.00 per share (the "1994 Private Placement"). 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 1994 Private Placement, 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. In addition, 15,120 shares were returned
to the Company for retirement (see Note 8).
CANCELLATION OF SHARES
In fiscal 1996, it was determined by the Company that 36,238 shares of
common stock were improperly issued in 1992 due to the fact no consideration was
received. Accordingly, such common shares were canceled effective June 30, 1996.
STOCKHOLDER PRIVATE PLACEMENT
Concurrent with the 1995 Private Placement (see Note 4), the Company's major
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. Through
June 30, 1996, the stockholder had sold 107,500 shares of common stock. On July
1, 1996 in connection with the Company's IPO, such shares of common stock
purchased in this private placement were registered with the Securities and
Exchange Commission (see below).
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 (the "Redeemable Warrants") at
$.25 per warrant. Net proceeds totaled
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 9--COMMON STOCK (CONTINUED)
$7,691,623, net of offering costs of $2,208,625 (unaudited). On August 14, 1996,
the underwriters exercised a portion of their "over-allotment" 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 totaled $594,161, net of
offering costs of $88,783.
Through June 30, 1996, in connection with the IPO, the Company has incurred
offering costs totalling $620,904. Such costs have been capitalized on the
accompanying consolidated balance sheet as of June 30, 1996 and have been offset
against the aforementioned proceeds as of December 31, 1996 in fiscal 1997.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at $4.40 per share, subject to adjustment as defined, expiring December
31, 2001. In the event that the Redeemable Warrants are called for redemption,
they will be exercisable for 30 days preceding the applicable redemption date.
Commencing one year after July 1, 1996, 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 $5.60 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.
In connection with the registration of the shares of common stock and
Redeemable Warrants discussed above, the Company registered 107,500 shares of
common stock registered for the account of certain selling stockholders.
The Company has also, in connection with the IPO, given the underwriter a
warrant, for $50, which entitles the underwriter to purchase 240,000 shares of
common stock at $5.80 per share.
NOTE 10--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 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
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 with an ascribed
value of $645,000.
In fiscal 1996, the Company amended its articles of incorporation and
deleted the authorization to issue Series A preferred stock.
NOTE 11--STOCK OPTIONS
The 1992 Stock Option PlanThe Company adopted the 1992 Stock Option Plan
(the "1992 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.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 11--STOCK OPTIONS (CONTINUED)
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 not 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 1992 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 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 a prior officer of the Company (see Note 8) 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 prior officer to
purchase 41,834 shares of the Company's common stock for $.06 per share. All
stock options issued to the prior officer were immediately vested and are
exercisable for a period of up to four years after termination of employment
from the Company. During the year ended June 30, 1995 and during the six months
ended December 31, 1996 (unaudited), a portion of the difference between the
fair market value of the common stock underlying the options at the date of
grant and the exercise price was included in operating costs and
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 11--STOCK OPTIONS (CONTINUED)
expenses in the accompanying consolidated statement of operations. During the
six months ended December 31, 1996 (unaudited), the prior officer exercised
10,000 of such options.
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. During the year ended June 30, 1995 and during the six
months ended December 31, 1996 (unaudited), a portion of the difference between
the fair market value of the common stock underlying the options at the date of
grant and the exercise price was included in operating costs and expenses in the
accompanying consolidated statement of operations. These options had an original
vesting period of four years. In September 1995, 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.
For the year ended June 30, 1995 and for the six months ended December 31,
1996, an aggregate of $733,165 and $178,607 (unaudited), respectively, was
charged to operating costs and expenses for the options vested during the year,
as discussed in the preceding two paragraphs. No amounts were charged to
operating costs for the year ended June 30, 1996 or the six months ended
December 31, 1995.
On September 5, 1995, in connection with the resignation of an officer of
the Company, 12,550 options were canceled in accordance with the 1992 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, the 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 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.
On September 22, 1995, the Board of Directors resolved that no additional
shares shall be issued under the 1992 Plan, with the exception of the options
discussed in the preceding paragraph.
THE 1995 STOCK OPTION PLAN
On October 9, 1995, the Company adopted the 1995 stock option plan (the
"1995 Plan") effective November 1, 1995. 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.
Options under the 1995 Plan may be granted in the form of incentive stock
options as provided in section 422 of the Internal Revenue Code, as amended, or
in the form of non-qualified stock options (the "Options"). The 1995 Plan
terminates October 31, 2005 and shall be administered by a committee appointed
by the Board of Directors of the Company.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 11--STOCK OPTIONS (CONTINUED)
Incentive stock options shall be limited to persons who are employees of the
Company and may not be granted at a price less than 100% of the fair value of
the stock as of the date of grant (110% as to any 10% stockholder at the time of
grant).
The term of each Option shall not be more than 10 years from the date of
grant (5 years for any 10% stockholder). Vesting of the Options is determinable
by the Committee on a case-by-case basis and the Options are not exercisable
unless the holder is currently employed with the Company. Upon termination of an
employee, the holder has 30 days to exercise any Options held.
On July 2, 1996, the Company agreed to grant 13,610 options under the 1995
stock option plan to non-executive employees at an exercise price of $4.00 per
share. The options vested 50% upon the date of grant and will vest 25% on June
30, 1997 and 1998, respectively. The options expire 10 years from date of grant.
Subsequent to December 31, 1996, certain options issued to employees under
the 1992 Plan were exercised (see Note 15).
The following table summarizes option transactions during the years ended
June 30, 1995 and 1996 and for the six months ended December 31, 1996
(unaudited) under both of the aforementioned plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
---------- -------------
<S> <C> <C>
Balances at July 1, 1994........................................... 491,968 $0.06
Granted............................................................ -- --
Exercised.......................................................... (4,184) $0.06
Canceled........................................................... (12,550) $0.06
---------- -------------
Balances at June 30, 1995.......................................... 475,234 $0.06
Granted............................................................ 300,000 $3.40-$5.00
Exercised.......................................................... -- --
Canceled........................................................... (100,000) $5.00
---------- -------------
Balances at June 30, 1996.......................................... 675,234 $0.06-$4.00
Granted............................................................ 13,610 $4.00
Exercised.......................................................... (10,000) $0.06
Canceled........................................................... (836) $0.06
---------- -------------
Balances at December 31, 1996 (unaudited).......................... 678,008 $0.06-$4.00
---------- -------------
---------- -------------
Vested as of December 31, 1996 (unaudited)......................... 551,418
---------- -------------
---------- -------------
</TABLE>
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method pursuant to SFAS 123, rather than the method
pursuant to APB #25 discussed herein. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk-free interest rates of 6.3%; dividend yields of
0.0%; volatility factors of the expected market price of the Company's common
stock of 100%; and expected terms of two to five years.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 11--STOCK OPTIONS (CONTINUED)
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE SIX
YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31,
1996 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Pro forma net loss:
Net loss, as reported.......................................... $ (4,474,976) $ (941,636)
Compensation expense under SFAS 123............................ (226,659) (88,513)
------------- -------------
Pro forma net loss............................................. $ (4,701,635) $(1,030,149)
------------- -------------
------------- -------------
Pro forma net loss per share................................... $ (2.56) $ (0.24)
------------- -------------
------------- -------------
</TABLE>
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. Effective November 1, 1995 (commencement of a license
agreement with GSD), $15,000 was paid to the Company representing advance
royalties. As of June 30, 1996 and December 31, 1996, $12,000 and $4,655
(unaudited), respectively, of such advance royalties are included in deferred
revenue on the accompanying consolidated balance sheet. GSD also is to guarantee
$50,000 of royalties over the license term of two years. The license agreement
is 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, 1996 no assets or liabilities of the music division are
included in the accompanying consolidated balance sheet.
The following summarizes the results of operations for the discontinued
operations for the year ended June 30, 1995:
<TABLE>
<S> <C>
Revenues......................................................... $ 220,937
Costs and expenses............................................... (332,043)
---------
Loss from operations............................................. $(111,106)
---------
---------
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 13--INCOME TAXES
The provision for income taxes from continuing operations for the years
ended June 30, 1995 and 1996 is comprised of minimum state taxes only.
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, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------ -------------------------
<S> <C> <C> <C> <C>
Income tax benefit computed at Federal statutory tax rate.......... $ (513,486) (34.0%) $ (1,520,948) (34.0%)
State and local taxes.............................................. 1,600 -- 1,600 --
Expenses not deductible for income tax purposes.................... 252,173 15.9 3,774 --
Change in the beginning-of-the-period balance of the valuation
allowance for deferred tax assets allocated to income tax
benefit.......................................................... 261,313 18.1 1,517,174 34.0
------------- --------- ------------- ---------
$ 1,600 --% $ 1,600 --%
------------- --------- ------------- ---------
------------- --------- ------------- ---------
</TABLE>
The components of the net deferred tax asset recorded in the accompanying
balance sheet as of June 30, 1996 is as follows:
<TABLE>
<S> <C>
Reserves, principally due to allowances for sales returns and
obsolete inventory............................................. $ 363,213
Accrued liabilities, principally due to accrual for financial
reporting purposes............................................. 1,811,583
Net operating loss carryforwards................................. 2,129,913
Less valuation allowance......................................... (4,304,709)
-----------
................................................................. $ --
-----------
-----------
</TABLE>
The valuation allowance increased $1,456,540 during the year ended June 30,
1996.
At June 30, 1996, the Company had federal and state net operating loss
carryforwards of approximately $5,742,000 and $2,864,000, respectively,
available to offset future taxable federal and state income. The federal and
state carryforwards amounts expire in varying amounts through 2012 and 2001,
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--DISTRIBUTION AGREEMENTS
ACCLAIM TERMINATION AGREEMENT
Effective April 1, 1996, the Company and Acclaim entered into an agreement
to terminate the distribution agreement (the "Termination Agreement"). On or
before June 30, 1996, Acclaim was to render a final accounting to the Company
together with payment of the balances of any amounts due to
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 14--DISTRIBUTION AGREEMENTS (CONTINUED)
the Company under the distribution agreement. The final accounting was not
received by June 30, 1996. Pursuant to the terms of the Termination Agreement,
Acclaim was obligated to notify its accounts that it will not accept returns of
any of the Company's software products after June 30, 1996.
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 is not obligated to repay the
short-term advance totaling $400,000 (see Note 6).
On August 28, 1996, the Company received $256,067 plus accrued interest of
$2,175 pursuant to the terms of the promissory note discussed above.
As of June 30, 1996, the Company recorded an additional $703,421 in accounts
receivable from Acclaim, which has been fully reserved for (see Note 1), due to
disputes and discrepancies in the information as reported by Acclaim.
SIMON & SCHUSTER DISTRIBUTION AGREEMENT
On June 1, 1996, the Company entered into a two year distribution services
agreement with Simon & Schuster Interactive Distribution Services ("SSIDS"),
which became effective July 1, 1996. 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 will be 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 will
be nonexclusive.
The Company will recognize revenue, net of distribution fees, for product
shipped to SSIDS on the date that SSIDS purchases such product and ships it
to SSIDS's customers. Pursuant to the agreement, SSIDS will make a monthly
payment to the Company in the amount equal to its gross revenues, as defined,
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 calendar month in question. Under the agreement
with SSIDS, SSIDS will be responsible for collection of accounts receivable
and the Company will remain liable for product returns. The Company intends
to maintain a reserve of 15 percent of gross revenues for product returns.
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
LEASES
Effective April 1, 1997, the Company entered into a five-year operating
lease for office space. Rent under this agreement totals $12,058 per month,
adjusted annually, as defined.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
OPTIONS
In January and February 1997, certain employees exercised stock options to
purchase 31,275 shares of common stock for cash at $0.06 per share under the
terms of the 1992 Plan (see Note 11).
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<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sound Source Interactive, Inc.
We hereby consent to the use in this Registration Statement of our report
dated September 16, 1996 relating to the consolidated financial statements as of
and for the two-year period ended June 30, 1996 appearing in the Prospectus,
which is part of the Registration Statement of Sound Source Interactive, Inc.
and to the reference to us under the heading "Experts" in such Prospectus.
CORBIN & WERTZ
Irvine, California
March 25, 1997
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<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. 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.
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TABLE OF CONTENTS
Page
Additional Information...................................................... 1
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 8
Use of Proceeds............................................................. 20
Dividend Policy............................................................. 20
Market Price of Securities.................................................. 21
Dilution.................................................................... 22
Capitalization.............................................................. 24
Selected Financial Data..................................................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 26
Business.................................................................... 33
Management.................................................................. 45
Principal Stockholders...................................................... 57
Selling Security Holders.................................................... 59
Certain Transactions........................................................ 61
Description of Securities................................................... 66
Securities Eligible for Future Sale......................................... 69
Plan of Distribution........................................................ 71
Legal Matters............................................................... 71
Experts..................................................................... 71
Index to Consolidated Financial Statements.................................. F-1
-----------
11,318,097 Shares of Common Stock Issuable Upon Exercise of Warrants
690,338 Shares of Common Stock for Selling Security Holders
5,058,307 Redeemable Warrants for Selling Security Holders
-----------
PROSPECTUS
-----------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used in this Part II without definitions are as defined in the
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 Bylaws of Sound Source Interactive, Inc. a Delaware
corporation (the "Registrant"), 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 has purchased a directors' and
officers' liability policy insuring its directors and officers. The
Registrant also has entered into indemnification agreements with each of its
directors whereby the Registrant will indemnify each such person against
II-1
<PAGE>
certain claims arising out of certain past, present or future acts, omissions or
breaches of duty committed by an indemnitee while serving as a 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 Registrant 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 of 1933, as amended (the "Securities Act").
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Securities and Exchange Commission, (the "Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
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 personal 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.
Securities and Exchange Commission registration fee .............. $505
Accounting fees and expenses ..................................... $7,500*
Printing and engraving expenses .................................. $10,000*
Blue Sky fees and expenses (including counsel fees) .............. $2,000*
Other legal fees and legal expenses .............................. $23,000*
--------
Total ............................................................ $43,005*
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* Estimated.
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<PAGE>
Item 26. Recent Sales of Unregistered Securities.
On May 16, 1994, the Registrant acquired all the issued and outstanding
capital stock of Sound Source Interactive, Inc. a California corporation (the "
"Subsidiary"), in exchange for newly issued stock of the Registrant (the "1994
Acquisition"). 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 pursuant to Sections 4(2) and 4(6) thereof.
On June 15, 1994, Mr. Bitetti exchanged his 1,000,000 shares of Series A
Preferred Stock for 83,333 shares of Common Stock issued by the Company. Such
issuance was exempt from the registration requirements of the Securities Act
pursuant to Sections 4(2) and 4(6) 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
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
Registrant which were cancelled. The Registrant 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 142,337 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
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<PAGE>
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 Sections 4(2) and 4(6) thereof.
On September 3, 1996, the Registrant filed with the Commission a registration
statement on Form S-8, Registration No. 333-11483, pertaining to the 1992
Stock Option Plan.
In April 1994, the Registrant granted Eric H. Winston, then an executive
officer and director of the Registrant, an option to purchase 251,004 shares
of Common Stock. In June 1994, the Registrant granted Mr. Winston, then an
executive officer and director of the Registrant, an option to purchase
41,834 shares of Common Stock. The issuances of such options to Mr. Winston
were exempt from the registration requirements of the Securities Act pursuant
to Section 4(2) thereof. On December 3, 1996, Mr. Winston exercised an option
to purchase 10,000 shares of Common Stock for an aggregate purchase price of
$600. The issuance of stock to Mr. Winston pursuant to such exercise was
exempt from the registration requirements of the Securities Act pursuant to
Sections 4(2) and 4(6) 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 Bridge
Warrant to purchase 20,918 shares of Common Stock for $50. Such Bridge Warrant
was 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
initial effectiveness of this Registration Statement on July 1, 1996, all of the
Bridge Warrants (including the warrant issued to Financial West Group, Inc.)
were 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. and Joseph Stevens & Co., L.P. (the "Underwriters")
its right to serve as warrant agent for the Bridge Warrants. As compensation for
such services as warrant agent, the Underwriters will receive a solicitation fee
of five percent of the exercise price of the Bridge Warrants, payable upon
exercise of the Bridge Warrants.
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<PAGE>
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's 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 Boston Group, L.P. 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 was 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 initial effectiveness of this Registration Statement on July 1, 1996 all of
the Private Warrants (including the warrant issued to Financial West Group,
Inc.) were 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 Underwriters its right to serve as warrant agent for the Private
Warrants. As compensation for its services as warrant agent, the Underwriters
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 President, Chief Operating Officer, Chief Financial Officer, Treasurer,
Secretary 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 pursuant to the Registrant's 1992 Stock Option Plan. 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 Registrant granted ASSI, Inc. warrants to purchase
2,000,000 shares of Common Stock. On May 30, 1996, the Company issued a $500,000
convertible promissory note to ASSI, Inc., which was convertible into warrants
to purchase Common Stock at a conversion price of $.25 per warrant. On July 7,
1996, the Registrant issued 2,016,657 warrants to ASSI, Inc. upon its conversion
of such promissory note. The terms of all the warrants issued to ASSI, Inc. are
identical to those of the Redeemable Warrants, except that (i) they became
exercisable October 1, 1996, (ii) they are not be mandatorily redeemable by the
Company and (iii) they are 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 transfer by
ASSI, Inc. of any of its ASSI Warrants or Redeemable 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 held by
persons other than ASSI, Inc. All such transactions with ASSI Inc. were 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.
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Item 27. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exh. No. Description of Exhibits
3.1 Second Restated Certificate of Incorporation of the Registrant. Filed
as Exhibit 3.1 to the Registrant's Registration Statement of Form SB-2
(No. 33-80827) ("Registration Statement No. 33-80827") and
incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registration Statement No. 33-80827 and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
Registration Statement 33-80827 and incorporated herein by reference.
4.2 Form of Warrant Agreement between the Registrant and Corporate Stock
Transfer Inc., as warrant agent, and form of Redeemable Warrant. Filed
as Exhibit 4.2 to Registration Statement No. 33-80827 and incorporated
herein by reference.
4.3 Form of Underwriter's Warrant Agreement between the Registrant and The
Boston Group, L.P. and Joseph Stevens and Company, L.P. and form of
Underwriters' Warrant. Filed as Exhibit 4.3 to the Registration
Statement No. 33-80827 and incorporated herein by reference.
4.5 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 underwriters. Filed as Exhibit 1 to the Registration
Statement No. 33-80827 and incorporated herein by reference.
5.1 Opinion of McDermott, Will & Emery. Filed herewith.
9.1 Stockholder Voting Agreement, dated as of April 30, 1996, among ASSI,
Inc., Vincent J. Bitetti and Eric H. Winston. Filed as Exhibit 9.1 to
Registration Statement No. 33-80827 and incorporated herein by
reference.
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April 30,
1996. Filed as Exhibit 9.2 to Registration Statement No. 33-80827 and
incorporated herein by reference.
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30,
1996. Filed as Exhibit 9.3 to Registration Statement No. 33-80827 and
incorporated herein by reference.
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April 30,
1996. Filed as Exhibit 9.4 to Registration Statement No. 33-80827 and
incorporated herein by reference.
9.5 Irrevocable Proxy and Voting Agreement of Martin Meyer to Vincent J.
Bitetti, dated May 4, 1994. Filed as Exhibit 9.5 to Registration
Statement No. 33-80827 and incorporated herein by reference.
9.6 Irrevocable Proxy and Voting Agreement of Mark Lane to Vincent J.
Bitetti, dated May 10, 1994. Filed as Exhibit 9.6 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.1 Second Amended and Restated Employment Agreement of Vincent J. Bitetti
dated as of April 30, 1996. Filed as Exhibit 10.1 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston
dated as of April 30, 1996. Filed as Exhibit 10.2 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.3 Amended and Restated Employment Agreement of Ulrich E. Gottschling,
dated as of February 1, 1997. To be filed by amendment.
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10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. Filed as
Exhibit 10.4 to Registration Statement No. 33-80827 and incorporated
herein by reference.
10.5 Sound Source Interactive, Inc. Amended and Restated 1995 Stock Option
Plan. Filed as Exhibit 10.5 to the Registrant's Annual Report on Form
10K-SB, as amended (the "Form 10K-SB") and incorporated herein by
reference.
10.6 Warrant Agreement, dated as of September 26, 1995, among the
Registrant, Sound Source Interactive, Inc., a California corporation
(the "Subsidiary") and Financial West Group, Inc., corporation
("FWG"), as warrant agent, pertaining to the Bridge Warrants (as
defined in the Prospectus). Filed as Exhibit 10.6 to Registration
Statement No. 33-80827 and incorporated herein by reference.
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). Filed as Exhibit 10.7 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.8 Sales and Distribution Agreement, dated as of June 15, 1995, between
the Registrant and Acclaim Distribution, Inc. Filed as Exhibit 10.13
to Registration Statement No. 33-80827 and incorporated herein by
reference.
10.9 Termination Agreement, dated as of March 31, 1996, between the
Registrant and Acclaim Entertainment, Inc. Filed herewith.
10.10 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Vincent J. Bitetti. Filed as Exhibit 10.35 to
Registration Statement No. 33-80827 and incorporated herein by
reference.
10.11 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Eric H. Winston. Filed as Exhibit 10.36 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.12 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Ulrich Gottschling. Filed as Exhibit 10.37 to
Registration Statement No. 33-80827 and incorporated herein by
reference.
10.13 Form of Registration Procedures Agreement executed between the
Registrant and each of the Selling Security Holders. Filed as Exhibit
10.44 to Registration Statement No. 33-80827 and incorporated herein
by reference.
10.14 Consulting Agreement, dated as of April 30, 1996, between the Company
and ASSI, Inc. Filed as Exhibit 10.45 to Registration Statement No.
33-80827 and incorporated herein by reference.
10.15 Share Purchase Agreement, dated April 3, 1995, between Eric Winston
and Vincent Bitetti. Filed as Exhibit 10.46 to Registration Statement
No. 33-80827 and incorporated herein by reference.
10.16 Distribution Services Agreement, dated as of June 1, 1996, between the
Registrant and Simon & Schuster Interactive Distribution Services.
Filed as Exhibit 10.47 to Registration Statement No. 33-80827 and
incorporated herein by reference.
10.17 Note Purchase Agreement, dated as of May 30, 1996, between the
Registrant and ASSI, Inc. Filed as Exhibit 10.48 to Registration
Statement No. 33-80827 and incorporated herein by reference.
10.18 Convertible Promissory Note, dated May 30, 1996, issued by the Company
to ASSI, Inc. Filed as Exhibit 10.49 to Registration Statement No.
33-80827 and incorporated herein by reference.
10.19 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Mark A. James. Filed as Exhibit 10.44 to the 1996 Form
10-KSB and incorporated herein by reference.
10.20 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Ernest T. Klinger. Filed as Exhibit 10.45 to the 1996
Form 10-KSB and incorporated herein by reference.
10.21 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Ronald W. Hart. Filed as Exhibit 10.46 to the 1996 Form
10-KSB and incorporated herein by reference.
II-7
<PAGE>
10.22 Separation and Release Agreement, dated as of October 24, 1996,
between the Registrant and Eric H. Winston. Filed as Exhibit 10.47 to
the 1996 Form 10-KSB and incorporated herein by reference.
10.23 Indemnification Agreement, dated as of February 3, 1997, between the
Registrant and Robert S. Burke. Filed herewith.
10.24 Office Lease, dated as of March 4, 1997, between Arden Realty Limited
Partnership and the Subsidiary. Filed herewith.
21.1 Subsidiary of the Registrant. Filed as Exhibit 21.1 to Registration
Statement No. 33-80827 and incorporated herein by reference.
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).
(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)
(ss.230.424(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.
II-8
<PAGE>
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, 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 public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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 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-9
<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 March __, 1997.
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 Ulrich E. Gottschling is 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.
II-10
<PAGE>
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.
Signature Title Date
--------- ----- ----
/s/ Vincent J. Bitetti Chairman of the Board and March 18, 1997
- -------------------------- Chief Executive Officer
Vincent J. Bitetti (principal executive officer)
/s/ Ulrich E. Gottschling President, Chief Operating March 18, 1997
- -------------------------- Officer, Chief Financial
Ulrich E. Gottschling Officer, Treasurer and
Secretary (principal financial
and accounting officer)
Director March 18, 1997
- --------------------------
Robert S. Burke
/s/ Ronald W. Hart Director March 18, 1997
- --------------------------
Ronald W. Hart
/s/ Mark A. James Director March 18, 1997
- --------------------------
Mark A. James
/s/ Ernest T. Klinger Director March 18, 1997
- --------------------------
Ernest T. Klinger
II-11
<PAGE>
Exhibit 5
<PAGE>
March __, 1997
Sound Source Interactive, Inc.
2985 E. Hillcrest Drive
Suite A
Westlake Village, CA 91362
Re: Sound Source Interactive, Inc.
Gentlemen:
We are providing this opinion in connection with Registration Statement No.
33-80827 and the Registration Statement of which this is being filed as an
exhibit of Sound Source Interactive, Inc. (the "Company"), each on Form SB-2 and
as amended (the "Registration Statements"), filed under the Securities Act of
1933, as amended. Capitalized terms used herein without definition have the
meanings set forth in the Registration Statements.
The Registration Statements relate to the following:
(a) 690,338 shares of Common Stock registered for the account of certain
Selling Security Holders;
(b) 5,058,307 Redeemable Warrants registered for the account of certain
Selling Security Holders;
(c) 11,078,097 shares of Common Stock issuable upon exercise of Redeemable
Warrants; and
(d) 240,000 shares of Common Stock issuable upon exercise of Underwriters'
Warrants.
We have examined (i) the Company's Second Restated Certificate of
Incorporation and its Amended and Restated By-Laws; (ii) an officer's
certificate as to the corporate proceedings of the Company relating to the
issuance of the
<PAGE>
Sound Source Interactive, Inc.
March __, 1997
Page 3
Shares and the Warrants and other factual matters; and (iii) such other
documents and records as we have deemed necessary in order to render this
opinion.
Based on the foregoing, it is our opinion that:
1. The shares of Common Stock referred to in clause (a) above have been
duly authorized and are validly issued, fully paid and nonassessable
by the Company. The shares of Common Stock referred to in clauses (c)
and (d) above have been duly authorized and, upon their issuance by
the Company in accordance with the terms of the Redeemable Warrants
and the Underwriters' Warrants, respectively, will be validly issued,
fully paid and nonassessable.
2. The Redeemable Warrants referred to in clause (b) above have been duly
authorized and are validly issued and are enforceable against the
Company in accordance with their terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting the enforcement of
creditor's rights and by general equity principles.
We consent (i) to the use of this opinion as an exhibit to the Registration
Statement and (ii) to the reference to our firm name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ McDermott, Will & Emery
McDERMOTT, WILL & EMERY
<PAGE>
Exhibit 10.9
<PAGE>
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT made and entered into as of this 31st day of
March, 1996 by and between ACCLAIM DISTRIBUTION, INC. ("Acclaim"), on the one
hand, and SOUND SOURCE INTERACTIVE, INC. "SSI"), on the other hand.
W I T N E S S E T H
WHEREAS, Acclaim and SSI are parties to a Sales and Distribution Agreement
dated as of June 28, 1995 regarding the sale and distribution of video and
computer game software developed by SSI (the "Agreement");
WHEREAS, SSI has performed each and all of its obligations under the
Agreement in accordance with all of the provisions thereof and to the full and
complete satisfaction of Acclaim;
WHEREAS, Acclaim has performed each and all of its obligations under the
Agreement in accordance with all of the provisions thereof and to the full and
complete satisfaction of SSI;
WHEREAS, SSI nonetheless desires that the Agreement be terminated so as to
allow SSI to pursue alternative arrangements and opportunities with respect to
the sale and distribution of video and computer game software developed by it;
and
WHEREAS, Acclaim is willing to grant SSI's request that the Agreement be
terminated in accordance with all of the provisions set forth below:
NOW, THEREFORE, in consideration of the mutual agreements set forth herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Acclaim on the one hand and SSI on the other now
agree as follows:
A. TERMINATION OF AGREEMENT:
1. Termination. Notwithstanding anything to the contrary contained
in the Agreement, the Agreement shall expire at the end of the day on April 30,
1996, with the following consequences:
(a) On or before June 30, 1996, Acclaim shall render a final
accounting to SSI which shall include a final statement as to Net Monies, Net
Receipts and Net Remaining Monies together with payment of the balance of any
and all Net Remaining Monies due to SSI under the Agreement;
<PAGE>
(b) Notwithstanding the rendition of the final accounting and
final statement referred to in subparagraph (a) immediately above, the first
sentence of Paragraph 14,1.3 of the Agreement shall survive the termination of
the Agreement and continue to have full force and effect, it being understood
and agreed, however, that Acclaim shall notify its accounts that no returns of
any Software Products shall be accepted by Acclaim at any time after June 30,
1996; and
(c) The provisions of Paragraphs 10.4, 10.5 and 10.6 of the
Agreement regarding objections to statements, audit rights and audit claims, the
provisions of Paragraph 18 of the Agreement regarding confidentiality and the
representations and warranties set forth in Paragraph 12 of the Agreement shall
survive the termination of the Agreement and continue to have full force and
effect.
2. New Products. Notwithstanding anything to the contrary contained
in the Agreement, as between SSI and Acclaim, SSI shall have the sole and
exclusive right to sell and distribute any and all Software Products first
introduced and marketed by SSI at any time after the date hereof ("New
Products") and Acclaim shall have no participation whatsoever in the sale or
distribution of New Products (or in any of the proceeds thereof) and no
liability whatsoever in any connection therewith.
3. Distribution Fee. Notwithstanding anything to the contrary
contained in the Agreement, the Distribution Fee with respect to the orders of
Software Products set forth on Exhibit "A" attached hereto and by this reference
incorporated herein shall be 5% of the Net Invoice Price for each unit shipped.
B. RELEASE FROM LIABILITY:
1. SSI, for itself and on behalf of its administrators and
assignees, hereby releases, remises, relieves and forever discharges Acclaim,
its parent, affiliated and subsidiary companies and their respective present and
former stockholders, directors, officers, employees, agents, attorneys,
assignees, insurers, partners, joint ventures, licensees, grantees and
successors in interest and each and every person and entity acting by or through
or under or in concert with them or any of them (collectively, the "Acclaim
Releasees") from any and al claims, demands, actions, causes of action,
liabilities, arbitrations, assertions, contentions, debts, accounts, law suits
and actions of every kind and nature, at law or in equity, which SSI now has,
has had or at any time may have against the Acclaim Releasees or any of them,
whether or not now or heretofore known, suspected or in dispute and regardless
of when occurring, arising out of, resulting from or related or connected in any
way to any acts or events or
-2-
<PAGE>
circumstances occurring on or before the date hereof. Notwithstanding anything
to the contrary contained herein, it is understood and agreed that the release
given hereby does not extend to claims that Acclaim has failed to render
accountings or make payments to SSI in accordance with the Agreement in respect
of sales of Software Products thereunder no matter when occurring and SSI's
right to make such claims subject to all the provisions of the Agreement shall
not be affected hereby.
2. It is the intention of the parties hereto that this Termination
Agreement shall be effective as a full and final settlement and release of each
and all of the claims and other matters referred to in Paragraph B.1. above. SSI
acknowledges that there is a risk that subsequent to the execution of this
Termination Agreement SSI will discover facts or discover, incur or suffer
claims which were unknown or unsuspected at the time this Termination Agreement
was executed and which, if known by SSI as of the date of this Termination
Agreement, may have materially affected the decision of SSI to execute this
Termination Agreement. By entering into this Termination Agreement, SSI is
assuming the risk of such unknown or unsuspected facts and claims, to which the
provisions hereof shall apply notwithstanding the discovery or existence of any
additional or different claims or facts relative to the subject matter hereof.
SSI acknowledges that it is familiar with Section 1542 of the Civil Code of the
State of California, which reads as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
To the full extent that it may lawfully do so, SSI waives the application of the
aforesaid Section 1542 to the release given hereby.
C. GENERAL PROVISIONS.
1. Acclaim on the one hand and SSI on the other mutually acknowledge
to each other that neither of them nor any agent, attorney or other
representative for either of them has made any promise, representation or
warranty whatever, express, implied or statutory, not contained herein
concerning the subject matter hereof to induce the other to execute this
Termination Agreement and Acclaim on the one hand and SSI on the other
acknowledge that neither of them has executed this Termination Agreement in
reliance on any such promise, representation or warranty not contained herein.
-3-
<PAGE>
2. Each of the parties hereto represents and warrants that such
party has not heretofore assigned or transferred, or purported to assign or
transfer, to any person or entity not a party hereto any claim, debt, covenant,
agreement, contract, liability, demand, obligation, account, expense, action,
cause of action or law suit being released hereunder.
3. This Termination Agreement constitutes and contains the entire
agreement and full and complete understanding of the parties and supersedes and
replaces all prior negotiations, proposed agreements and agreements, written or
oral, with respect to the subject matter hereof. No modification of any of the
provisions hereof shall be valid or binding unless set forth in a writing signed
by the party to be charged.
4. This Termination Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
beneficiaries.
5. The language of this Termination Agreement shall be deemed to
have been drafted by each and all of the parties hereto since each was assisted
by counsel in reviewing and agreeing thereto. Ambiguities shall not be resolved
against any party by virtue of such party's participation in the drafting
hereof. Nothing contained herein shall be construed so as to require the
commission of any act contrary to law. Wherever there is any conflict between
any provision of this Termination Agreement and any present or future statute,
law, ordinance or regulation contrary to which the parties have no legal right
to contract, the latter shall prevail, with the understanding, however, that the
affected provision hereof shall be curtailed and limited only to the extent
necessary to bring it within legal requirements.
6. The Agreement and this Termination Agreement and their validity,
construction and effect shall be governed by the laws of the State of California
applicable to agreements entered into and performed entirely within the State of
California. The parties irrevocably submit to the jurisdiction of all state and
federal courts within the County of Los Angeles in connection with any matter
relating to the Agreement and this Termination Agreement, which courts shall
have exclusive jurisdiction with respect thereto. Process in any action relating
to the Agreement and this Termination Agreement may be served by registered or
certified mail, with the same force and effect as personal service within the
State of California, in addition to any other permitted means.
7. To the extent that any document is required to be executed by any
of the parties hereto in order to effectuate this Termination Agreement, such
party will execute and deliver such
-4-
<PAGE>
document.
8. This Termination Agreement may be executed in counterparts with
the same force and effect as if a single original had been executed by all of
the parties.
9. If any legal action or other proceeding is brought for the
enforcement of this Termination Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorney's fees and other costs
incurred in such action or proceeding in addition to any other relief to which
such party or parties may be entitled.
10. Neither SSI nor any person or party acting by or through or in
concert with SSI shall disclose the fact of this Termination Agreement or any of
its terms or conditions to any person or entity.
11. (a) Unless otherwise defined above, all words and phrases used
herein shall have the same meanings as are given to them in the Agreement.
(b) Acclaim and SSI now ratify and affirm all of the provisions
of the Agreement as amended hereby.
12. The parties hereto represent that they have read this Termination
Agreement, that they have discussed it thoroughly with their respective
attorneys, that they understand all of the provisions hereof, that they are
entering into this Termination Agreement voluntarily and that the individuals
executing this Termination Agreement have the power and authority to do so on
behalf of the respective parties hereto and to bind such parties to the terms
hereof.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Termination Agreement to be
executed as of the date first written above.
ACCLAIM DISTRIBUTION, INC.
By /s/ [Illegible]
- ------------------------------
Its President
---------------------------
SOUND SOURCE INTERACTIVE, INC.
By /s/ Vincent J. Bitetti
- ------------------------------
Its CEO
---------------------------
-6-
Exhibit 10.23
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of February 3,
1997, by and between Sound Source Interactive, Inc., a Delaware corporation (the
"Company"), and Robert S. Burke ("Indemnitee").
W I T N E S S E T H:
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution
<PAGE>
mechanism, or any hearing, inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including an appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is; approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter ("Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the obligation
of the Company under Section 1(a) shall be subject to the condition that the
Reviewing Party (as described in Section 10(e) hereof) shall not have determined
(in a written opinion in any case in which the Independent Legal Counsel
referred to in section 1(c) hereof is involved) that Indemnitee would not be
permitted to be indemnified under applicable law, and (ii) the obligation of the
Company to make an advance payment of Expenses to Indemnitee pursuant to Section
2(a) (an "Expense Advance") shall be subject to the condition that, if, when and
to the extent that the Reviewing Party shall have determined that Indemnitee
would not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be
-2-
<PAGE>
required to reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse
the Company for any Expense Advance shall be unsecured and no interest shall be
charged thereon. If there has not been a Change in Control (as defined in
Section 10(c) hereof), the Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), the
Reviewing Party shall be the Independent Legal Counsel referred to in Section
1(c) hereof. If there has been no determination by the Reviewing Party or if the
Reviewing Party determines that Indemnitee substantively would not be permitted
to be indemnified in whole or in part under applicable law, Indemnitee shall
have the right to commence litigation seeking an initial determination by the
court or challenging any such determination by the Reviewing Party or any aspect
thereof, including the legal or factual bases therefor, and the Company hereby
consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to payments of Expenses and Expense
Advances under this Agreement or any other agreement or under the Company's
Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, (as defined in Section 10(d) hereof) shall be
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other provision
of this Agreement other than Section 9 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any action, suit,
-3-
<PAGE>
proceeding, inquiry or investigation referred to in Section 1(a) hereof or in
the defense of any claim, issue or matter therein, Indemnitee shall be
indemnified against all Expenses incurred by Indemnitee in connection therewith.
2. Expenses; Indemnification Procedures.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
the termination of any Claim by Judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has not any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company,
of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may
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<PAGE>
cover such claim, the Company shall give prompt notice of the commencement of
such Claim to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such action, suit, proceeding, inquiry or
investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall
have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's
expense and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the reasonable fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any change
after the date of this Agreement in any applicable law, statute or rule which
expands the right of a Delaware corporation to indemnify a member of its Board
of Directors or an officer, such changes shall be, ipso facto, within the
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of
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<PAGE>
Incorporation, the Company's Bylaws, any agreement, any vote of stockholders or
disinterested Directors, the General Corporation Law of the State of Delaware,
or otherwise, both as to action in Indemnitee's official capacity and as to
action in another capacity while holding such office. The indemnification
provided under this Agreement shall continue as to Indemnitee for any action
taken or not taken while serving in an indemnified capacity even though
Indemnitee may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
4. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred by him in connection with any Claim, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability. The Company shall, from time to time,
make the good faith determination whether or not it is practicable for the
Company to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner
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<PAGE>
as to provide Indemnitee the same rights and benefits as are accorded to the
most favorably insured of the Company's directors, if the Indemnitee is a
director; or of the Company's officers, if the Indemnitee is not a director of
the Company but is an officer; or of the Company's key employees, if Indemnitee
is not an officer or director but is a key employee. Notwithstanding the
foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, the premium costs for such insurance are disproportionate
to the amount of coverage provided, the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or Indemnitee is
covered by a similar insurance maintained by a subsidiary or parent of the
Company.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of intent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(d) Insured Claims. To indemnify indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, Judgments,
fines ERISA excise taxes or Penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and
-7-
<PAGE>
directors' liability insurance maintained by the Company or any parent or
subsidiary of the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitation. No legal action shall be brought and no cause of
action shall be asserted by or in the right of the Company against Indemnitee,
Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be
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<PAGE>
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination or election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all of substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitee under similar indemnity agreements).
-9-
<PAGE>
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the company, spouses, heirs
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action a court
of competent jurisdiction over such action determines that each of the material
assertions made by Indemnitee as a basis for such action were not made in good
faith or were frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee in defense of such action including costs and expenses incurred with
respect to Indemnitee's counterclaims and crossclaim made in such action), and
shall be entitled to the advancement of Expenses with respect
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<PAGE>
to such action, unless as a part of such action a court having jurisdiction over
such action determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All, notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that say be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
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<PAGE>
19. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
21. No Construction As Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SOUND SOURCE INTERACTIVE, INC.
By:/s/ Vincent J. Bitetti
------------------------------------------
Vincent J. Bitetti, Chairman of the
Board and Chief Executive Officer
Address: 2985 E. Hillcrest Drive, Suite A
Westlake Village, California, 91362
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Robert S. Burke
- ------------------------
Robert S. Burke
1067 Glen Road
- ------------------------
Lafayette, CA 94549
- ------------------------
(address)
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<PAGE>
STANDARD OFFICE LEASE
FOR
CALABASAS COMMERCE CENTER
BY AND BETWEEN
ARDEN REALTY LIMITED PARTNERSHIP,
a Maryland limited partnership,
AS LANDLORD,
AND
SOUND SOURCE INTERACTIVE, INC.,
a California corporation,
AS TENANT
<PAGE>
TABLE OF CONTENTS
AGES
ARTICLE 1 BASIC LEASE PROVISIONS...................................1
ARTICLE 2 TERM.....................................................2
ARTICLE 3 RENTAL...................................................2
(a) Basic Rental........................................2
(b) Increase in Direct Costs............................3
(c) Definitions.........................................3
(d) Determination of Payment............................5
ARTICLE 4 SECURITY DEPOSIT.........................................6
ARTICLE 5 HOLDING OVER.............................................6
ARTICLE 6 PERSONAL PROPERTY TAXES..................................7
ARTICLE 7 USE......................................................7
ARTICLE 8 CONDITION OF PREMISES....................................8
ARTICLE 9 REPAIRS AND ALTERATIONS..................................8
ARTICLE 10 LIENS....................................................9
ARTICLE 11 PROJECT SERVICES........................................10
ARTICLE 12 RIGHTS OF LANDLORD......................................10
ARTICLE 13 INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY.11
(a) Indemnity..........................................11
(b) Exemption of Landlord from Liability...............11
ARTICLE 14 INSURANCE...............................................12
(a) Tenant's Insurance.................................12
(b) Form of Policies...................................12
(c) Landlord's Insurance...............................12
(d) Waiver of Subrogation..............................13
(e) Compliance with Law................................13
ARTICLE 15 ASSIGNMENT AND SUBLETTING...............................13
ARTICLE 16 DAMAGE OR DESTRUCTION...................................15
ARTICLE 17 SUBORDINATION...........................................16
ARTICLE 18 EMINENT DOMAIN..........................................16
ARTICLE 19 DEFAULT.................................................17
ARTICLE 20 REMEDIES................................................18
ARTICLE 21 TRANSFER OF LANDLORD'S INTEREST.........................19
ARTICLE 22 BROKER..................................................19
ARTICLE 23 PARKING...................................................19
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ARTICLE 24 WAIVER....................................................20
ARTICLE 25 ESTOPPEL CERTIFICATE......................................20
ARTICLE 26 LIABILITY OF LANDLORD.....................................20
ARTICLE 27 INABILITY TO PERFORM......................................21
ARTICLE 28 HAZARDOUS WASTE...........................................21
ARTICLE 29 SURRENDER OF PREMISES; REMOVAL OF PROPERTY ...............22
ARTICLE 30 MISCELLANEOUS.............................................23
(a) Severability; Entire Agreement.......................23
(b) Attorneys' Fees; Waiver of Jury Trial................23
(c) Time of Essence......................................24
(d) Headings.............................................24
(e) Reserved Area........................................24
(f) No Option............................................24
(g) Use of Project Name; Improvements....................24
(h) Rules and Regulations................................24
(i) Quiet Possession.....................................24
(j) Rent.................................................25
(k) Successors and Assigns...............................25
(l) Notices..............................................25
(m) Intentionally Omitted................................25
(n) Right of Landlord to Perform.........................25
(o) Access, Changes in Project, Facilities, Name.........25
(p) Corporate Authority..................................26
(q) Identification of Tenant.............................26
(r) Intentionally Omitted................................26
(s) Exhibits and Addendum................................27
ARTICLE 31 OPTION TO RENEW...........................................27
(a) Option Right.........................................27
(b) Option Rent..........................................27
(c) Exercise of Options .................................27
(d) Determination of Market Rent.........................27
ARTICLE 32 RIGHT OF FIRST OFFER......................................28
(a) Right of First Offer.................................28
(b) Procedure for Offer..................................28
(c) Procedure for Acceptance.............................28
(d) Lease of First Offer Space...........................29
(e) No Defaults..........................................29
ARTICLE 33 TERMINATION OPTION........................................29
ARTICLE 34 SIGNAGE/DIRECTORY.........................................30
ARTICLE 35 COMMUNICATION EQUIPMENT...................................30
Addendum / / Yes /x/ No
Exhibit "A" Premises
Exhibit "B" Rules and Regulations
Exhibit "C" Notice of Lease Term Dates and Tenant's Proportionate Share
Exhibit "D" Tenant Work Letter
-ii-
<PAGE>
INDEX OF DEFINED TERMS
DEFINED TERMS PAGE
Abated Rent.................................................2
Abatement Event.............................................8
Abatement Notice............................................8
Additional Rent.............................................3
Adjustment Dates............................................2
Approved Working Drawings...........................Exhibit D
Architect...........................................Exhibit D
Base Year...................................................1
Brokers.....................................................1
Bureau......................................................2
Claims.....................................................11
Commencement Date...........................................1
Communication Equipment....................................30
Contractor..........................................Exhibit D
Direct Costs................................................3
Economic Terms.............................................28
Effective Date......................................Exhibit D
Eligibility Period..........................................8
Estimate....................................................5
Estimate Statement..........................................5
Estimated Excess............................................5
Event of Default...........................................17
Excess......................................................5
Expiration Date.............................................1
First Month's Rent..........................................2
First Offer Notice.........................................28
First Offer Space..........................................28
Force Majeure..............................................21
Force Majeure Delays................................Exhibit D
Hazardous Material.........................................22
Index.......................................................2
Initial Basic Rental........................................1
Interest Notice............................................27
Landlord....................................................1
Landlord Delays.....................................Exhibit D
Laws.......................................................22
Lease.......................................................1
Lease Year..................................................2
Market Rent................................................26
Operating Costs.............................................3
Option.....................................................26
Option Rent................................................26
Option Rent Notice.........................................27
Option Term................................................26
Original Tenant............................................26
Outside Agreement Date.....................................27
Outside Date........................................Exhibit D
Outside Date Termination Notice.....................Exhibit D
Over-Allowance Amount...............................Exhibit D
Parking Charges.............................................2
Parking Passes..............................................2
Partnership Tenant.........................................26
Permitted Use...............................................1
Plans...............................................Exhibit D
Premises....................................................1
Project.....................................................1
Real Property...............................................3
Representative.............................................20
Review Period...............................................5
Security Deposit............................................1
Square Footage..............................................1
Statement...................................................5
Superior Leases............................................28
Superior Rights............................................28
Tax Costs...................................................3
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Tenant......................................................1
Tenant's Acceptance........................................27
Tenant's Signage...........................................29
Tenant Delays.......................................Exhibit D
Tenant Improvements.................................Exhibit D
Tenant's Proportionate Share................................1
Term........................................................1
Termination Date...........................................29
Termination Fee............................................29
Termination Notice.........................................29
Termination Option.........................................29
Transfer...................................................13
Transfer Premium...........................................14
Transferee.................................................14
Working Drawings....................................Exhibit D
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<PAGE>
STANDARD OFFICE LEASE
This Standard Office Lease ("Lease") is made and entered into as of this
4th day ofMarch, 1997, by and between ARDEN REALTY LIMITED PARTNERSHIP, a
Maryland limited partnership ("Landlord"), and SOUND SOURCE INTERACTIVE,
INC., a California corporation ("Tenant").
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
the premises designated on the plan attached hereto and incorporated herein
as Exhibit "A" ("Premises"), located in Building No. 2 of the project
("Project") now known as Calabasas Commerce Center whose address is 26115
Mureau Road, Calabasas, California for the Term and upon the terms and
conditions hereinafter set forth, and Landlord and Tenant hereby agree as
follows:
ARTICLE 1
BASIC LEASE PROVISIONS
A. Term: Sixty-two (62) months
Commencement Date: The earlier of (i) the date Tenant
first commences to conduct business
in the Premises, or (ii) the date
of Substantial Completion of Tenant
Improvements in the Premises
(subject to extension as provided
in Section 5.4. of Exhibit "D").
The Commencement Date is
anticipated to occur on April 1,
1997. Upon Tenant's occupancy of
the Premises, Landlord and Tenant
agree to execute and deliver a
Commencement Letter in a form
substantially similar to that
attached hereto as Exhibit "C".
Expiration Date: The last day of the month which is
sixty-two (62) months after the
month in which the Commencement
Date falls, unless extended or
earlier terminated pursuant to
this Lease.
B. Square Footage: Approximately 8,613 rentable square
feet.
C. Initial Basic Rental:
Annual Monthly Monthly Basic Rental
Lease Year Basic Rental Basic Rental Per Rentable Square Foot
---------- ------------- ------------ ------------------------
1 $144,698.40 $12,058.20 $1.40
See Section 3(a) for abatement and potential increases.
D. Base Year: 1997
E. Tenant's Proportionate Share: 39.57%
F. Security Deposit: A security deposit of $12,058.20,
shall be due and payable by Tenant
to Landlord upon Tenant's execution
of this Lease.
G. Permitted Use: General office, recording studio,
and storage use.
H. Brokers: Grubb & Ellis Company; Lee &
Associates
<PAGE>
I. Parking Passes: Tenant shall have the use of 3.7
unreserved parking passes for each
1,000 rentable square feet
contained in the Premises, which
equals thirty-two (32) passes.
J. Parking Charges: Parking charges shall be as
provided in Article 23 hereof.
K. First Month's Rent: The first full month's rent of
$12,058.20 shall be due and payable
by Tenant to Landlord upon Tenant's
execution of this Lease.
ARTICLE 2
TERM
The Term of this Lease shall commence on the Commencement Date as set
forth in Article 1.A. of the Basic Lease Provisions and shall end on the
Expiration Date set forth in Article 1.A. of the Basic Lease Provisions. For
purposes of this Lease, the term "Lease Year" shall mean each consecutive
twelve (12) month period during the Lease Term, with the first Lease Year
commencing on the Commencement Date; however, (a) if the Commencement Date
falls on a day other than the first day of a calendar month, the first Lease
Year shall end on the last day of the eleventh (11th) month after the
Commencement Date and the second (2nd) and each succeeding Lease Year shall
commence on the first day of the next calendar month, and (b) the last Lease
Year shall end on the Expiration Date. If Landlord is unable to deliver
possession of the Premises to Tenant on or before the anticipated
Commencement Date, except as provided in Section 5.3 of Exhibit "D," Landlord
shall not be subject to any liability for its failure to do so, and such
failure shall not affect the validity of this Lease nor the obligations of
Tenant hereunder.
ARTICLE 3
RENTAL
(a) Basic Rental.
(i) Initial Basic Rental. Tenant agrees to pay to Landlord during the
Term hereof, at Landlord's office or to such other person or at such other
place as directed from time to time by written notice to Tenant from
Landlord, the initial monthly and annual sums as set forth in Article 1.C of
the Basic Lease Provisions, payable in advance on the first day of each
calendar month, without demand, setoff or deduction, and in the event this
Lease commences or the date of expiration of this Lease occurs other than on
the first day or last day of a calendar month, the rent for such month shall
be prorated. Notwithstanding the foregoing, the first full month's rent
shall be paid to Landlord in accordance with Article 1.K. of the Basic Lease
provisions, and Basic Rental for the second (2nd) and third (3rd) full months
of the Term shall be abated in its entirety (collectively, the "Abated Rent").
(ii) Increases to Basic Rental. The Basic Rental shall be increased
on the following dates (collectively, the "Adjustment Dates") in accordance
with the provisions of this Section 3(a)(ii): the first day of the second
(2nd) Lease Year and the first day of each succeeding Lease Year during the
Lease Term and any Option Term (as applicable). For purposes of this Section
3(a)(ii), the term "Index" shall mean the Consumer Price Index-All Urban
Consumers (Los Angeles-Anaheim-Riverside, California, All Items, Base
1982-1984 = 100) as published by the United States Department of Labor,
Bureau of Labor Statistics ("Bureau"). The most recently published Index as
of the month which is three (3) months prior to the applicable Adjustment
Date shall be compared with the Index for the same calendar month most
recently preceding the Commencement Date (as to Adjustment Dates within the
initial Term, whereas the comparison Index during the Option Term shall be
the Index for the same calendar month most recently preceding the date upon
which such Option Term commences) and the initial Basic Rental shall be
increased in accordance with the percentage increase, if any, between such
Indexes; provided, however, that in no event shall (A) the increase in Basic
Rental be greater than
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five percent (5%) of the Basic Rental payable for the month immediately
preceding the applicable Adjustment Date, or (B) Basic Rental decrease at any
time during the Lease Term as a result of a decrease in the Index. Landlord
shall use commercially reasonable efforts to calculate and give Tenant
written notice of any such increase in Basic Rental prior to the applicable
Adjustment Date. Should the Bureau discontinue the publication of the Index,
or publish the same less frequently or on a different schedule, or alter the
same in some other manner, including, but not limited to, changing the name
of the Index or the geographic area covered by the Index, Landlord, in its
reasonable discretion, shall adopt a substitute index or procedure which
reasonably reflects and monitors consumer prices.
(b) Increase in Direct Costs. The term "Base Year" means the calendar
year set forth in Article 1.D. of the Basic Lease Provisions. If, in any
calendar year during the Term of this Lease, the "Direct Costs" (as
hereinafter defined) paid or incurred by Landlord shall be higher than the
Direct Costs for the Base Year, Tenant shall pay an additional sum for such
and each subsequent calendar year equal to the product of the amount set
forth in Article 1.E. of the Basic Lease Provisions multiplied by such
increased amount of "Direct Costs." In the event either the Premises and/or
the Project is expanded or reduced, then Tenant's Proportionate Share shall
be appropriately adjusted, and as to the calendar year in which such change
occurs, Tenant's Proportionate Share for such year shall be determined on the
basis of the number of days during that particular calendar year that such
Tenant's Proportionate Share was in effect. In the event this Lease shall
terminate on any date other than the last day of a calendar year, the
additional sum payable hereunder by Tenant during the calendar year in which
this Lease terminates shall be prorated on the basis of the relationship
which the number of days which have elapsed from the commencement of said
calendar year to and including said date on which this Lease terminates bears
to three hundred sixty (360). Any and all amounts due and payable by Tenant
pursuant to Article 3(b),(c) and (d) hereof shall be deemed "Additional Rent"
and Landlord shall be entitled to exercise the same rights and remedies upon
default in these payments as Landlord is entitled to exercise with respect to
defaults in monthly Basic Rental payments.
(c) Definitions. As used herein the term "Direct Costs" shall mean the
sum of the following:
(i) "Tax Costs", which shall mean any and all real estate taxes and
other similar charges on real property or improvements, assessments, water
and sewer charges, and all other charges assessed, reassessed or levied upon
the Project and appurtenances thereto and the parking or other facilities
thereof, or the real property thereunder (collectively the "Real Property")
or attributable thereto or on the rents, issues, profits or income received
or derived therefrom which are assessed, reassessed or levied by the United
States, the State of California or any local government authority or agency
or any political subdivision thereof, and shall include Landlord's reasonable
legal fees, costs and disbursements incurred in connection with proceedings
for reduction of Tax Costs or any part thereof; provided, however, if at any
time after the date of this Lease the methods of taxation now prevailing
shall be altered so that in lieu of or as a supplement to or a substitute for
the whole or any part of any Tax Costs, there shall be assessed, reassessed
or levied (a) a tax, assessment, reassessment, levy, imposition or charge
wholly or partially as a net income, capital or franchise levy or otherwise
on the rents, issues, profits or income derived therefrom, or (b) a tax,
assessment, reassessment, levy (including but not limited to any municipal,
state or federal levy), imposition or charge measured by or based in whole or
in part upon the Real Property and imposed upon Landlord, or (c) a license
fee measured by the rent payable under this Lease, then all such taxes,
assessments, reassessments or levies or the part thereof so measured or
based, shall be deemed to be included in the term "Direct Costs." In no
event shall Tax Costs included in Direct Costs for any year subsequent to the
Base Year be less than the amount of Tax Costs included in Direct Costs for
the Base Year. In addition, when calculating Tax Costs for the Base Year,
special assessments shall only be deemed included in Tax Costs for the Base
Year to the extent that such special assessments are included in Tax Costs
for the applicable subsequent calendar year during the Term.
(ii) "Operating Costs", which shall mean all costs and expenses
incurred by Landlord in connection with the maintenance, operation,
replacement, ownership and repair of the Project, the equipment, the
intrabuilding network cable, adjacent walks, malls and landscaped and common
areas and the parking structure, areas and facilities of the Project,
including, but not
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limited to, salaries, wages, medical, surgical and general welfare benefits
and pension payments, payroll taxes, fringe benefits, employment taxes,
workers' compensation, uniforms and dry cleaning thereof for all persons who
perform duties connected with the operation, maintenance and repair of the
Project, its equipment, the intrabuilding network cable and the adjacent
walks and landscaped areas, including janitorial, gardening, security,
parking, operating engineer, elevator, painting, plumbing, electrical,
carpentry, heating, ventilation, air conditioning, window washing, hired
services, a reasonable allowance for depreciation of the cost of acquiring or
the rental expense of personal property used in the maintenance, operation
and repair of the Project, accountant's fees incurred in the preparation of
rent adjustment statements, legal fees, real estate tax consulting fees,
personal property taxes on property used in the maintenance and operation of
the Project, capital expenditures incurred to effect economies of operation
and capital expenditures required by government regulations, laws, or
ordinances including, but not limited to the American with Disabilities Act;
the cost of all charges for electricity, gas, water and other utilities
furnished to the Project, including any taxes thereon; the cost of all
charges for fire and extended coverage, liability and all other insurance for
the Project carried by Landlord; the cost of all building and cleaning
supplies and materials; the cost of all charges for cleaning, maintenance and
service contracts and other services with independent contractors and
administration fees; a property management fee (which fee may be imputed if
Landlord has internalized management or otherwise acts as its own property
manager) and license, permit and inspection fees relating to the Project. In
the event, during any calendar year, the Project is less than ninety-five
percent (95%) occupied at all times, Operating Costs shall be adjusted to
reflect the Operating Costs of the Project as though ninety-five percent
(95%) were occupied at all times, and the increase or decrease in the sums
owed hereunder shall be based upon such Operating Costs as so adjusted.
Notwithstanding anything to the contrary set forth in this Article 3, when
calculating Operating Costs for the Base Year, Operating Costs shall exclude
(a) market-wide labor-rate increases due to extraordinary circumstances
including, but not limited to, boycotts and strikes, (b) utility rate
increases due to extraordinary circumstances including, but not limited to,
conservation surcharges, boycotts, embargoes or other shortages, and (c)
amortization of any capital items including, but not limited to, capital
improvements, capital repairs and capital replacements (including such
amortized costs where the actual improvement, repair or replacement was made
in prior years).
Notwithstanding anything above to the contrary, Operating Costs shall not
include (1) the cost of providing any service directly to and paid directly
by any tenant (outside of such tenant's Direct Cost payments); (2) the cost
of any items for which Landlord is reimbursed by insurance proceeds,
condemnation awards, a tenant of the Project, or otherwise to the extent so
reimbursed; (3) any real estate brokerage commissions or other costs incurred
in procuring tenants, or any fee in lieu of commission; (4) depreciation,
amortization of principal and interest on mortgages or ground lease payments
(if any); (5) costs of items considered capital repairs, replacements,
improvements and equipment under generally accepted accounting principles
consistently applied except as expressly included in Operating Costs pursuant
to the definition above; (6) costs incurred by Landlord due to the violation
by Landlord or any tenant of the terms and conditions of any lease of space
in the Project or any law, code, regulation, ordinance or the like; (7)
Landlord's general corporate overhead and general and administrative
expenses; (8) any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord (other than in the parking
facility for the Project); (9) costs incurred in connection with upgrading
the Project to comply with disability, life, seismic, fire and safety codes,
ordinances, statutes, or other laws in effect prior to the Commencement Date,
including, without limitation, the ADA, including penalties or damages
incurred due to such non-compliance; and (10) costs incurred to (i) comply
with laws relating to the removal of any "Hazardous Material," as that term
is defined in Article 28 of this Lease, which was in existence on the Project
prior to the Commencement Date, and was of such a nature that a federal,
state or municipal governmental authority, if it had then had knowledge of
the presence of such Hazardous Material, in the state, and under the
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conditions that it then existed on the Project, would have then required the
removal of such Hazardous Material or other remedial or containment action
with respect thereto, and (ii) to remove, remedy, contain, or treat any
Hazardous Material, which Hazardous Material is brought onto the Project
after the date hereof by Landlord or any other tenant of the Project and is
of such a nature, at that time, that a federal, state or municipal
governmental authority, if it had then had knowledge of the presence of such
Hazardous Material, in the state, and under the conditions, that it then
exists on the Project, would have then required the removal of such Hazardous
Material or other remedial or containment action with respect thereto.
(d) Determination of Payment.
(i) If for any calendar year ending or commencing within the Term,
Tenant's Proportionate Share of Direct Costs for such calendar year exceeds
Tenant's Proportionate Share of Direct Costs for the Base Year, then Tenant
shall pay to Landlord, in the manner set forth in Sections 3(d)(ii) and
(iii), below, and as additional rent, an amount equal to the excess (the
"Excess").
(ii) Landlord shall give Tenant a yearly expense estimate statement (the
"Estimate Statement") which shall set forth Landlord's reasonable estimate
(the "Estimate") of what the total amount of Direct Costs for the
then-current calendar year shall be and the estimated Excess (the "Estimated
Excess") as calculated by comparing Tenant's Proportionate Share of Direct
Costs for such calendar year, which shall be based upon the Estimate, to
Tenant's Proportionate Share of Direct Costs for the Base Year. The failure
of Landlord to timely furnish the Estimate Statement for any calendar year
shall not preclude Landlord from enforcing its rights to collect any
Estimated Excess under this Article 3. If pursuant to the Estimate Statement
an Estimated Excess is calculated for the then-current calendar year, Tenant
shall pay, with its next installment of Monthly Basic Rental due, a fraction
of the Estimated Excess for the then-current calendar year (reduced by any
amounts paid pursuant to the last sentence of this Section 3(d)(ii)). Such
fraction shall have as its numerator the number of months which have elapsed
in such current calendar year to the month of such payment, both months
inclusive, and shall have twelve (12) as its denominator. Until a new
Estimate Statement is furnished, Tenant shall pay monthly, with the Monthly
Basic Rental installments, an amount equal to one-twelfth (1/12th) of the
total Estimated Excess set forth in the previous Estimate Statement delivered
by Landlord to Tenant.
(iii) In addition, Landlord shall endeavor to give to Tenant on or
before the first day of April following the end of each calendar year, a
statement (the "Statement") which shall state the Direct Costs incurred or
accrued for such preceding calendar year, and which shall indicate the
amount, if any, of the Excess. Upon receipt of the Statement for each
calendar year during the Term, if amounts paid by Tenant as Estimated Excess
are less than the actual Excess as specified on the Statement, Tenant shall
pay, with its next installment of Monthly Basic Rental due, the full amount
of the Excess for such calendar year, less the amounts, if any, paid during
such calendar year as Estimated Excess. If, however, the Statement indicates
that amounts paid by Tenant as Estimated Excess are greater than the actual
Excess as specified on the Statement, such overpayment shall be credited
against Tenant's next installments of Estimated Excess. The failure of
Landlord to timely furnish the Statement for any calendar year shall not
prejudice Landlord from enforcing its rights under this Article 3. Even
though the Term has expired and Tenant has vacated the Premises, when the
final determination is made of Tenant's Proportionate Share of the Direct
Costs for the calendar year in which this Lease terminates, if an Excess is
present, Tenant shall immediately pay to Landlord an amount as calculated
pursuant to the provisions of this Article 3(d). The provisions of this
Section 3(d)(iii) shall survive the expiration or earlier termination of the
Term.
(iv) Within one hundred twenty (120) days after receipt of a Statement
by Tenant ("Review Period"), if Tenant disputes the amount set forth in the
Statement, Tenant's employees or an independent certified public accountant
(which accountant is a member of a nationally or regionally recognized
accounting firm), designated by Tenant, may, after reasonable notice to
Landlord and at reasonable times, inspect Landlord's records at Landlord's
offices, provided that Tenant is not then in default after expiration of all
applicable cure periods and provided further that Tenant and such accountant
or representative shall, and each of them shall use their commercially
reasonable efforts to cause their respective agents and employees to,
maintain all information contained in Landlord's records in strict
confidence. Notwithstanding the foregoing, Tenant shall only have the right
to review Landlord's records one (1) time during any twelve (12) month
period. Tenant's failure to dispute the amounts set forth in any Statement
within the Review Period shall be deemed to be Tenant's approval of such
Statement and Tenant, thereafter, waives the right or ability to dispute the
amounts set forth in such Statement. If after such inspection, but within
thirty (30) days after the Review Period, Tenant notifies Landlord in writing
that Tenant still disputes such amounts, a certification as to the proper
amount shall be
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made, at Tenant's expense, by an independent certified public accountant
selected by Landlord and who is a member of a nationally or regionally
recognized accounting firm. Landlord shall cooperate in good faith with
Tenant and the accountant to show Tenant and the accountant the information
upon which the certification is to be based. However, if such certification
by the accountant proves that the Direct Costs set forth in the Statement
were overstated by more than ten percent (10%), then the cost of the
accountant and the cost of such certification shall be paid for by Landlord.
Promptly following the parties receipt of such certification, the parties
shall make such appropriate payments or reimbursements, as the case may be,
to each other, as are determined to be owing pursuant to such certification.
(v) If the Project is a part of a multi-building development, those
Direct Costs attributable to such development as a whole (and not
attributable solely to any individual building therein) shall be allocated by
Landlord to the Project and to the other buildings within such development on
an equitable basis.
ARTICLE 4
SECURITY DEPOSIT
Tenant has deposited with Landlord the sum set forth in Article 1.F. of the
Basic Lease Provisions as security for the full and faithful performance of
every provision of this Lease to be performed by Tenant. If Tenant breaches
any provision of this Lease, including but not limited to the payment of
rent, Landlord may use all or any part of this security deposit for the
payment of any rent or any other sums in default, or to compensate Landlord
for any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said deposit is so used or applied, Tenant shall,
within five (5) days after written demand therefor, deposit cash with
Landlord in an amount sufficient to restore the security deposit to its
original amount. Tenant agrees that Landlord shall not be required to keep
the security deposit in trust, segregate it or keep it separate from
Landlord's general funds but Landlord may commingle the security deposit with
its general funds and Tenant shall not be entitled to interest on such
deposit. At the expiration of the Lease Term, and provided there exists no
default by Tenant hereunder, the security deposit or any balance thereof
shall be returned to Tenant within fifteen (15) days (or, at Landlord's
option, to Tenant's assignee), provided that subsequent to the expiration of
this Lease, Landlord may retain from said security deposit any and all
amounts permitted by California Civil Code Section 1950 .7 or any successor
or replacement statute. Tenant hereby waives the provisions of Section
1950.7 of the California Civil Code and all other provisions of law, now or
hereafter in effect, which provide that Landlord may claim from a security
deposit only those sums reasonably necessary to remedy defaults in the
payment of rent, to repair damage caused by Tenant or to clean the Premises,
it being agreed that Landlord may, in addition, claim those sums reasonably
necessary to compensate Landlord for any other loss or damage, foreseeable or
unforeseeable, caused by the acts or omissions of Tenant or any officer,
employee, agent, contractor or invitee of Tenant.
ARTICLE 5
HOLDING OVER
Should Tenant, without Landlord's written consent, hold over after
termination of this Lease, Tenant shall become a tenant from month to month,
only upon each and all of the terms herein provided as may be applicable to a
month to month tenancy and any such holding over shall not constitute an
extension of this Lease. During such holding over, Tenant shall pay in
advance, monthly, rent at one hundred twenty-five percent (125%) of the rate
in effect for the last month of the Term of this Lease for the first two (2)
months after termination of this Lease, provided that Landlord determines
that Landlord and Tenant are negotiating in good faith to enter into a new
lease for space in the Project or in another project owned by Landlord, and
thereafter at two hundred percent (200%) of the rate in effect for the last
month of the Term of this Lease, in addition to, and not in lieu of, all
other payments required to be made by Tenant hereunder including but not
limited to Tenant's Proportionate Share of any increase in Direct Costs.
Nothing contained in this Article 5 shall be construed as consent by Landlord
to any holding over of the Premises by Tenant, and Landlord expressly
reserves the right to require Tenant to surrender possession of the Premises
to Landlord as provided in this Lease upon the expiration or
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earlier termination of the Term. If Tenant fails to surrender the Premises
upon the expiration or termination of this Lease, Tenant agrees to indemnify,
defend and hold Landlord harmless from all costs, loss, expense or liability,
including without limitation, claims made by any succeeding tenant and real
estate brokers claims and attorney's fees.
ARTICLE 6
PERSONAL PROPERTY TAXES
Tenant shall pay, prior to delinquency, all taxes assessed against or
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant located in the Premises. In the event any or all of
Tenant's trade fixtures, furnishings, equipment and other personal property
shall be assessed and taxed with property of Landlord, or if the cost or
value of any leasehold improvements in the Premises exceeds the cost or value
of a Project-standard buildout as determined by Landlord and, as a result,
real property taxes for the Project are increased, Tenant shall pay to
Landlord its share of such taxes within ten (10) days after delivery to
Tenant by Landlord of a statement in writing setting forth the amount of such
taxes applicable to Tenant's property or above-standard improvements.
Notwithstanding anything to the contrary contained herein, Landlord agrees
that the initial improvements (improvements other than those made in
connection with the recording studio) constructed pursuant to the Tenant Work
Letter (Exhibit "D") shall not result in a cost or value in excess of a
Project-standard buildout. Tenant shall assume and pay to Landlord at the
time of paying Basic Rental any garage or parking taxes which Landlord may be
required to pay or collect under any law now in effect or hereafter enacted.
Tenant shall pay directly to the party or entity entitled thereto all
business license fees which may from time to time be assessed against or
levied upon Tenant, as and when the same become due and before delinquency.
Notwithstanding anything to the contrary contained herein, any sums payable
by Tenant under this Article 6 shall not be included in the computation of
"Tax Costs."
ARTICLE 7
USE
Tenant shall use and occupy the Premises only for the use set forth in
Article 1.G. of the Basic Lease Provisions and shall not use or occupy the
premises or permit the same to be used or occupied for any other purpose
without the prior written consent of Landlord, which consent may be given or
withheld in Landlord's sole and absolute discretion, and Tenant agrees that
it will use the Premises in such a manner so as not to interfere with or
infringe the rights of other tenants in the Project. Tenant shall, at its
sole cost and expense, promptly comply with all laws, statutes, ordinances
and governmental regulations or requirements now in force or which may
hereafter be in force relating to or affecting (i) the condition, use or
occupancy of the Premises or the Project excluding structural changes to the
Project not related to Tenant's particular use of the Premises, and (ii)
improvements installed or constructed in the Premises by or for the benefit
of Tenant, other than the initial Tenant Improvements constructed pursuant to
the Tenant Work Letter attached hereto as Exhibit "D." Tenant shall not do or
permit to be done anything which would invalidate or increase the cost of any
fire and extended coverage insurance policy covering the Project and/or the
property located therein and Tenant shall comply with all rules, orders,
regulations and requirements of any organization which sets out standards,
requirements or recommendations commonly referred to by major fire insurance
underwriters. Tenant shall promptly upon demand reimburse Landlord for any
additional premium charges for any such insurance policy assessed or
increased by reason of Tenant's failure to comply with the provisions of this
Article.
ARTICLE 8
CONDITION OF PREMISES
(a) Condition of Premises. The Premises shall be initially improved as
provided in, and subject to, the Tenant Work Letter attached hereto as
Exhibit "D" and made a part hereof. The taking of possession of the Premises
by Tenant shall conclusively establish that the Premises and the Project were
at such time in satisfactory condition subject to punch-list items and latent
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defects. Tenant hereby waives Sections 1941 and 1942 of the Civil Code of
California or any successor provision of law.
(b) Landlord's Rights. Landlord reserves the right from time to time, but
subject to payment by and/or reimbursement from Tenant as otherwise provided
herein: (i) to install, use, maintain, repair, replace and relocate for
service to the Premises and/or other parts of the Project pipes, ducts,
conduits, wires, appurtenant fixtures, and mechanical systems, wherever
located in the Premises or the Project, (ii) to alter, close or relocate any
facility in the Premises or the Common Areas or otherwise conduct any of the
above activities for the purpose of complying with a general plan for
fire/life safety for the Project or otherwise and (iii) to comply with any
federal, state or local law, rule or order with respect thereto or the
regulation thereof not currently in effect. Landlord shall attempt to
perform any such work with the least inconvenience to Tenant as possible, but
in no event, except as provided in Section 8(c) below, shall Tenant be
permitted to withhold or reduce Basic Rental or other charges due hereunder
as a result of same or otherwise make claim against Landlord for interruption
or interference with Tenant's business and/or operations.
(c) Rental Abatement. In the event that Tenant is prevented from using,
and does not use, the Premises or any portion thereof, as a result of any
failure of Landlord to provide services or access to the Premises (an
"Abatement Event"), then Tenant shall give Landlord notice ("Abatement
Notice") of such Abatement Event, and if such Abatement Event continues
beyond the "Eligibility Period" (as that term is defined below), then the
Basic Rental and Tenant's Proportionate Share of Direct Costs shall be abated
entirely or reduced, as the case may be, after expiration of the Eligibility
Period for such time that Tenant continues to be so prevented from using, and
does not use, the Premises or a portion thereof, in the proportion that the
rentable area of the portion of the Premises that Tenant is prevented from
using, and does not use, bears to the total rentable area of the Premises.
The term "Eligibility Period" shall mean a period of five (5) consecutive
business days after Landlord's receipt of any Abatement Notice(s). Such
right to abate Basic Rental and Tenant's Proportionate Share of Direct Costs
shall be Tenant's sole and exclusive remedy at law or in equity for an
Abatement Event.
ARTICLE 9
REPAIRS AND ALTERATIONS
Landlord shall maintain the structural portions of the Project including
the foundation, floor/ceiling slabs, roof, curtain wall, exterior glass,
columns, beams, shafts, stairs, stairwells, elevator cabs and common areas
and shall also maintain and repair the basic mechanical, electrical,
lifesafety, plumbing, sprinkler systems and heating, ventilating and
air-conditioning systems (provided, however, that Landlord's obligation with
respect to any such systems, after delivery to Tenant of such systems in good
operating condition, shall be to repair and maintain those portions of the
systems located in the core of the Project or in other areas outside of the
Premises, but Tenant shall be responsible to repair and maintain any
distribution of such systems throughout the Premises). Except as expressly
provided as Landlord's obligation in this Article 9, Tenant shall keep the
Premises in good condition and repair. All damage or injury to the Premises
or the Project caused by the willful act or negligence of Tenant, its
employees, agents or visitors, guests, invitees or licensees or by the use of
the Premises shall be promptly repaired by Tenant, at its sole cost and
expense, to the reasonable satisfaction of Landlord; provided, however, that
for damage to the Project as a result of casualty, Landlord shall have the
right (but not the obligation) to select the contractor and oversee all such
repairs. Landlord may make any repairs which are not promptly made by Tenant
after Tenant's receipt of written notice and the reasonable opportunity of
Tenant to make said repair within five (5) business days from receipt of said
written notice, and charge Tenant for the cost thereof, which cost shall be
paid by Tenant within five (5) days from invoice from Landlord. Tenant shall
be responsible for the design and function of all non-standard improvements
of the Premises, whether or not installed by Landlord at Tenant's request.
Tenant waives all rights to make repairs at the expense of Landlord, or to
deduct the cost thereof from the rent. Tenant shall make no alterations,
changes or additions in or to the Premises without Landlord's prior written
consent, which consent shall not be unreasonably withheld by Landlord, and
then only by contractors or mechanics approved by Landlord in writing and
upon the approval by Landlord in writing of fully detailed and dimensioned
plans and specifications
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pertaining to the work in question, to be prepared and submitted by Tenant at
its sole cost and expense. Tenant shall at its sole cost and expense obtain
all necessary approvals and permits pertaining to any work approved by
Landlord. If Landlord, in approving any work, specifies a commencement date
therefor, Tenant shall not commence any work prior to such date. Tenant
hereby indemnifies and agrees to hold Landlord free and harmless from all
liens and claims of lien, and all other liability, claims and demands arising
out of any work done or material supplied to the Premises by or at the
request of Tenant. If permitted alterations, changes, or additions are made,
they shall be made at Tenant's sole cost and expense and shall be and become
the property of Landlord, except that Landlord may, by notice to Tenant given
concurrently with Landlord's consent to any alterations, changes, or
additions, require Tenant at Tenant's expense to remove all partitions,
counters, railings and the like installed by Tenant, and to repair any
damages to the Premises caused by such removal. Any and all costs
attributable to or related to the applicable building codes of the city in
which the Project is located (or any other authority having jurisdiction over
the Project) arising from Tenants plans, specifications, improvements,
alterations or otherwise shall be paid by Tenant at its sole cost and
expense. With regard to repairs, alterations or any other work arising from
or related to this Article 9, Landlord shall be entitled to receive an
administrative/supervision fee (which fee shall vary depending upon whether
or not Tenant orders the work directly from Landlord but in no event will
exceed five percent (5%)) sufficient to compensate Landlord for all overhead,
general conditions, fees and other costs and expenses arising from Landlord's
involvement with such work. The construction of initial improvements to the
Premises shall be governed by the terms of the Tenant Work Letter and not the
terms of this Article 9.
Notwithstanding anything to the contrary contained herein, Tenant may make
strictly cosmetic changes to the finish work in the Premises ("Cosmetic
Alterations") without Landlord's consent, provided that the aggregate cost of
any such changes does not exceed $20,000.00 in any twelve (12) month period,
and such changes do not require any structural or other substantial
modifications to the Premises, do not require any changes to, or adversely
affect, the Project systems and equipment, and do not affect the exterior
appearance of the Project. Tenant shall give Landlord at least thirty (30)
days prior notice of such Cosmetic Alterations, which notice shall be
accompanied by reasonably adequate evidence that such changes meet the
criteria contained in the immediately preceding sentence.
ARTICLE 10
LIENS
Tenant shall keep the Premises and the Project free from any mechanics'
liens, vendors liens or any other liens arising out of any work performed,
materials furnished or obligations incurred by Tenant, and agrees to defend,
indemnify and hold harmless Landlord from and against any such lien or claim
or action thereon, together with costs of suit and reasonable attorneys' fees
incurred by Landlord in connection with any such claim or action. Before
commencing any work of alteration, addition or improvement to the Premises,
Tenant shall give Landlord at least ten (10) business days' written notice of
the proposed commencement of such work (to afford Landlord an opportunity to
post appropriate notices of non-responsibility). In the event that there
shall be recorded against the Premises or the Project or the property of
which the Premises is a part any claim or lien arising out of any such work
performed, materials furnished or obligations incurred by Tenant and such
claim or lien shall not be removed or discharged by bond or otherwise within
ten (10) days of filing, Landlord shall have the right but not the obligation
to pay and discharge said lien without regard to whether such lien shall be
lawful or correct or to require that Tenant deposit with Landlord in cash,
lawful money of the United States, one hundred fifty percent (150%) of the
amount of such claim, which sum may be retained by Landlord until such claim
shall have been removed of record or until judgment shall have been rendered
on such claim and such judgment shall have become final, at which time
Landlord shall have the right to apply such deposit in discharge of the
judgment on said claim and any costs, including reasonable attorneys' fees
incurred by Landlord, and shall remit the balance thereof to Tenant.
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ARTICLE 11
PROJECT SERVICES
(a) Landlord agrees to furnish to the Premises, air conditioning and heat
all in such reasonable quantities as in the judgment of Landlord is
reasonably necessary for the comfortable occupancy of the Premises. In
addition, Landlord shall provide electric current for normal lighting and
normal office machines. Landlord shall replace, upon Tenant's request and as
Landlord deems necessary, at a cost to be included in Operating Costs,
Project-standard lightbulbs in the Premises. All such electricity shall be
separately metered at Tenant's sole cost and expense and Tenant shall make
payment directly to the entity providing such electricity. Janitorial and
maintenance services shall be furnished five (5) days per week, excepting
national holidays. Tenant shall comply with all rules and regulations which
Landlord may reasonably establish for the proper functioning and protection
of the common area air conditioning, heating, elevator, electrical
intrabuilding network cable and plumbing systems. Landlord shall not be
liable for, and, except as provided in Section 8(c) of this Lease, there
shall be no rent abatement as a result of, any stoppage, reduction or
interruption of any such services caused by governmental rules, regulations
or ordinances, riot, strike, labor disputes, breakdowns, accidents, necessary
repairs or other cause. Except as specifically provided in this Article 11,
Tenant agrees to pay for all utilities and other services utilized by Tenant
and additional building services furnished to Tenant not uniformly furnished
to all tenants of the Project at the rate generally charged by Landlord to
tenants of the Project.
(b) Landlord shall provide, at a cost to be included in Operating Costs,
water on the same floor as the Premises for lavatory and drinking purposes in
such reasonably quantities as in the judgment of Landlord is reasonably
necessary for general office use. Tenant will not, without the prior written
consent of Landlord, use any apparatus or device in the Premises which will
in any way increase the amount of water usually furnished or supplied for use
of the Premises as general office space; nor connect any apparatus, machine
or device with water pipes for the purpose of using water.
(c) Landlord may charge Tenant for Landlord's actual costs for any
utilities or services (other than electric current and heating, ventilation
and/or air conditioning which shall be governed by Article 11(a) above)
utilized by Tenant in excess of the amount or type that Landlord reasonably
determines is typical for general office use.
ARTICLE 12
RIGHTS OF LANDLORD
Landlord and its agents, upon at least twenty-four (24) hours prior
notice (except in the case of emergency and regularly scheduled service),
shall have the right to enter the Premises at all reasonable times for the
purpose of cleaning the Premises, examining or inspecting the same, serving
or posting and keeping posted thereon notices as provided by law, or which
Landlord deems necessary for the protection of Landlord or the Property,
showing the same to prospective tenants or purchasers of the Project, in the
case of an emergency, and for making such alterations, repairs, improvements
or additions to the Premises or to the Project as Landlord may deem necessary
or desirable. If Tenant shall not be personally present to open and permit
an entry into the Premises at any time when such an entry by Landlord is
necessary or permitted hereunder, Landlord may enter by means of a master key
or may enter forcibly, only in the case of an emergency, without liability to
Tenant and without affecting this Lease.
ARTICLE 13
INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY
(a) Indemnity. Tenant shall indemnify, defend and hold Landlord harmless
from any and all claims arising from Tenant's use of the Premises or the
Project including Tenant's Signage rights set forth in Article 32 or from the
conduct of its business or from any activity, work or thing which may be
permitted or suffered by Tenant in or about the Premises or the Project and
shall further indemnify, defend and hold Landlord harmless from and against
any and all claims
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arising from any breach or default in the performance of any obligation on
Tenant's part to be performed under this Lease or arising from any negligence
of Tenant or any of its agents, contractors, employees or invitees, patrons,
customers or members in or about the Project and from any and all costs,
attorneys' fees, expenses and liabilities incurred in the defense of any
claim or any action or proceeding brought thereon, including negotiations in
connection therewith. Tenant hereby assumes all risk of damage to property
or injury to persons in or about the Premises from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord, provided that
Tenant shall not be required to indemnify and/or hold Landlord harmless from
any loss, cost, liability, damage or expense, including, but not limited to,
penalties, fines, attorneys' fees or costs (collectively, "Claims"), to any
person, property or entity resulting from the negligence or willful
misconduct of Landlord or its agents, contractors, or employees, in
connection with Landlord's activities in the Project (except for damage to
the Tenant Improvements and Tenant's personal property, fixtures, furniture
and equipment in the Premises, to the extent Tenant is required to obtain the
requisite insurance coverage pursuant to this Lease), and Landlord hereby so
indemnifies and holds Tenant harmless from any such Claims; provided further
that because Landlord maintains insurance on the Project and Tenant
compensates Landlord for such insurance as part of Tenant's Proportionate
Share of Direct Costs and because of the existence of waivers of subrogation
set forth in Article 14 of this Lease, Landlord hereby indemnifies and holds
Tenant harmless from any Claims to any property outside of the Premises to
the extent such Claim is covered by such insurance, even if resulting from
the negligent acts, omissions, or willful misconduct of Tenant or those of
its agents, contractors, or employees. Similarly, since Tenant must carry
insurance pursuant to Article 14 to cover its personal property within the
Premises and the Tenant Improvements, Tenant hereby indemnifies and holds
Landlord harmless from any Claim to any property within the Premises, to the
extent such Claim is covered by such insurance, even if resulting from the
negligent acts, omissions or willful misconduct of Landlord or those of its
agents, contractors, or employees.
(b) Exemption of Landlord from Liability. Except as provided in
Paragraph 13(a) above, Landlord shall not be liable for injury to Tenant's
business, or loss of income therefrom, or for damage that may be sustained by
the person, goods, wares, merchandise or property of Tenant, its employees,
invitees, customers, agents, or contractors, or any other person in, on or
about the Premises directly or indirectly caused by or resulting from fire,
steam, electricity, gas, water, or rain which may leak or flow from or into
any part of the Premises, or from the breakage, leakage, obstruction or other
defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, light fixtures, or mechanical or electrical systems or from
intrabuilding network cable, whether such damage or injury results from
conditions arising upon the Premises or upon other portions of the Project or
from other sources or places and regardless of whether the cause of such
damage or injury or the means or repairing the same is inaccessible to
Tenant, except in connection with damage or injury resulting from the gross
negligence or willful misconduct of Landlord, or its authorized agents.
Landlord shall not be liable to Tenant for any damages arising from any act
or neglect of any other tenant of the building.
Tenant acknowledges that Landlord's election to provide mechanical
surveillance or to post security personnel in the Project is solely within
Landlord's discretion; Landlord shall have no liability in connection with
the decision whether or not to provide such services and Tenant hereby waives
all claims based thereon. Landlord shall not be liable for losses due to
theft, vandalism, or like causes. Tenant shall defend, indemnify, and hold
Landlord harmless from any such claims made by any employee, licensee,
invitee, contractor, agent or, other person whose presence in, on or about
the Premises or the Project is attendant to the business of Tenant.
ARTICLE 14
INSURANCE
(a) Tenant's Insurance. Tenant, shall at all times during the Term of
this Lease, and at its own cost and expense, procure and continue in force
the following insurance coverage: (i) Commercial General Liability Insurance
with a combined single limit for bodily injury and property damages of not
less than One Million Dollars ($1,000,000) per occurrence and Two Million
Dollars ($2,000,000) in the annual aggregate, including products liability
coverage if applicable, covering the insuring provisions of this Lease and
the performance of Tenant of the indemnity and exemption of Landlord from
liability agreements set forth in Article 13 hereof; (ii) a
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policy of standard fire, extended coverage and special extended coverage
insurance (all risks), including a vandalism and malicious mischief
endorsement, sprinkler leakage coverage and earthquake sprinkler leakage
where sprinklers are provided in an amount equal to the full replacement
value new without deduction for depreciation of all (A) Tenant Improvements,
alterations, fixtures and other improvements in the Premises and (B) trade
fixtures, furniture, equipment and other personal property installed by or at
the expense of Tenant; (iii) Worker's Compensation coverage as required by
law; and (iv) business interruption, loss of income and extra expense
insurance covering failure of Tenant's telecommunications equipment and
covering all other perils, failures or interruptions. Tenant shall carry and
maintain during the entire Lease Term (including any option periods, if
applicable), at Tenant's sole cost and expense, increased amounts of the
insurance required to be carried by Tenant pursuant to this Article 14 and
such other reasonable types of insurance coverage and in such reasonable
amounts covering the Premises and Tenant's operations therein, as may be
reasonably required by Landlord, but only where such increased amounts or
other types of insurance are then generally required by owners in comparable
projects.
(b) Form of Policies. The aforementioned minimum limits of policies and
Tenant's procurement and maintenance thereof shall in no event limit the
liability of Tenant hereunder. The Commercial General Liability Insurance
policy shall name Landlord, Landlord's property manager, Landlord's lender(s)
and such other persons or firms as Landlord specifies from time to time, as
additional insureds' with an appropriate endorsement to the policy(s). All
such insurance policies carried by Tenant shall be with companies having a
rating of not less than A-VIII in Best's Insurance Guide. Tenant shall
furnish to Landlord, from the insurance companies, or cause the insurance
companies to furnish, certificates of coverage. No such policy shall be
cancelable or subject to reduction of coverage or other modification or
cancellation except after thirty (30) days prior written notice to Landlord
by the insurer. All such policies shall be endorsed to agree that Tenant's
policy is primary and that any insurance covered by Landlord is excess and
not contributing with any Tenant insurance requirement hereunder. Tenant
shall, at least twenty (20) days prior to the expiration of such policies,
furnish Landlord with renewals or binders. Tenant agrees that if Tenant does
not take out and maintain such insurance or furnish Landlord with renewals or
binders, Landlord may (but shall not be required to) procure said insurance
on Tenant's behalf and charge Tenant the cost thereof, which amount shall be
payable by Tenant upon demand with interest from the date such sums are
extended. Tenant shall have the right to provide such insurance coverage
pursuant to blanket policies obtained by Tenant, provided such blanket
policies expressly afford coverage to the Premises and to Tenant as required
by this Lease.
(c) Landlord's Insurance. Landlord shall, as a cost to be included in
Operating Costs, procure and maintain at all times during the Term of this
Lease, a policy or policies of insurance covering loss or damage to the
Project in the amount of the full replacement costs without deduction for
depreciation thereof (exclusive of Tenant's trade fixtures, inventory,
personal property and equipment), providing protection against all perils
included within the classification of fire and extended coverage, vandalism
coverage and malicious mischief, sprinkler leakage, water damage, and special
extended coverage on building. Additionally, Landlord may (but shall not be
required to) carry: (i) Bodily Injury and Property Damage Liability
Insurance and/or Excess Liability Coverage Insurance; and (ii) Earthquake
and/or Flood Damage Insurance; and (iii) Rental Income Insurance at its
election or if required by its lender from time to time during the Term
hereof, in such amounts and with such limits as Landlord or its lender may
deem appropriate. The costs of such insurance shall be included in Operating
Costs.
(d) Waiver of Subrogation. Landlord and Tenant each agree to have their
respective insurers issuing the insurance described in Sections 14(a)(ii),
14(a)(iv) and the first sentence of Section 14(c) waive any rights of
subrogation that such companies may have against the other party. Tenant
hereby waives any right that Tenant may have against Landlord and Landlord
hereby waives any right that Landlord may have against Tenant as a result of
any loss or damage to the extent such loss or damage is insurable under such
policies.
(e) Compliance with Law. Tenant agrees that it will not, at any time,
during the Term of this Lease, do anything in or about the Premises that will
in any way tend to increase the insurance rates upon the Project. Tenant
agrees to pay Landlord forthwith upon demand the amount of any increase in
premiums for insurance against loss by fire that may be charged during
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the Term of this Lease on the amount of insurance to be carried by Landlord
on the Project resulting from the foregoing, or from Tenant doing any act in
or about said Premises that does so increase the insurance rates, whether or
not Landlord shall have consented to such act on the part of Tenant. If
Tenant installs upon the Premises any electrical equipment which constitutes
an overload of electrical lines of the Premises, Tenant shall at its own cost
and expense in accordance with all other Lease provisions, and subject to the
provisions of Article 9, 10 and 11, hereof, make whatever changes are
necessary to comply with requirements of the insurance underwriters and any
governmental authority having jurisdiction thereover, but nothing herein
contained shall be deemed to constitute Landlord's consent to such
overloading. Tenant shall, at its own expense, comply with all requirements
of the insurance authority having jurisdiction over the Project necessary for
the maintenance of reasonable fire and extended coverage insurance for the
Premises, including without limitation thereto, the installation of fire
extinguishers or an automatic dry chemical extinguishing system.
ARTICLE 15
ASSIGNMENT AND SUBLETTING
Tenant shall have no power to, either voluntarily, involuntarily, by
operation of law or otherwise, sell, assign, transfer or hypothecate this
Lease, or sublet the Premises or any part thereof, or permit the Premises or
any part thereof to be used or occupied by anyone other than Tenant or
Tenant's employees without the prior written consent of Landlord which shall
not be unreasonably withheld or delayed. Landlord shall consent or deny
consent to any proposed Transfer within ten (10) business days after
Landlord's receipt of requests therefor together with all other information
requested by Landlord in order for Landlord to evaluate the proposed
Transfer. If Tenant is a corporation, unincorporated association,
partnership or limited liability company, the sale, assignment, transfer or
hypothecation of any class of stock or other ownership interest in such
corporation, association, partnership or limited liability company in excess
of forty-nine percent (49%) in the aggregate shall be deemed an assignment
within the meaning and provisions of this Article 15. Tenant may transfer
its interest pursuant to this Lease only upon the following express
conditions, which conditions are agreed by Landlord and Tenant to be
reasonable:
(a) That the proposed transferee shall be subject to the prior written
consent of Landlord, which consent will not be unreasonably withheld or
delayed but, without limiting the generality of the foregoing, it shall be
reasonable for Landlord to deny such consent if:
(i) The use to be made of the Premises by the proposed transferee is
(a) a use which conflicts with any so-called "exclusive" then in favor of, or
for any use which is the same as that stated in any percentage rent lease to,
another tenant of the Project or any other buildings which are in the same
complex as the Project, or (b) a use which would be prohibited by any other
portion of this Lease (including but not limited to any Rules and Regulations
then in effect); or
(ii) The financial responsibility of the proposed transferee is not
reasonably satisfactory to Landlord;
(b) Whether or not Landlord consents to any such transfer, Tenant shall
pay to Landlord Landlord's then standard processing fee and reasonable
attorneys' fees incurred in connection with the proposed transfer up to the
aggregate sum of $750.00;
(c) That the proposed transferee shall execute an agreement pursuant to
which it shall agree to perform faithfully and be bound by all of the terms,
covenants, conditions, provisions and agreements of this Lease applicable to
that portion of the Premises so transferred; and
(d) That an executed duplicate original of said assignment and assumption
agreement or other transfer on a form reasonably approved by Landlord, shall
be delivered to Landlord within five (5) business days after the execution
thereof, and that such transfer shall not be binding upon Landlord until the
delivery thereof to Landlord and the execution and delivery of Landlord's
consent thereto. It shall be a condition to Landlord's consent to any
subleasing, assignment or other transfer of part or all of Tenant's interest
in the Premises (hereinafter referred to as a "Transfer") that (i) upon
Landlord's consent to any Transfer, Tenant shall pay and continue to
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pay fifty percent (50%) of any "Transfer Premium" (defined below), received
by Tenant from the transferee; (ii) any sublessee of part or all of Tenant's
interest in the Premises shall agree that in the event Landlord gives such
sublessee notice that Tenant is in default under this Lease, such sublessee
shall thereafter make all sublease or other payments directly to Landlord,
which will be received by Landlord without any liability whether to honor the
sublease or otherwise (except to credit such payments against sums due under
this Lease), and any sublessee shall agree to attorn to Landlord or its
successors and assigns at their request should this Lease be terminated for
any reason, except that in no event shall Landlord or its successors or
assigns be obligated to accept such attornment; (iii) any such Transfer and
consent shall be effected on forms supplied by Landlord and/or its legal
counsel; (iv) Landlord may require that Tenant not then be in default
hereunder in any respect; and (v) Tenant or the proposed subtenant or
assignee (collectively, "Transferee") shall agree to pay Landlord, upon
demand, as additional rent, a sum equal to the additional costs, if any,
incurred by Landlord for maintenance and repair as a result of any change in
the nature of occupancy caused by such subletting or assignment. "Transfer
Premium" shall mean all rent, additional rent or other consideration payable
by a Transferee in connection with a Transfer in excess of the rent and
Additional Rent payable by Tenant under this Lease during the term of the
Transfer and if such Transfer is less than all of the Premises, the Transfer
Premium shall be calculated on a rentable square foot basis after deducting
the reasonable expenses incurred by Tenant for (i) any changes, alterations
and improvements to the Premises paid for by Tenant in connection with the
Transfer, (ii) any other out-of-pocket monetary concessions provided by
Tenant to the transferee, and (iii) any brokerage commissions paid for by
Tenant in connection with the Transfer. "Transfer Premium" shall also
include, but not be limited to, key money, bonus money or other cash
consideration paid by a transferee to Tenant in connection with such
Transfer, and any payment in excess of fair market value for services
rendered by Tenant to the Transferee and any payment in excess of fair market
value for assets, fixtures, inventory, equipment, or furniture transferred by
Tenant to the Transferee in connection with such Transfer. Any sale
assignment, hypothecation, transfer or subletting of this Lease which is not
in compliance with the provisions of this Article 15 shall be void and shall,
at the option of Landlord, terminate this Lease. In no event shall the
consent by Landlord to an assignment or subletting be construed as relieving
Tenant, any assignee, or sublessee from obtaining the express written consent
of Landlord to any further assignment or subletting, or as releasing Tenant
from any liability or obligation hereunder whether or not then accrued and
Tenant shall continue to be fully liable therefor. No collection or
acceptance of rent by Landlord from any person other than Tenant shall be
deemed a waiver of any provision of this Article 15 or the acceptance of any
assignee or subtenant hereunder, or a release of Tenant (or of any successor
of Tenant or any subtenant). Notwithstanding anything to the contrary in
this Lease, if Tenant or any proposed Transferee claims that Landlord has
unreasonably withheld or delayed its consent under this Article 15 or
otherwise has breached or acted unreasonably under this Article 15, their
sole remedies shall be a declaratory judgment and an injunction for the
relief sought and/or monetary damages, and Tenant hereby waives all other
remedies, including, without limitation, any right at law or equity to
terminate this Lease, on its own behalf and, to the extent permitted under
all applicable laws, on behalf of the proposed Transferee.
Notwithstanding anything to the contrary contained in this Article 15, an
assignment or subletting of all or a portion of the Premises to an affiliate
of Tenant (an entity which is controlled by, controls, or is under common
control with Tenant), shall not require Landlord's consent and shall not
otherwise be subject to the provisions of this Article 15, provided that
Tenant notifies Landlord of any such assignment or sublease and promptly
supplies Landlord with any documents or information requested by Landlord
regarding such assignment or sublease or such affiliate, and further provided
that such assignment or sublease is not a subterfuge by Tenant to avoid its
obligations under this Lease. The term "control" as used in the immediately
preceding sentence shall mean the ownership, directly or indirectly, of
greater than fifty percent (50%) of the voting securities of, or possession
of, in the ordinary direction of affairs, at least fifty-one percent (51%) of
the voting interest in, any entity.
Notwithstanding anything to the contrary contained in this Article 15,
Landlord shall have the option, by giving written notice to Tenant within ten
(10) business days after Landlord's receipt of a request for consent to a
proposed Transfer, to terminate this Lease as to the portion of the Premises
that is the subject of the Transfer. If this Lease is so terminated with
respect to less than the entire Premises, the Basic Rental and Tenant's
Proportionate Share shall be prorated
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based on the number of rentable square feet retained by Tenant as compared to
the total number of rentable square feet contained in the original Premises,
and this Lease as so amended shall continue thereafter in full force and
effect, and upon the request of either party, the parties shall execute
written confirmation of the same.
ARTICLE 16
DAMAGE OR DESTRUCTION
If the Project is damaged by fire or other insured casualty and the
insurance proceeds have been made available therefor by the holder or holders
of any mortgages or deeds of trust covering the Premises or the Project, the
damage shall be repaired by Landlord to the extent such insurance proceeds
are available therefor and provided such repairs can, in Landlord's
reasonable opinion, be completed within two hundred ten (210) days after the
necessity for repairs as a result of such damage becomes known to Landlord
without the payment of overtime or other premiums, and until such repairs are
completed rent shall be abated in proportion to the part of the Premises
which is unusable by Tenant in the conduct of its business. However, if the
damage is due to the fault or neglect of Tenant, its employees, agents,
contractors, guests, invitees and the like, there shall be no abatement of
rent. Upon the occurrence of any damage to the Premises, Tenant shall assign
to Landlord (or to any party designated by Landlord) all insurance proceeds
payable to Tenant under Section 14(a)(ii)(A) above; provided, however, that
if the cost of repair of improvements within the Premises by Landlord exceeds
the amount of insurance proceeds received by Landlord from Tenant's insurance
carrier, as so assigned by Tenant, such excess costs shall be paid by Tenant
to Landlord prior to Landlord's repair of such damage. If repairs cannot, in
Landlord's reasonable opinion, be completed within two hundred ten (210) days
after the necessity for repairs as a result of such damage becomes known to
Landlord without the payment of overtime or other premiums, Landlord may, at
its option, either (i) make them in a reasonable time and in such event this
Lease shall continue in effect and the rent shall be abated, if at all, in
the manner provided in this Article 16, or (ii) elect not to effect such
repairs and instead terminate this Lease, by notifying Tenant in writing of
such termination within sixty (60) days after Landlord learns of the
necessity for repairs as a result of damage, such notice to include a
termination date giving Tenant sixty (60) days to vacate the Premises. In
addition, Landlord may elect to terminate this Lease if the Project shall be
damaged by fire or other casualty or cause, whether or not the Premises are
affected, and the damage is not fully covered, except for deductible amounts,
by Landlord's insurance policies. Finally, if the Premises or the Project is
damaged to any substantial extent during the last twelve (12) months of the
Term, then notwithstanding anything contained in this Article 16 to the
contrary, Landlord shall have the option to terminate this Lease by giving
written notice to Tenant of the exercise of such option within sixty (60)
days after Landlord learns of the necessity for repairs as the result of such
damage and if the Premises is damaged to any substantial extent during the
last twelve (12) months of the Term, Tenant shall have the option to
terminate this Lease by giving written notice to Landlord of the exercise of
such option within sixty (60) days after Landlord learns of the necessity for
repairs as the result of such damage. A total destruction of the Project
shall automatically terminate this Lease. Except as provided in this Article
16, there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business or property
arising from such damage or destruction or the making of any repairs,
alterations or improvements in or to any portion of the Project or the
Premises or in or to fixtures, appurtenances and equipment therein. Tenant
understands that Landlord will not carry insurance of any kind on Tenant's
furniture, furnishings, trade fixtures or equipment, and that Landlord shall
not be obligated to repair any damage thereto or replace the same. Except for
proceeds relating to Tenant's furniture, furnishings, trade fixtures and
equipment, Tenant acknowledges that Tenant shall have no right to any
proceeds of insurance relating to property damage. With respect to any
damage which Landlord is obligated to repair or elects to repair, Tenant, as
a material inducement to Landlord entering into this Lease, irrevocably
waives and releases its rights under the provisions of Sections 1932 and 1933
of the California Civil Code.
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ARTICLE 17
SUBORDINATION
This Lease is subject and subordinate to all ground or underlying leases,
mortgages and deeds of trust which affect the property or the Project,
including all renewals, modifications, consolidations, replacements and
extensions thereof; provided, however, if the lessor under any such lease or
the holder or holders of any such mortgage or deed of trust shall advise
Landlord that they desire or require this Lease to be prior and superior
thereto, upon written request of Landlord to Tenant, Tenant agrees to
promptly execute, acknowledge and deliver any and all documents or
instruments which Landlord or such lessor, holder or holders deem reasonably
necessary for purposes thereof. Landlord shall have the right to cause this
Lease to be and become and remain subject and subordinate to any and all
ground or underlying leases, mortgages or deeds of trust which may hereafter
be executed covering the Premises, the Project or the property or any
renewals, modifications, consolidations, replacements or extensions thereof,
for the full amount of all advances made or to be made thereunder and without
regard to the time or character of such advances, together with interest
thereon and subject to all the terms and provisions thereof; provided,
however, that Landlord obtains from the lender or other party in question a
written undertaking in favor of Tenant to the effect that such lender or
other party will not disturb Tenant's right of possession under this Lease if
Tenant is not then or thereafter in breach of any covenant or provision of
this Lease. Tenant agrees, within ten (10) days after Landlord's written
request therefor, to execute, acknowledge and deliver upon request any and
all documents or instruments requested by Landlord or necessary or proper to
assure the subordination of this Lease to any such mortgages, deed of trust,
or leasehold estates. Tenant agrees that in the event any proceedings are
brought for the foreclosure of any mortgage or deed of trust or any deed in
lieu thereof, to attorn to the purchaser or any successors thereto upon any
such foreclosure sale or deed in lieu thereof as so requested to do so by
such purchaser and to recognize such purchaser as the lessor under this
Lease; Tenant shall, within five (5) days after request execute such further
instruments or assurances as such purchaser may reasonably deem necessary to
evidence or confirm such attornment. Tenant agrees to provide copies of any
notices of Landlord's default under this Lease to any mortgagee or deed of
trust beneficiary whose address has been provided to Tenant and Tenant shall
provide such mortgagee or deed of trust beneficiary a commercially reasonable
time after receipt of such notice within which to cure any such default.
Tenant waives the provisions of any current or future statute, rule or law
which may give or purport to give Tenant any right or election to terminate
or otherwise adversely affect this Lease and the obligations of the Tenant
hereunder in the event of any foreclosure proceeding or sale.
ARTICLE 18
EMINENT DOMAIN
If the whole of the Premises or the Project or so much thereof as to
render the balance unusable by Tenant shall be taken under power of eminent
domain, or is sold, transferred or conveyed in lieu thereof, this Lease shall
automatically terminate as of the date of such condemnation, or as of the
date possession is taken by the condemning authority, at Landlord's option.
No award for any partial or entire taking shall be apportioned, and Tenant
hereby assigns to Landlord any award which may be made in such taking or
condemnation, together with any and all rights of Tenant now or hereafter
arising in or to the same or any part thereof; provided, however, that
nothing contained herein shall be deemed to give Landlord any interest in or
to require Tenant to assign to Landlord any award made to Tenant for the
taking of personal property, furniture, equipment and trade fixtures
belonging to Tenant and removable by Tenant at the expiration of the Term
hereof as provided hereunder or for goodwill or the interruption of, or
damage to, Tenant's business. In the event of a partial taking described in
this Article 18, or a sale, transfer or conveyance in lieu thereof, which
does not result in a termination of this Lease, the rent shall be apportioned
according to the ratio that the part of the Premises remaining useable by
Tenant bears to the total area of the Premises. Tenant hereby waives any and
all rights it might otherwise have pursuant to Section 1265.130 of the
California Code of Civil Procedure.
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ARTICLE 19
DEFAULT
Each of the following acts or omissions of Tenant or of any guarantor of
Tenant's performance hereunder, or occurrences, shall constitute an "Event of
Default":
(a) Failure or refusal to pay Basic Rental, Additional Rent or any other
amount to be paid by Tenant to Landlord hereunder within five (5) calendar
days after notice that the same is due or payable hereunder; said five (5)
day period shall be in lieu of, and not in addition to, the notice
requirements of Section 1161 of the California Code of Civil Procedure or any
similar or successor law;
(b) Except as set forth in items (a) above and (c) through and including
(g) below, failure to perform or observe any other covenant or condition of
this Lease to be performed or observed within thirty (30) days following
written notice to Tenant of such failure. Such thirty (30) day notice shall
be in lieu of, and not in addition to, any required under Section 1161 of the
California Code of Civil Procedure or any similar or successor law;
(c) Abandonment or failure to accept tender of possession of the Premises
or any significant portion thereof;
(d) The taking in execution or by similar process or law (other than by
eminent domain) of the estate hereby created;
(e) The filing by Tenant or any guarantor hereunder in any court pursuant
to any statute of a petition in bankruptcy or insolvency or for
reorganization or arrangement for the appointment of a receiver of all or a
portion of Tenant's property; the filing against Tenant or any guarantor
hereunder of any such petition, or the commencement of a proceeding for the
appointment of a trustee, receiver or liquidator for Tenant, or for any
guarantor hereunder, or of any of the property of either, or a proceeding by
any governmental authority for the dissolution or liquidation of Tenant or
any guarantor hereunder, if such proceeding shall not be dismissed or
trusteeship discontinued within thirty (30) days after commencement of such
proceeding or the appointment of such trustee or receiver; or the making by
Tenant or any guarantor hereunder of an assignment for the benefit of
creditors. Tenant hereby stipulates to the lifting of the automatic stay in
effect and relief from such stay for Landlord in the event Tenant files a
petition under the United States Bankruptcy laws, for the purpose of Landlord
pursuing its rights and remedies against Tenant and/or a guarantor of this
Lease;
(f) Tenant's failure to cause to be released any mechanics liens filed
against the Premises or the Project, by bond or otherwise, within thirty (30)
days after the date the same shall have been filed or recorded; or
(g) Tenant's failure to observe or perform according to the provisions of
Articles 17 or 25 within five (5) business days after notice from Landlord.
All defaults by Tenant of any covenant or condition of this Lease shall be
deemed by the parties hereto to be material.
ARTICLE 20
REMEDIES
(a) Upon the occurrence of an Event of Default under this Lease as
provided in Article 19 hereof, Landlord may exercise all of its remedies as
may be permitted by law, including but not limited to the remedy provided by
Section 1951.4 of the California Civil Code, and including without
limitation, terminating this Lease, reentering the Premises and removing all
persons and property therefrom, which property may be stored by Landlord at a
warehouse or elsewhere at the risk, expense and for the account of Tenant.
If Landlord elects to terminate this Lease, Landlord shall be entitled to
recover from Tenant the aggregate of all amounts permitted by law, including
but not limited to (i) the worth at the time of the amount of any unpaid rent
which had been earned at the time of such termination; plus (ii) the worth at
the time of award of
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the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss
that Tenant proves could have been reasonably avoided; plus (iii) the worth
at the time of award of the amount by which the unpaid rent for the balance
of the Lease Term after the time of award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided; plus (iv) any
other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, specifically including but not limited to, brokerage commissions
and advertising expenses incurred, expenses of remodeling the Premises or any
portion thereof for a new tenant; and (v) at Landlord's election, such other
amounts in addition to or in lieu of the foregoing as may be permitted from
time to time by applicable law. The term "rent" as used in this Article
20(a) shall be deemed to be and to mean all sums of every nature required to
be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or
to others. As used in items (i) and (ii), above, the "worth at the time of
award" shall be computed by allowing interest at the rate set forth in item
(e), below, but in no case greater than the maximum amount of such interest
permitted by law. As used in item (iii), above, the "worth at the time of
award" shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(b) Nothing in this Article 20 shall be deemed to affect Landlord's right
to indemnification for liability or liabilities arising prior to the
termination of this Lease for personal injuries or property damage under the
indemnification clause or clauses contained in this Lease.
(c) Notwithstanding anything to the contrary set forth herein, Landlord's
re-entry to perform acts of maintenance or preservation of or in connection
with efforts to relet the Premises or any portion thereof, or the appointment
of a receiver upon Landlord's initiative to protect Landlord's interest under
this Lease shall not terminate Tenant's right to possession of the Premises
or any portion thereof and, until Landlord does elect to terminate this
Lease, this Lease shall continue in full force and effect and Landlord may
enforce all of Landlord's rights and remedies hereunder including, without
limitation, the remedy described in California Civil Code Section 1951.4
(lessor may continue lease in effect after lessee's breach and abandonment
and recover rent as it becomes due, if Lessee has the right to sublet or
assign, subject only to reasonable limitations). Accordingly, if Landlord
does not elect to terminate this Lease on account of any default by Tenant,
Landlord may, from time to time, without terminating this Lease, enforce all
of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
(d) All rights, powers and remedies of Landlord hereunder and under any
other agreement now or hereafter in force between Landlord and Tenant shall
be cumulative and not alternative and shall be in addition to all rights,
powers and remedies given to Landlord by law, and the exercise of one or more
rights or remedies shall not impair Landlord's right to exercise any other
right or remedy.
(e) Any amount due from Tenant to Landlord hereunder which is not paid
when due shall bear interest at the lower of ten percent (10%) per annum or
the maximum lawful rate of interest from the due date until paid, unless
otherwise specifically provided herein, but the payment of such interest
shall not excuse or cure any default by Tenant under this Lease. In addition
to such interest: (a) if Basic Rental is not paid within ten (10) days after
the same is due, a late charge equal to five percent (5%) of the amount
overdue or $100, whichever is greater, shall be assessed and shall accrue for
each calendar month or part thereof until such rental, including the late
charge, is paid in full, which late charge Tenant hereby agrees is a
reasonable estimate of the damages Landlord shall suffer as a result of
Tenant's late payment and (b) an additional charge of $25 shall be assessed
for any check given to Landlord by or on behalf of Tenant which is not
honored by the drawee thereof; which damages include Landlord's additional
administrative and other costs associated with such late payment and
unsatisfied checks and the parties agree that it would be impracticable or
extremely difficult to fix Landlord's actual damage in such event. Such
charges for interest and late payments and unsatisfied checks are separate
and cumulative and are in addition to and shall not diminish or represent a
substitute for any or all of Landlord's rights or remedies under any other
provision of this Lease.
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ARTICLE 21
TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer or termination of Landlord's interest in the
Premises or the Project by sale, assignment, transfer, foreclosure,
deed-in-lieu of foreclosure or otherwise whether voluntary or involuntary,
Landlord shall be automatically relieved of any and all obligations and
liabilities on the part of Landlord from and after the date of such transfer
or termination, including furthermore without limitation, the obligation of
Landlord under Article 4 and California Civil Code 1950.7 above to return the
security deposit, provided said security deposit is transferred to said
transferee. Tenant agrees to attorn to the transferee upon any such transfer
and to recognize such transferee as the lessor under this Lease and Tenant
shall, within five (5) days after request, execute such further instruments
or assurances as such transferee may reasonably deem necessary to evidence or
confirm such attornment.
ARTICLE 22
BROKER
In connection with this Lease, Landlord and Tenant warrant and represent
that each has had dealings only with firm(s) set forth in Article 1.H. of the
Basic Lease Provisions and that neither knows of no other person or entity
who is or might be entitled to a commission, finder's fee or other like
payment in connection herewith and do hereby indemnify and agree to hold each
other, each other's agents, members, partners, representatives, officers,
affiliates, shareholders, employees, successors and assigns harmless from and
against any and all loss, liability and expenses that Landlord or Tenant may
incur should such warranty and representation prove incorrect, inaccurate or
false.
ARTICLE 23
PARKING
Tenant shall rent from Landlord, commencing on the Commencement Date, the
number of unreserved parking passes set forth in Section 1(I) of the Basic
Lease Provisions, which parking passes shall pertain to the Project parking
facility. Tenant shall pay to Landlord for automobile parking passes the
prevailing rate charged from time to time at the location of such parking
passes. Notwithstanding the foregoing, Tenant shall not be charged for such
parking passes during the initial Term. Charges for parking passes for the
Option Term (if applicable) shall be determined as a component of Option
Rent. However, Tenant shall be responsible for the full amount of any taxes
imposed by any governmental authority in connection with the renting of such
parking passes by Tenant or the use of the parking facility by Tenant.
Tenant's continued right to use the parking passes is conditioned upon Tenant
abiding by all rules and regulations which are prescribed from time to time
for the orderly operation and use of the parking facility where the parking
passes are located, including any sticker or other identification system
established by Landlord, Tenant's cooperation in seeing that Tenant's
employees and visitors also comply with such rules and regulations, and
Tenant not being in default under this Lease. Landlord specifically reserves
the right to change the size, configuration, design, layout and all other
aspects of the Project parking facility at any time and Tenant acknowledges
and agrees that Landlord may, without incurring any liability to Tenant under
this Lease, from time to time, close-off or restrict access to the Project
parking facility for purposes of permitting or facilitating any such
construction, alteration or improvements. Landlord may delegate its
responsibilities hereunder to a parking operator or a lessee of the parking
facility in which case such parking operator or lessee shall have all the
rights of control attributed hereby to the Landlord. The parking passes
rented by Tenant pursuant to this Article 23 are provided to Tenant solely
for use by Tenant's own personnel and such passes may not be transferred,
assigned, subleased or otherwise alienated by Tenant without Landlord's prior
approval.
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ARTICLE 24
WAIVER
No waiver by Landlord of any provision of this Lease shall be deemed to
be a waiver of any other provision hereof or of any subsequent breach by
Tenant of the same or any other provision. No provision of this Lease may be
waived by Landlord, except by an instrument in writing executed by Landlord.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to render unnecessary the obtaining
of Landlord's consent to or approval of any subsequent act of Tenant, whether
or not similar to the act so consented to or approved. No act or thing done
by Landlord or Landlord's agents during the Term of this Lease shall be
deemed an acceptance of a surrender of the Premises, and no agreement to
accept such surrender shall be valid unless in writing and signed by
Landlord. Any payment by Tenant or receipt by Landlord of an amount less
than the total amount then due hereunder shall be deemed to be in partial
payment only thereof and not a waiver of the balance due or an accord and
satisfaction, notwithstanding any statement or endorsement to the contrary on
any check or any other instrument delivered concurrently therewith or in
reference thereto. Accordingly, Landlord may accept any such amount and
negotiate any such check without prejudice to Landlord's right to recover all
balances due and owing and to pursue its other rights against Tenant under
this Lease, regardless of whether Landlord makes any notation on such
instrument of payment or otherwise notifies Tenant that such acceptance or
negotiation is without prejudice to Landlord's rights.
ARTICLE 25
ESTOPPEL CERTIFICATE
Tenant shall, at any time and from time to time, upon not less than ten
(10) days' prior written notice from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing certifying the following
information, (but not limited to the following information in the event
further information is requested by Landlord): (i) that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as modified, is in full
force and effect); (ii) the dates to which the rental and other charges are
paid in advance, if any; (iii) the amount of Tenant's security deposit, if
any; and (iv) acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder, and no events or
conditions then in existence which, with the passage of time or notice or
both, would constitute a default on the part of Landlord hereunder, or
specifying such defaults, events or conditions, if any are claimed. It is
expressly understood and agreed that any such statement may be relied upon by
any prospective purchaser or encumbrancer of all or any portion of the Real
Property. Tenant's failure to deliver such statement within such time shall
constitute an admission by Tenant that all statements contained therein are
true and correct. Tenant agrees to execute all documents required in
accordance with this Article 25 within ten (10) days after delivery of said
documents.
ARTICLE 26
LIABILITY OF LANDLORD
Notwithstanding anything in this Lease to the contrary, any remedy of
Tenant for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord in the event of any default by Landlord
hereunder or any claim, cause of action or obligation, contractual, statutory
or otherwise by Tenant against Landlord concerning, arising out of or
relating to any matter relating to this Lease and all of the covenants and
conditions or any obligations, contractual, statutory, or otherwise set forth
herein, shall be limited solely and exclusively to an amount which is equal
to the lesser of (i) the interest of Landlord in and to the Project, and (ii)
the interest Landlord would have in the Project if the Project were
encumbered by third party debt in an amount equal to eighty percent (80%) of
the then current value of the Project (as such value if reasonably determined
by Landlord). No other property or assets of Landlord, or any member,
officer, director, shareholder, partner, trustee, agent, servant or employee
of Landlord (the "Representative") shall be subject to levy, execution or
other enforcement procedure for the satisfaction of Tenant's remedies under
or with respect to this
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Lease, Landlord's obligations to Tenant, whether contractual, statutory or
otherwise, the relationship of Landlord and Tenant hereunder, or Tenant's use
or occupancy of the Premises. Tenant further understands that any liability,
duty or obligation of Landlord to Tenant, shall automatically cease and
terminate as of the date that Landlord or any of Landlord's Representatives
no longer have any right, title or interest in or to the Project.
ARTICLE 27
INABILITY TO PERFORM
This Lease and the obligations of Tenant hereunder shall not be affected
or impaired because Landlord is unable to fulfill any of its obligations
hereunder or is delayed in doing so, if such inability or delay is caused by
reason of any prevention, delay, stoppage due to strikes, lockouts, acts of
God, or any other cause previously, or at such time, beyond the reasonable
control or anticipation of Landlord (collectively, a "Force Majeure") and
Landlord's obligations under this Lease shall be forgiven and suspended by
any such Force Majeure.
ARTICLE 28
HAZARDOUS WASTE
(a) Tenant shall not cause or permit any Hazardous Material (as defined
in Article 28(d) below) to be brought, kept or used in or about the Project
by Tenant, its agents, employee, contractors, or invitees, except that Tenant
may maintain products in the Premises that are incidental to the operation of
its offices, such as spray adhesives, photocopy supplies, secretarial
supplies, and limited janitorial supplies which products contain chemicals
that are categorized as Hazardous Materials, provided that the use of such
products in the Premises by Tenant shall be in compliance with applicable
laws and shall be in the manner in which such products are designed to be
used and provided further that Tenant must provide prior written notice to
Landlord of the identity of such substances or materials. Tenant indemnifies
Landlord from and against any breach by Tenant of the obligations stated in
the preceding sentence, and agrees to defend and hold Landlord harmless from
and against any and all claims, judgments, damages, penalties, fines, costs,
liabilities, or losses (including, without limitation, diminution in value of
the Project, damages for the loss or restriction or use of rentable or usable
space or of any amenity of the Project, damages arising from any adverse
impact or marketing of space in the Project, and sums paid in settlement of
claims, attorneys' fees, consultant fees, and expert fees) which arise during
or after the Term of this Lease as a result of such breach. This
indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any
cleanup, remedial, removal, or restoration work required by any federal,
state, or local governmental agency or political subdivision because of
Hazardous Material present in the soil or ground water on or under the
Project. Without limiting the foregoing, if the presence of any Hazardous
Material on the Project caused or permitted by Tenant results in any
contamination of the Project and subject to the provisions of Articles 9, 10
and 11, hereof, Tenant shall promptly take all actions at its sole expense as
are necessary to return the Project to the condition existing prior to the
introduction of any such Hazardous Material and the contractors to be used by
Tenant for such work must be approved by Landlord, which approval shall not
be unreasonably withheld so long as such actions would not potentially have
any material adverse long-term or short-term effect on the Project and so
long as such actions do not materially interfere with the use and enjoyment
of the Project by the other tenants thereof.
(b) Except as provided in Section 28(a) above, Landlord shall be
responsible for, at Landlord's sole cost and expense, removal and remediation
of Hazardous Materials at the Project to the extent such removal or
remediation is required by any applicable governmental law, statute, rule or
regulation.
(c) It shall not be unreasonable for Landlord to withhold its consent to
any proposed Transfer if (i) the proposed transferee's anticipated use of the
Premises involves the generation, storage, use, treatment, or disposal of
Hazardous Material; (ii) the proposed Transferee has been required by any
prior landlord, lender, or governmental authority to take remedial action in
connection with Hazardous Material contaminating a property if the
contamination resulted from such Transferee's actions or use of the property
in question; or (iii) the proposed Transferee is
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subject to an enforcement order issued by any governmental authority in
connection with the use, disposal, or storage of a Hazardous Material.
(d) As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material, or waste which is or becomes regulated by any
local governmental authority, the State of California or the United States
Government. The term "Hazardous Material" includes, without limitation, any
material or substance which is (i) defined as "Hazardous Waste," "Extremely
Hazardous Waste," or "Restricted Hazardous Waste" under Sections 25115, 25117
or 25122.7, or listed pursuant to Section 25140, of the California Health and
Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii)
defined as a "Hazardous Substance" under Section 25316 of the California
Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner
Hazardous Substance Account Act), (iii) defined as a "Hazardous Material,"
"Hazardous Substance," or "Hazardous Waste" under Section 25501 of the
California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous
Materials Release Response Plans and Inventory), (iv) defined as a "Hazardous
Substance" under Section 25281 of the California Health and Safety Code,
Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (v)
petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
Hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the
California Administrative Code, Division 4, Chapter 20, (viii) designated as
a "Hazardous Substance" pursuant to Section 311 of the Federal Water
Pollution Control Act (33 U.S.C. Section 1317), (ix) defined as a "Hazardous
Waste" pursuant to Section 1004 of the Federal Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), or
(x) defined as a "Hazardous Substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601).
(e) As used herein, the term "Laws" mean any applicable federal, state or
local laws, ordinances, or regulations relating to any Hazardous Material
affecting the Project, including, without limitation, the laws, ordinances,
and regulations referred to in Article 28 (d) above.
ARTICLE 29
SURRENDER OF PREMISES; REMOVAL OF PROPERTY
(a) The voluntary or other surrender of this Lease by Tenant to Landlord,
or a mutual termination hereof, shall not work a merger, and shall at the
option of Landlord, operate as an assignment to it of any or all subleases or
subtenancies affecting the Premises.
(b) Upon the expiration of the Term of this Lease, or upon any earlier
termination of this Lease, Tenant shall quit and surrender possession of the
Premises to Landlord in as good order and condition as the same are now and
hereafter may be improved by Landlord or Tenant, reasonable wear and tear and
repairs which are Landlord's obligation excepted, and shall, without expense
to Landlord, remove or cause to be removed from the Premises all debris and
rubbish, all furniture, equipment, business and trade fixtures, free-standing
cabinet work, moveable partitioning and other articles of personal property
owned by Tenant or installed or placed by Tenant at its own expense in the
Premises, and all similar articles of any other persons claiming under Tenant
unless Landlord exercises its option to have any subleases or subtenancies
assigned to it, and Tenant shall repair all damage to the Premises resulting
from the installation and removal of such items to be removed.
(c) Whenever Landlord shall reenter the Premises as provided in Article
12 hereof, or as otherwise provided in this Lease, any property of Tenant not
removed by Tenant upon the expiration of the Term of this Lease (or within
seventy-two (72) hours after a termination by reason of Tenant's default), as
provided in this Lease, shall be considered abandoned and Landlord may remove
any or all of such items and dispose of the same in any manner or store the
same in a public warehouse or elsewhere for the account and at the expense
and risk of Tenant, and if Tenant shall fail to pay the cost of storing any
such property after it has been stored for a period of ninety (90) days or
more, Landlord may sell any or all of such property at public or private
sale, in such manner and at such times and places as Landlord, in its sole
discretion, may deem proper, without notice or to demand upon Tenant, for the
payment of all or any part of such charges or the removal of any such
property, and shall apply the proceeds of such sale: first, to the cost and
expense of such sale, including reasonable attorneys' fees for services
rendered;
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second, to the payment of the cost of or charges for storing any such
property; third, to the payment of any other sums of money which may then or
thereafter be due to Landlord from Tenant under any of the terms hereof; and
fourth, the balance, if any, to Tenant.
(d) All fixtures, alterations, additions, improvements and/or
appurtenances attached to or built into the Premises prior to or during the
Term, whether by Landlord or Tenant and whether at the expense of Landlord or
Tenant, or of both, shall be and remain part of the Premises and shall not be
removed by Tenant at the end of the Term unless otherwise expressly provided
for in this Lease or unless such removal is required by Landlord pursuant to
the provisions of Article 9, above. Such fixtures, alterations, additions,
improvements and/or appurtenances shall include but not be limited to: all
floor coverings, drapes, paneling, built-in cabinetry, molding, doors, vaults
(including vault doors), plumbing systems, electrical systems, lighting
systems, silencing equipment, all fixtures and outlets for the systems
mentioned above and for all radio and telegraph purposes, and any special
flooring or ceiling installations.
ARTICLE 30
MISCELLANEOUS
(a) Severability; Entire Agreement. Any provision of this Lease which
shall prove to be invalid, void, or illegal shall in no way affect, impair or
invalidate any other provision hereof any such other provisions shall remain
in full force and effect. This Lease and the Exhibits and any Addendum
attached hereto constitute the entire agreement between the parties hereto
with respect to the subject matter hereof, and no prior agreement or
understanding pertaining to any such matter shall be effective for any
purpose. No provision of this Lease may be amended or supplemented except by
an agreement in writing signed by the parties hereto or their successor in
interest. This Lease shall be governed by and construed in accordance with
the laws of the State of California.
(b) Attorneys' Fees; Waiver of Jury Trial.
(i) In any action to enforce the terms of this Lease, including any
suit by Landlord for the recovery of rent or possession of the Premises, the
losing party shall pay the successful party a reasonable sum for attorneys'
fees in such suit and such attorneys' fees shall be deemed to have accrued
prior to the commencement of such action and shall be paid whether or not
such action is prosecuted to judgment.
(ii) Should Landlord, without fault on Landlord's part, be made a party
to any litigation instituted by Tenant or by any third party against Tenant,
or by or against any person holding under or using the Premises by license of
Tenant, or for the foreclosure of any lien for labor or material furnished to
or for Tenant or any such other person or otherwise arising out of or
resulting from any act or transaction of Tenant or of any such other person,
Tenant covenants to save and hold Landlord harmless from any judgment
rendered against Landlord or the Premises or any part thereof and from all
costs and expenses, including reasonable attorneys' fees incurred by Landlord
in connection with such litigation.
(iii) When legal services are rendered by an attorney at law who is
an employee of a party, attorneys' fees incurred by that party shall be
deemed to include an amount based upon the number of hours spent by such
employee on such matters multiplied by an appropriate billing rate determined
by taking into consideration the same factors, including but not limited by,
the importance of the matter, time applied, difficulty and results, as are
considered when an attorney not in the employ of a party is engaged to render
such service.
(iv) EACH PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THIS LEASE, FOR
DAMAGES FOR ANY BREACH UNDER THIS LEASE, OR OTHERWISE FOR ENFORCEMENT OF ANY
RIGHT OR REMEDY HEREUNDER.
(c) Time of Essence. Each of Tenant's covenants herein is a condition
and time is of the essence with respect to the performance of every provision
of this Lease.
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(d) Headings. The article headings contained in this Lease are for
convenience only and do not in any way limit or amplify any term or provision
hereof. The terms "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular, the neuter shall include the masculine and
feminine genders and the obligations herein imposed upon Tenant shall be
joint and several as to each of the persons, firms or corporations of which
Tenant may be composed.
(e) Reserved Area. Tenant hereby acknowledges and agrees that the
exterior walls of the Premises and the area between the finished ceiling of
the Premises and the slab of the floor of the project thereabove have not
been demised hereby and the use thereof together with the right to install,
maintain, use, repair and replace pipes, ducts, conduits and wires leading
through, under or above the Premises in locations which will not materially
interfere with Tenant's use of the Premises and serving other parts of the
Project are hereby excepted and reserved unto Landlord.
(f) No Option. The submission of this Lease by Landlord, its agent or
representative for examination or execution by Tenant does not constitute an
option or offer to lease the Premises upon the terms and conditions contained
herein or a reservation of the Premises in favor of Tenant, it being intended
hereby that this Lease shall only become effective upon the execution hereof
by Landlord and delivery of a fully executed Lease to Tenant.
(g) Use of Project Name; Improvements. Tenant shall not be allowed to
use the name, picture or representation of the Project, or words to that
effect, in connection with any business carried on in the Premises or
otherwise (except as Tenant's address) without the prior written consent of
Landlord. In the event that Landlord undertakes any additional improvements
on the Real Property including but not limited to new construction or
renovation or additions to the existing improvements, Landlord shall not be
liable to Tenant for any noise, dust, vibration or interference with access
to the Premises or disruption in Tenant's business caused thereby, except as
provided in Section 8(c) of this Lease.
(h) Rules and Regulations. Tenant shall observe faithfully and comply
strictly with the Rules and Regulations attached to this Lease and made a
part hereof, and such other Rules and Regulations as Landlord may from time
to time reasonably adopt for the safety, care and cleanliness of the Project,
the facilities thereof, or the preservation of good order therein. Landlord
shall not be liable to Tenant for violation of any such Rules and
Regulations, or for the breach of any covenant or condition in any lease by
any other tenant in the Project. A waiver by Landlord of any Rule or
Regulation for any other tenant shall not constitute nor be deemed a waiver
of the Rule or Regulation for this Tenant. Landlord agrees that in no event
will Landlord enforce or interpret the Rules and Regulations with respect to
other tenants of the Project in a manner which will be discriminatory
relative to Tenant.
(i) Quiet Possession. Upon Tenant's paying the Basic Rent, Additional
Rent and other sums provided hereunder and observing and performing all of
the covenants, conditions and provisions on Tenant's part to be observed and
performed hereunder, Tenant shall have quiet possession of the Premises for
the entire Term hereof, subject to all of the provisions of this Lease.
(j) Rent. All payments required to be made hereunder to Landlord shall be
deemed to be rent, whether or not described as such.
(k) Successors and Assigns. Subject to the provisions of Article 15
hereof, all of the covenants, conditions and provisions of this Lease shall
be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, personal representatives, successors and assigns.
(l) Notices. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal service evidenced by a
signed receipt or sent by registered or certified mail, return receipt
requested, addressed to Tenant at the Premises or to Landlord at the address
of the place from time to time established for the payment of rent and which
shall be effective upon proof of delivery. Either party may by notice to the
other specify a different address for notice purposes except that, upon
Tenant's taking possession of the Premises, the Premises shall constitute
Tenant's address for notice purposes. A copy of all notices to be given to
Landlord hereunder shall be concurrently transmitted by Tenant to such party
hereafter
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designated by notice from Landlord to Tenant. Any notices sent by
Landlord regarding or relating to eviction procedures, including without
limitation three day notices, may be sent by regular mail.
(m) Intentionally Omitted
(n) Right of Landlord to Perform. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be performed
by Tenant at Tenant's sole cost and expense and without any abatement of
rent. If Tenant shall fail to pay any sum of money, other than rent,
required to be paid by it hereunder or shall fail to perform any other act on
its part to be performed hereunder, and such failure shall continue beyond
any applicable cure period set forth in this Lease, Landlord may, but shall
not be obligated to, without waiving or releasing Tenant from any obligations
of Tenant, make any such payment or perform any such other act on Tenant's
part to be made or performed as is in this Lease provided. All sums so paid
by Landlord and all reasonable incidental costs, together with interest
thereon at the rate of ten percent (10%) per annum from the date of such
payment by Landlord, shall be payable to Landlord on demand and Tenant
covenants to pay any such sums, and Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event
of the nonpayment thereof by Tenant as in the case of default by Tenant in
the payment of the rent.
(o) Access, Changes in Project, Facilities, Name.
(i) Every part of the Project except the inside surfaces of all
walls, windows and doors bounding the Premises (including exterior building
walls, core corridor walls and doors and any core corridor entrance), and any
space in or adjacent to the Premises used for shafts, stacks, pipes,
conduits, fan rooms, ducts, electric or other utilities, sinks or other
building facilities, and the use thereof, as well as access thereto through
the Premises for the purposes of operation, maintenance, decoration and
repair, are reserved to Landlord.
(ii) Tenant shall permit Landlord to install, use and maintain pipes,
ducts and conduits within the walls, columns and ceilings of the Premises.
(iii) Landlord reserves the right, without incurring any liability to
Tenant therefor, to make such changes in or to the Project and the fixtures
and equipment thereof, as well as in or to the street entrances, halls,
passages, elevators, stairways and other improvements thereof, as it may deem
necessary or desirable.
(iv) Landlord may adopt any name for the Project and Landlord reserves
the right to change the name or address of the Project at any time. Landlord
agrees that, in the event Landlord voluntarily changes the address of the
Project, Landlord shall reimburse Tenant for Tenant's reasonable, as
determined by Landlord, printing costs for Tenant's then reasonable and
current stock of stationery, incurred as a result of such address change.
(p) Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants
that he or she is duly authorized to execute and deliver this Lease on behalf
of said corporation in accordance with a duly adopted resolution of the Board
of Directors of said corporation or in accordance with the By-laws of said
corporation, and that this Lease is binding upon said corporation in
accordance with its terms. If Tenant is a corporation, said corporation and
each individual executing this Lease on behalf of said corporation covenants
that Tenant shall provide to Landlord a copy of such resolution of the Board
of Directors authorizing the execution of this Lease on behalf of such
corporation, which copy of resolution shall be duly certified by the
secretary or an assistant secretary of the corporation to be a true copy of a
resolution duly adopted by the Board of Directors of said corporation.
(q) Identification of Tenant.
(i) If Tenant constitutes more than one person or entity, (A) each of
them shall be jointly and severally liable for the keeping, observing and
performing of all of the terms, covenants, conditions and provisions of this
Lease to be kept, observed and performed by Tenant, (B) the term "Tenant" as
used in this Lease shall mean and include each of them jointly and
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severally, and (C) the act of or notice from, or notice or refund to, or the
signature of, any one or more of them, with respect to the tenancy of this
Lease, including, but not limited to, any renewal, extension, expiration,
termination or modification of this Lease, shall be binding upon each and all
of the persons or entities executing this Lease as Tenant with the same force
and effect as if each and all of them had so acted or so given or received
such notice or refund or so signed.
(ii) If Tenant is a partnership (or is comprised of two or more
persons, individually and as co-partners of a partnership) or if Tenant's
interest in this Lease shall be assigned to a partnership (or to two or more
persons, individually and as co-partners of a partnership) pursuant to
Article 15 hereof (any such partnership and such persons hereinafter referred
to in this Article 30(q)(ii) as "Partnership Tenant"), the following
provisions of this Lease shall apply to such Partnership Tenant:
(A) The liability of each of the parties comprising Partnership
Tenant shall be joint and several.
(B) Each of the parties comprising Partnership Tenant hereby
consents in advance to, and agrees to be bound by, any written instrument
which may hereafter be executed, changing, modifying or discharging this
Lease, in whole or in part, or surrendering all or any part of the Premises
to the Landlord, and by notices, demands, requests or other communication
which may hereafter be given, by Partnership Tenant or any of the parties
comprising Partnership Tenant.
(C) Any bills, statements, notices, demands, requests or other
communications given or rendered to Partnership Tenant or to any of the
parties comprising Partnership Tenant shall be deemed given or rendered to
Partnership Tenant and to all such parties and shall be binding upon
Partnership Tenant and all such parties.
(D) If Partnership Tenant admits new partners, all of such new
partners shall, by their admission to Partnership Tenant, be deemed to have
assumed performance of all of the terms, covenants and conditions of this
Lease on Tenant's part to be observed and performed.
(E) Partnership Tenant shall give prompt notice to Landlord of
the admission of any such new partners, and, upon demand of Landlord, shall
cause each such new partner to execute and deliver to Landlord an agreement
in form satisfactory to Landlord, wherein each such new partner shall assume
performance of all of the terms, covenants and conditions of this Lease on
Partnership Tenant's part to be observed and performed (but neither
Landlord's failure to request any such agreement nor the failure of any such
new partner to execute or deliver any such agreement to Landlord shall
terminate the provisions of clause (D) of this Article 30(q)(ii) or relieve
any such new partner of its obligations thereunder).
(r) Intentionally Omitted
(s) Exhibits and Addendum. The Exhibits and Addendum, if applicable,
attached hereto are incorporated herein by this reference as if fully set
forth herein.
ARTICLE 31
OPTION TO RENEW
(a) Option Right. Landlord hereby grants the Tenant named in this Lease
(the "Original Tenant") one (1) option ("Option") to extend the Lease Term
for a period of five (5) years (an "Option Term"), which option shall be
exercisable only by written notice delivered by Tenant to Landlord set forth
below. The rights contained in this Article 31 shall be personal to the
Original Tenant and may only be exercised by the Original Tenant (and not any
assignee, sublessee or other transferee of the Original Tenant's interest in
this Lease) if the Original Tenant occupies the entire Premises as of the
date of Tenant's Acceptance (as defined in Section 31(c) below).
(b) Option Rent. The rent payable by Tenant during the Option Term
("Option Rent") shall be equal to ninety-five percent (95%) of the "Market
Rent" (defined below). "Market Rent" shall mean the applicable Monthly Basic
Rental, including all escalations, Direct
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Costs, additional rent and other charges at which tenants, as of the
commencement of the Option Term, are leasing non-sublease, non-encumbered,
non-equity, space comparable in size, location and quality to the Premises in
renewal transactions for a term comparable to the Option Term which
comparable space is located in office buildings comparable to the Project in
Calabasas, California.
(c) Exercise of Options. The Option shall be exercised by Tenant only in
the following manner: (i) Tenant shall not be in default on the delivery
date of the Interest Notice and Tenant's Acceptance; (ii) Tenant shall
deliver written notice ("Interest Notice") to Landlord not less than nine (9)
months prior to the expiration of the Lease Term, stating that Tenant is
interested in exercising the Option, (iii) within fifteen (15) business days
of Landlord's receipt of Tenant's written notice, Landlord shall deliver
notice ("Option Rent Notice") to Tenant setting forth the Option Rent; and
(iv) if Tenant desires to exercise such Option, Tenant shall provide Landlord
written notice within five (5) business days after receipt of the Option Rent
Notice ("Tenant's Acceptance") and upon, and concurrent with such exercise,
Tenant may, at its option, object to the Option Rent contained in the Option
Rent Notice, in which case the parties shall follow the procedure, and the
Option Rent shall be determined, as set forth in Section 31(d) below.
Tenant's failure to deliver the Interest Notice or Tenant's Acceptance on or
before the dates specified above shall be deemed to constitute Tenant's
election not to exercise the Option.
(d) Determination of Market Rent. If Tenant timely and appropriately
objects to the Market Rent in Tenant's Acceptance, Landlord and Tenant shall
attempt to agree upon the Market Rent using their best good-faith efforts.
If Landlord and Tenant fail to reach agreement within twenty-one (21) days
following Tenant's Acceptance ("Outside Agreement Date"), then each party
shall make a separate determination of the Market Rent which shall be
submitted to each other and to arbitration in accordance with the following
items (i) through (vii):
(i) Landlord and Tenant shall each appoint, within ten (10) days of
the Outside Agreement Date, one arbitrator who shall by profession be a
current real estate broker or appraiser of commercial high-rise properties in
the immediate vicinity of the Project, and who has been active in such field
over the last five (5) years. The determination of the arbitrators shall be
limited solely to the issue of whether Landlord's or Tenant's submitted
Market Rent is the closest to the actual Market Rent as determined by the
arbitrators, taking into account the requirements of item (b), above.
(ii) The two arbitrators so appointed shall within five (5) business
days of the date of the appointment of the last appointed arbitrator agree
upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two
arbitrators.
(iii) The three arbitrators shall within fifteen (15) days of the
appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Market Rent, and shall
notify Landlord and Tenant thereof.
(iv) The decision of the majority of the three arbitrators shall be
binding upon Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an arbitrator
within ten (10) days after the applicable Outside Agreement Date, the
arbitrator appointed by one of them shall reach a decision, notify Landlord
and Tenant thereof, and such arbitrator's decision shall be binding upon
Landlord and Tenant.
(vi) If the two arbitrators fail to agree upon and appoint a third
arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator or any arbitrator shall be dismissed and
the matter to be decided shall be forthwith submitted to arbitration under
the provisions of the American Arbitration Association, but subject to the
instruction set forth in this item (d).
(vii) The cost of arbitration shall be paid by Landlord and Tenant
equally.
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ARTICLE 32
RIGHT OF FIRST OFFER
(a) Right of First Offer. Landlord hereby grants to Tenant a right of
first offer with respect to that space constituting the remainder of the
Project (other than the Premises) outlined on Exhibit "A" attached hereto and
made a part hereof ("First Offer Space"). Notwithstanding the foregoing (i)
such first offer right of Tenant shall commence only following the expiration
or earlier termination of any existing lease pertaining to the First Offer
Space, and, as to any First Offer Space which is vacant as of the date of
this Lease, the first lease pertaining to any portion of such First Offer
Space entered into by Landlord after the date of this Lease (collectively,
the "Superior Leases"), including any renewal of such existing or future
lease, whether or not such renewal is pursuant to an express written
provision in such lease, and regardless of whether any such renewal is
consummated pursuant to a lease amendment or a new lease, and (ii) such first
offer right shall be subordinate and secondary to all rights of expansion,
first refusal, first offer or similar rights granted to the tenants of the
Superior Leases (the rights described in items (i) and (ii), above to be
known collectively as "Superior Rights"). Tenant's right of first offer shall
be on the terms and conditions set forth in this Section 32.
(b) Procedure for Offer. Landlord shall notify Tenant (the "First Offer
Notice") from time to time when Landlord determines that Landlord shall
commence the marketing of any First Offer Space because such space shall
become available for lease to third parties, where no holder of a Superior
Right desires to lease such space. The First Offer Notice shall describe the
space so offered to Tenant and shall set forth Landlord's proposed economic
terms and conditions applicable to Tenant's lease of such space
(collectively, the "Economic Terms"). Notwithstanding the foregoing,
Landlord's obligation to deliver the First Offer Notice shall not apply
during the last nine (9) months of the initial Lease Term unless Tenant has
delivered an Interest Notice to Landlord pursuant to Section 31(c) above nor
shall Landlord be obligated to deliver the First Offer Notice during the last
eight (8) months of the initial Lease Term unless Tenant has delivered
Tenant's Acceptance to Landlord pursuant to Section 31(c) above.
(c) Procedure for Acceptance. If Tenant wishes to exercise Tenant's
right of first offer with respect to the space described in the First Offer
Notice, then within five (5) business days after delivery of the First Offer
Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's
intention to exercise its right of first offer with respect to the entire
space described in the First Offer Notice. If concurrently with Tenant's
exercise of the first offer right, Tenant notifies Landlord that it does not
accept the Economic Terms set forth in the First Offer Notice, Landlord and
Tenant shall, for a period of thirty (30) days after Tenant's exercise,
negotiate in good faith to reach agreement as to such Economic Terms. If
Tenant does not so notify Landlord that it does not accept the Economic Terms
set forth in the First Offer Notice concurrently with Tenant's exercise of
the first offer right, the Economic Terms shall be as set forth in the First
Offer Notice. In addition, if Tenant does not exercise its right of first
offer within the five (5) business day period, or, if Tenant exercises its
first offer right but timely objects to Landlord's determination of the
Economic Terms and if, despite their good faith negotiations, Landlord and
Tenant are unable to reach agreement on such Economic Terms within said
fifteen (15) day period, then Landlord shall be free to lease the space
described in the First Offer Notice to anyone to whom Landlord desires on any
terms Landlord desires and Tenant's right of first offer shall terminate as
to the First Offer Space described in the First Office Notice.
Notwithstanding anything to the contrary contained herein, Tenant must elect
to exercise its right of first offer, if at all, with respect to all of the
space offered by Landlord to Tenant at any particular time, and Tenant may
not elect to lease only a portion thereof.
(d) Lease of First Offer Space. If Tenant timely exercises Tenant's
right to lease the First Offer Space as set forth herein, Landlord and Tenant
shall execute an amendment adding such First Offer Space to this Lease upon
the same non-economic terms and conditions as applicable to the initial
Premises, and the economic terms and conditions as provided in this Section
32. Tenant shall commence payment of rent for the First Offer Space and the
Lease Term of the First Offer Space shall commence upon the date of delivery
of such space to Tenant. The Lease Term for the First Offer Space shall
expire co-terminously with Tenant's lease of the initial Premises.
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(e) No Defaults. The rights contained in this Section 32 shall be
personal to the Original Tenant, and may only be exercised by the Original
Tenant (and not any assignee, sublessee or other transferee of the Original
Tenant's interest in this Lease) if Tenant occupies the entire Premises as of
the date of the First Offer Notice. Tenant shall not have the right to lease
First Office Space as provided in this Section 32 if, as of the date of the
First Offer Notice, or, at Landlord's option, as of the scheduled date of
delivery of such First Offer Space to Tenant, Tenant is in default under this
Lease.
ARTICLE 33
TERMINATION OPTION
Provided Tenant has not previously exercised its right of first offer
pursuant to Article 32 of this Lease and provided further that Tenant fully
and completely satisfies each of the conditions set forth in this Article 33,
Tenant shall have the option ("Termination Option") to terminate this Lease
effective at the end of the thirty-sixth (36th) full calendar month of the
Term only (the "Termination Date"). In order to exercise the Termination
Option, Tenant must fully and completely satisfy each and every one of the
following conditions: (a) Tenant must give Landlord written notice
("Termination Notice") of its intention to terminate this Lease, which
Termination Notice must be delivered to Landlord at least six (6) months
prior to the Termination Date, (b) at the time of the Termination Notice
Tenant shall not be in default under this Lease after expiration of
applicable cure periods, and (c) concurrently with Tenant's delivery of the
Termination Notice to Landlord, Tenant shall pay to Landlord a termination
fee ("Termination Fee") equal to the sum of (i) the unamortized balance, as
of the Termination Date, of (A) the costs incurred by Landlord in designing
and constructing the Tenant Improvements, (B) the brokerage commissions paid
by Landlord in connection with this Lease, and (C) the Abated Rent, plus (ii)
an amount equal to three (3) months of Monthly Basic Rental calculated at the
rate payable at the time of the Termination Notice. Amortization pursuant to
subsection (i), above, shall be calculated on a sixty-two (62) month
amortization schedule commencing as of the Commencement Date based upon equal
monthly payments of principal and interest, with interest imputed on the
outstanding principal balance at the rate of ten percent (10%) per annum. In
the event Tenant exercises its right to first offer pursuant to Article 32
hereof prior to the date of Tenant's delivery of the Termination Notice, then
the Termination Option shall become void and of no further force and effect
and Tenant shall have no further rights under this Article 33. In the event
Tenant delivers the Termination Notice to Landlord, Tenant's right of first
offer pursuant to Article 32 hereof shall become void and of no further force
or effect.
ARTICLE 34
SIGNAGE/DIRECTORY
Provided Tenant is not in default hereunder, Tenant, at Tenant's sole
cost and expense, shall have the right to one (l) line in the lobby directory
during the Lease Term. Provided Tenant is not in default hereunder, Tenant
shall have the right, at Tenant's sole cost and expense, to install an
"eyebrow" sign on the Project's exterior and a strip on the Project's
"monument" sign (collectively "Tenant's Signage"). Tenant's Signage shall be
subject to Landlord's approval as to size, design, location, graphics,
materials, colors and similar specifications and shall be consistent with the
exterior design, materials and appearance of the Project and the Project's
signage program and shall be further subject to all applicable local
governmental laws, rules, regulations, codes and other approvals. Tenant's
signage shall be personal to the original Tenant and may not be assigned to
any assignee or sublessee, or any other person or entity. Landlord has the
right, but not the obligation, to oversee the installation of Tenant's
Signage. The cost to operate, if any, Tenant's Signage shall be paid for by
Tenant, and Tenant shall be separately metered for such expense (the cost of
separately metering any utility usage shall also be paid for by Tenant).
Upon the expiration of the Lease Term, or other earlier termination of this
Lease, Tenant shall be responsible for any and all costs associated with the
removal of Tenant's Signage, including, but not limited to, the cost to
repair and restore the Project to its original condition, normal wear and
tear excepted.
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ARTICLE 35
COMMUNICATION EQUIPMENT
Subject to all governmental laws, rules and regulations, Tenant and
Tenant's contractors (which shall first be reasonably approved by Landlord)
shall have the right and access to install, repair, replace, remove, operate
and maintain one (1) so-called "satellite dish" or other similar device, such
as antennae (collectively, "Communication Equipment") no greater than
eighteen (18) inches in diameter, together with all cable, wiring, conduits
and related equipment, for the purpose of receiving and sending radio,
television, computer, telephone or other communication signals, at a location
on the roof of the Project designated by Landlord. Landlord shall have the
right to require Tenant to relocate the Communication Equipment at any time
to another location on the roof of the Project reasonably approved by Tenant.
Tenant shall retain Landlord's roofing contractor to make any necessary
penetrations and associated repairs to the roof in order to preserve
Landlord's roof warranty. Tenant's installation and operation of the
Communication Equipment shall be governed by the following terms and
conditions:
(a) Tenant's right to install, replace, repair, remove, operate and
maintain the Communication Equipment shall be subject to all
governmental laws, rules and regulations and Landlord makes no representation
that such laws, rules and regulations permit such installation and operation.
(b) All plans and specifications for the Communication Equipment shall be
subject to Landlord's reasonable approval.
(c) All costs of installation, operation and maintenance of the
Communication Equipment and any necessary related equipment (including,
without limitation, costs of obtaining any necessary permits
and connections to the Project's electrical system) shall be borne by Tenant.
(d) It is expressly understood that Landlord retains the right to use the
roof of the Project for any purpose whatsoever provided that Landlord shall
not unduly interfere with Tenant's use of the Communication Equipment.
(e) Tenant shall use the Communication Equipment so as not to cause any
interference to other tenants in the Project or with any other tenant's
Communication Equipment, and not to damage the Project or interfere with the
normal operation of the Project.
(f) Landlord shall not have any obligations with respect to the
Communication Equipment. Landlord makes no representation that the
Communication Equipment will be able to receive or transmit communication
signals without interference or disturbance (whether or not by reason of the
installation or use of similar equipment by others on the roof of the Project)
and Tenant agrees that Landlord shall not be liable to Tenant therefor.
(g) Tenant shall (i) be solely responsible for any damage caused as a
result of the Communication Equipment, (ii) promptly pay any tax, license or
permit fees charged pursuant to any laws or regulations in connection with the
installation, maintenance or use of the Communication Equipment and comply
with all precautions and safeguards recommended by all governmental
authorities, and (iii) pay for all necessary repairs, replacements to or
maintenance of the Communication Equipment.
(h) The Communication Equipment shall remain the sole property of Tenant.
Tenant shall remove the Communication Equipment and related equipment at
Tenant's sole cost and expense upon the expiration or sooner termination of
this Lease or upon the imposition of any governmental law or regulation
which may require removal, and shall repair the Project upon such removal to
the extent required by such work of removal. If Tenant fails to remove the
Communication Equipment and repair the Project within fifteen (15) business
days after the expiration or earlier termination of this Lease, Landlord may
do so at Tenant's expense. The provisions of this Section 35(h) shall
survive the expiration or earlier termination of this Lease.
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(i) The Communication Equipment shall be deemed to constitute a portion of
the Premises for purposes of Articles 13 and 14 of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease, consisting of the
foregoing provisions and Articles, including all exhibits and other
attachments referenced therein, as of the date first above written.
"LANDLORD" ARDEN REALTY LIMITED PARTNERSHIP, a
Maryland limited partnership
By: ARDEN REALTY, INC., a Maryland
corporation, Its sole general partner
By:
-----------------------------
Victor J. Coleman
Its: President and COO
By:
-----------------------------
Its:
-----------------------
"TENANT" SOUND SOURCE INTERACTIVE, INC.,
a California corporation
By:
----------------------------------
Print Name:
--------------------------
Its:
--------------------------
By:
----------------------------------
Print Name:
--------------------------
Its:
--------------------------
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EXHIBIT "A"
PREMISES AND FIRST OFFER SPACE
EXHIBIT "A"
-----------
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EXHIBIT "B"
RULES AND REGULATIONS
1. No sign, advertisement or notice shall be displayed, printed or
affixed on or to the Premises or to the outside or inside of the Project or
so as to be visible from outside the Premises or Project without Landlord's
prior written consent. Landlord shall have the right to remove any
non-approved sign, advertisement or notice, without notice to and at the
expense of Tenant, and Landlord shall not be liable in damages for such
removal. All approved signs or lettering on doors and walls shall be
printed, painted, affixed or inscribed at the expense of Tenant by Landlord
or by a person selected by Landlord and in a manner and style acceptable to
Landlord.
2. Tenant shall not obtain for use on the Premises ice, drinking water,
waxing, cleaning, interior glass polishing, rubbish removal, towel or other
similar services, or accept barbering or bootblackening, or coffee cart
services, milk, soft drinks or other like services on the Premises, except
from persons authorized by Landlord and at the hours and under regulations
fixed by Landlord. No vending machines or machines of any description shall
be installed, maintained or operated upon the Premises without Landlord's
prior written consent, except for a reasonable number of food and soft drink
vending machines for use by Tenant's employees and guests.
3. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by Tenant or used for any purpose other
than for ingress and egress from Tenant's Premises.
4. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein.
5. Tenant shall not overload the floor of the Premises or mark, drive
nails, screw or drill into the partitions, ceilings or floor or in any way
deface the Premises.
6. In no event shall Tenant place a load upon any floor of the Premises
or portion of any such flooring exceeding the floor load per square foot of
area for which such floor is designed to carry and which is allowed by law,
or any machinery or equipment which shall cause excessive vibration to the
Premises or noticeable vibration to any other part of the Project. Prior to
bringing any heavy safes, vaults, large computers or similarly heavy
equipment into the Project, Tenant shall inform Landlord in writing of the
dimensions and weights thereof and shall obtain Landlord's consent thereto.
Such consent shall not constitute a representation or warranty by Landlord
that the safe, vault or other equipment complies, with regard to distribution
of weight and/or vibration, with the provisions of this Rule 6 nor relieve
Tenant from responsibility for the consequences of such noncompliance, and
any such safe, vault or other equipment which Landlord determines to
constitute a danger of damage to the Project or a nuisance to other tenants,
either alone or in combination with other heavy and/or vibrating objects and
equipment, shall be promptly removed by Tenant upon Landlord's written notice
of such determination and demand for removal thereof.
7. Tenant shall not, except as provided in Article 28 of this Lease,
use or keep in the Premises or Project any kerosene, gasoline or inflammable,
explosive or combustible fluid or material, or use any method of heating or
air-conditioning other than that supplied by Landlord.
8. Tenant shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in
any manner except as approved by Landlord.
9. Tenant shall not install or use any blinds, shades, awnings or
screens in connection with any window or door of the Premises and shall not
use any drape or window covering facing any exterior glass surface other than
the standard drapes, blinds or other window covering established by Landlord.
EXHIBIT "B"
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10. Tenant shall cooperate with Landlord in obtaining maximum
effectiveness of the cooling system by closing drapes when the sun's rays
fall directly on windows of the Premises. Tenant shall not obstruct, alter,
or in any way impair the efficient operation of Landlord's heating,
ventilating and air-conditioning system.
11. The Premises shall not be used for manufacturing or for the storage
of merchandise except as such storage may be incidental to the permitted use
of the Premises. Tenant shall not, without Landlord's prior written consent,
occupy or permit any portion of the Premises to be occupied or used for the
manufacture or sale of liquor or tobacco in any form, or a barber or manicure
shop, or as an employment bureau. The Premises shall not be used for lodging
or sleeping or for any improper, objectionable or immoral purpose. No
auction shall be conducted on the Premises.
12. Tenant hereby agrees to use its best efforts to keep the noise level
emanating from the Premises to a reasonable level, as determined by Landlord,
for a Class-A office building. Tenant agrees that in the event Landlord
receives complaints from other tenants in the Project or neighboring
buildings and/or residences, Tenant shall, at its sole cost and expense, add
sound-proofing material to the Premises or take all other measures necessary
to remedy the noise problem.
13. No bicycles, vehicles or animals of any kind shall be brought into
or kept in or about the Premises, and no cooking shall be done or permitted
by any tenant in the Premises, except that the preparation of coffee, tea,
hot chocolate and similar items for tenants, their employees and visitors
shall be permitted. No tenant shall cause or permit any unusual or
objectionable odors to be produced in or permeate from or throughout the
Premises.
14. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Project shall not be covered or obstructed by any tenant, nor shall any
bottles, parcels or other articles be placed on the window sills.
15. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanisms thereof unless Landlord is first notified thereof,
gives written approval, and is furnished a key therefor. Each tenant must,
upon the termination of his tenancy, give to Landlord all keys of stores,
offices, or toilets or toilet rooms, either furnished to, or otherwise
procured by, such tenant, and in the event of the loss of any keys so
furnished, such tenant shall pay Landlord the cost of replacing the same or
of changing the lock or locks opened by such lost key if Landlord shall deem
it necessary to make such change.
16. Landlord shall have the right to prohibit any advertising by any
tenant which, in Landlord's opinion, tends to impair the reputation of the
Project or its desirability as an office building and upon written notice
from Landlord any tenant shall refrain from and discontinue such advertising.
17. Landlord reserves the right to control access to the Project by all
persons after reasonable hours of generally recognized business days and at
all hours on Sundays and legal holidays. Each tenant shall be responsible
for all persons for whom it requests after hours access and shall be liable
to Landlord for all acts of such persons. Landlord shall have the right from
time to time to establish reasonable rules pertaining to freight elevator
usage, including the allocation and reservation of such usage for tenants'
initial move-in to their premises, and final departure therefrom.
18. Any person employed by any tenant to do janitorial work shall, while
in the Project and outside of the Premises, be subject to and under the
control and direction of the Office of the Project (but not as an agent or
servant of Landlord, and the tenant shall be responsible for all acts of such
persons).
19. All doors opening on to public corridors shall be kept closed,
except when being used for ingress and egress.
EXHIBIT "B"
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20. The requirements of tenants will be attended to only upon
application to the Office of the Project.
21. Canvassing, soliciting and peddling in the Project are prohibited
and each tenant shall cooperate to prevent the same.
22. All office equipment of any electrical or mechanical nature shall be
placed by tenants in the Premises in settings approved by Landlord, to absorb
or prevent any vibration, noise or annoyance.
23. No air-conditioning unit or other similar apparatus shall be
installed or used by any tenant without the prior written consent of
Landlord. Tenant shall pay the cost of all electricity used for
air-conditioning in the Premises if such electrical consumption exceeds
normal office requirements, regardless of whether additional apparatus is
installed pursuant to the preceding sentence.
24. There shall not be used in any space, or in the public halls of the
Project, either by any tenant or others, any hand trucks except those
equipped with rubber tires and side guards.
25. All electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Project must be fluorescent and/or of a quality, type,
design and bulb color approved by Landlord. Tenant shall not permit the
consumption in the Premises of more than 21/2 watts per net usable square
foot in the Premises in respect of office lighting nor shall Tenant permit
the consumption in the Premises of more than 11/2 watts per net usable square
foot of space in the Premises in respect of the power outlets therein, at any
one time. In the event that such limits are exceeded, Landlord shall have
the right to require Tenant to remove lighting fixtures and equipment and/or
to charge Tenant for the cost of the additional electricity consumed.
26. Parking.
(a) Intentionally Omitted
(b) Automobiles must be parked entirely within the stall lines on the
floor.
(c) All directional signs and arrows must be observed.
(d) The speed limit shall be 5 miles per hour.
(e) Parking is prohibited in areas not striped for parking.
(f) Parking cards or any other device or form of identification
supplied by Landlord (or its operator) shall remain the property of Landlord
(or its operator). Such parking identification device must be displayed as
requested and may not be mutilated in any manner. The serial number of the
parking identification device may not be obliterated. Devices are not
transferable or assignable and any device in the possession of an
unauthorized holder will be void. There will be a replacement charge to the
Tenant or person designated by Tenant of $25.00 for loss of any parking card.
(g) The monthly rate for parking is payable one (1) month in advance
and must be paid by the third business day of each month. Failure to do so
will automatically cancel parking privileges and a charge at the prevailing
daily rate will be due. No deductions or allowances from the monthly rate
will be made for days parker does not use Parking Facilities.
(h) Tenant may validate visitor parking, if necessary, by such method
or methods as the Landlord may approve, at the validation rate from time to
time generally applicable to visitor parking.
(i) Landlord (and its operator) may refuse to permit any person who
violates the within rules to park at the Project, and any violation of the
rules shall subject the automobile to removal from the Project at the
parker's expense. In either of said events, Landlord (or its operator) shall
refund a prorata portion of the current monthly parking rate and the sticker
or any other form of identification supplied by Landlord (or its operator)
will be returned to Landlord (or its operator).
(j) Property managers or attendants are not authorized to make or
allow any exceptions to these Rules and Regulations.
(k) Every parker is required to park and lock their own automobile.
All responsibility for any loss or damage to automobiles or any personal
property therein is assumed by the parker.
EXHIBIT "B"
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(l) Loss or theft of parking identification devices from automobiles
must be reported to the Property manager immediately, and a lost or stolen
report must be filed by the parker at that time.
(m) The parking facilities are for the sole purpose of parking one
automobile per space. Washing, waxing, cleaning or servicing of any vehicles
by the parker or his agents is prohibited.
(n) Landlord (and its operator) reserves the right to refuse the
issuance of monthly stickers or other parking identification devices to any
Tenant and/or its employees who refuse to comply with the above Rules and
Regulations and all City, State or Federal ordinances, laws or agreements.
(o) Tenant agrees to acquaint all employees with these Rules
and Regulations.
(p) No vehicle shall be parked at the Project for a period of more
than one (1) week.
EXHIBIT "B"
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EXHIBIT "C"
NOTICE OF LEASE TERM DATES
AND TENANT'S PROPORTIONATE SHARE
TO: ------------------------------ DATE:---------------------------
------------------------------
------------------------------
RE: Lease dated , 19 , between
----------------- ---- ---------------------------
("Landlord"), and
----------------- ---------------------------
("Tenant"), concerning Suite , located at
----------------- -----
------------------------------------------------
Ladies and Gentlemen:
In accordance with the Lease, Landlord wishes to advise and/or confirm the
following:
1. That the Premises have been accepted herewith by the Tenant as
being substantially complete in accordance with the Lease and that there is
no deficiency in construction.
2. That the Tenant has taken possession of the Premises and
acknowledges that under the provisions of the Lease the Term of said Lease
shall commence as of ____________ for a term of ________________________
ending on ________________________.
3. That in accordance with the Lease, Basic Rental commenced to
accrue on ________________________.
4. If the Commencement Date of the Lease is other than the first day
of the month, the first billing will contain a prorata adjustment. Each
billing thereafter shall be for the full amount of the monthly installment as
provided for in said Lease.
5. Rent is due and payable in advance on the first day of each and
every month during the Term of said Lease. Your rent checks should be made
payable to ________________________ at
________________________________________________.
6. The exact number of rentable square feet within the Premises is
__________ square feet.
7. Tenant's Proportionate Share, as adjusted based upon the exact
number of rentable square feet within the Premises is _______%.
AGREED AND ACCEPTED:
TENANT:
- -----------------------------------------,
a-----------------------------------------
By:
---------------------------
Its:
-----------------------
EXHIBIT "C"
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EXHIBIT "D"
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions relating
to the renovation of the Tenant Improvements in the Premises. This Tenant
Work Letter is essentially organized chronologically and addresses the issues
of the construction of the Premises, in sequence, as such issues will arise.
SECTION 1
CONSTRUCTION DRAWINGS FOR THE PREMISES
Landlord shall construct the improvements in the Premises (the "Tenant
Improvements") pursuant to that certain space study dated January 22, 1997
prepared by Cole Martinez and Curtis as further delineated in the pricing
bids dated January 22, 1997 and subsequently amended on January 27, 1997 and
March 4, 1997 prepared by Pinnacle Construction (collectively, the "Plans").
Unless specifically noted to the contrary on the Plans, the Tenant
Improvements shall be constructed using Building-standard specifications and
materials as determined by Landlord. Based upon the Plans, Landlord shall
cause the Architect to prepare detailed plans and specifications for the
Tenant Improvements ("Working Drawings"). Landlord shall then forward the
Working Drawings to Tenant for Tenant's approval. Tenant shall approve or
reasonably disapprove any draft of the Working Drawings within three (3)
business days after Tenant's receipt thereof; provided, however, that (i)
Tenant shall not be entitled to disapprove any portion, component or aspect
of the Working Drawings which are consistent with the Plans unless Tenant
agrees to pay for the additional cost resulting from such change in the Plans
as part of the Over-Allowance Amount pursuant to Section 2 below, and (ii)
any disapproval of the Working Drawings by Tenant shall be accompanied by a
detailed written explanation of the reasons for Tenant's disapproval.
Failure of Tenant to reasonably disapprove any draft of the Working Drawings
within said three (3) business day period shall be deemed to constitute
Tenant's approval thereof. The Working Drawings, as approved by Landlord and
Tenant, may be referred to herein as the "Approved Working Drawings." Tenant
shall make no changes or modifications to the Plans or the Approved Working
Drawings without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion if such change or modification would
directly or indirectly delay the "Substantial Completion," as that term is
defined in Section 5.1 of this Tenant Work Letter, of the Tenant Improvements
in the Premises or increase the cost of designing or constructing the Tenant
Improvements.
SECTION 2
OVER-ALLOWANCE AMOUNT
In the event that after Tenant's execution of the Lease, any revisions,
changes, or substitutions shall be made to the Plans or the Approved Working
Drawings or the Tenant Improvements, any additional costs, to the extent such
costs exceed the pricing bids referred to in Section 1 of this Tenant Work
Letter, which arise in connection with such revisions, changes or
substitutions shall be considered to be an "Over-Allowance Amount." The
Over-Allowance Amount shall be paid by Tenant to Landlord, as Additional
Rent, within ten (10) days after Tenant's receipt of invoice therefor. The
Over-Allowance Amount shall be disbursed by Landlord prior to the
disbursement of any portion of Landlord's contribution to the construction of
the Tenant Improvements.
SECTION 3
RETENTION OF CONTRACTOR;
WARRANTIES AND GUARANTIES
Landlord hereby assigns to Tenant all warranties and guaranties by the
contractor who constructs the Tenant Improvements (the "Contractor") relating
to the Tenant Improvements,
EXHIBIT "D"
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and Tenant hereby waives all claims against Landlord relating to, or arising
out of the construction of, the Tenant Improvements. The Contractor shall be
designated and retained by Landlord to construct the Tenant Improvements.
SECTION 4
TENANT'S COVENANTS
Tenant shall, at no cost to Tenant, cooperate with Landlord and the space
planner or architect retained by Landlord ("Architect") to cause a Notice of
Completion to be recorded in the office of the Recorder of the County of Los
Angeles in accordance with Section 3093 of the Civil Code of the State of
California or any successor statute upon completion of construction of the
Tenant Improvements.
SECTION 5
COMPLETION OF THE TENANT IMPROVEMENTS
5.1 Substantial Completion. For purposes of this Lease, "Substantial
Completion" of the Tenant Improvements in the Premises shall occur upon the
completion of construction of the Tenant Improvements in the Premises
pursuant to the Approved Working Drawings, with the exception of any punch
list items and any tenant fixtures, work-stations, built-in furniture, or
equipment to be installed by Tenant. Notwithstanding the foregoing, Tenant
hereby acknowledges and agrees that Substantial Completion of the Premises
shall be deemed to have occurred, and the Commencement Date shall occur, even
though the recording room to be constructed in accordance with the plans has
not yet been completed. Notwithstanding the foregoing, Landlord agrees to use
diligent efforts to complete construction of the recording room. Landlord
shall provide Tenant with good faith notice of the date of Substantial
Completion of the Tenant Improvements in the Premises at least fourteen (14)
days prior to the date Landlord reasonably expects such date to occur.
5.2 Delay of the Substantial Completion of the Premises. Except as
provided in this Section 5.2, the Commencement Date shall occur as set forth
in the Lease. If there shall be a delay or there are delays in the
Substantial Completion of the Tenant Improvements in the Premises as a result
of the following (collectively, "Tenant Delays"):
5.2.1 Tenant's failure to timely approve any matter requiring
Tenant's approval;
5.2.2 A breach by Tenant of the terms of this Tenant Work Letter or
the Lease; or
5.2.3 Tenant's request for changes in the Plans, Working Drawings or
Approved Working Drawings;
then, notwithstanding anything to the contrary set forth in the Lease or this
Tenant Work Letter and regardless of the actual date of the Substantial
Completion of the Tenant Improvements in the Premises, the date of
Substantial Completion thereof shall be deemed to be the date that
Substantial Completion would have occurred if no Tenant Delay or Delays, as
set forth above, had occurred.
5.3 Outside Date. In the event that the Substantial Completion of the
Tenant Improvements in the Premises has not occurred by the "Outside Date,"
which date shall be ten (10) weeks from the date upon which Landlord obtains
the permit to begin constructing the Tenant Improvements, as such date may
be extended by the number of days of Tenant Delays and by the number of days
of "Force Majeure Delays" (as defined below), then the sole remedy of Tenant
shall be the right to deliver a notice to Landlord (the "Outside Date
Termination Notice") electing to terminate this Lease effective upon receipt
of the Outside Date Termination Notice by Landlord (the "Effective Date").
Except as provided hereinbelow, the Outside Date Termination Notice must be
delivered by Tenant to Landlord, if at all, not earlier than the Outside Date
and not later than five (5) business days after the Outside Date.
EXHIBIT "D"
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If Tenant delivers the Outside Date Termination Notice to Landlord, then
Landlord shall have the right to suspend the Effective Date for a period
ending thirty (30) days after the original Effective Date. In order to
suspend the Effective Date, Landlord must deliver to Tenant, within five (5)
business days after receipt of the Outside Date Termination Notice, a
certificate of the Contractor certifying that it is such Contractor's best
good faith judgment that Substantial Completion of the Tenant Improvements in
the Premises will occur within thirty (30) days after the original Effective
Date. If Substantial Completion of the Tenant Improvements in the Premises
occurs within said thirty (30) day suspension period, then the Outside Date
Termination Notice shall be of no further force and effect; if, however,
Substantial Completion of the Tenant Improvements in the Premises does not
occur within said thirty (30) day suspension period, then this Lease shall
terminate as of the date of expiration of such thirty (30) day period. If
prior to the Outside Date Landlord determines that Substantial Completion of
the Tenant Improvements in the Premises will not occur by the Outside Date,
Landlord shall have the right to deliver a written notice to Tenant stating
Landlord's opinion as to the date by which Substantial Completion of the
Tenant Improvements in the Premises shall occur and Tenant shall be required,
within five (5) business days after receipt of such notice, to either deliver
the Outside Date Termination Notice (which will mean that this Lease shall
thereupon terminate and shall be of no further force and effect) or agree to
extend the Outside Date to that date which is set by Landlord. Failure of
Tenant to so respond in writing within said five (5) business day period
shall be deemed to constitute Tenant's agreement to extend the Outside Date
to that date which is set by Landlord. If the Outside Date is so extended,
Landlord's right to request Tenant to elect to either terminate or further
extend the Outside Date shall remain and shall continue to remain, with each
of the notice periods and response periods set forth above, until the
Substantial Completion of the Tenant Improvements in the Premises or until
this Lease is terminated. For purposes of this Section 5.3, "Force Majeure
Delays" shall mean and refer to a period of delay or delays encountered by
Landlord affecting the work of construction of the Tenant Improvements
because of delays due to excess time in obtaining governmental permits or
approvals beyond the time period normally required to obtain such permits or
approvals for similar space, similarly improved, in comparable office
buildings in Calabasas, California; fire, earthquake or other acts of God;
acts of the public enemy; riot; public unrest; insurrection; governmental
regulations of the sales of materials or supplies or the transportation
thereof; strikes or boycotts; shortages of material or labor or any other
cause beyond the reasonable control of Landlord.
5.4 Landlord Delay of Lease Commencement Date. If Substantial
Completion of the Tenant Improvements in the Premises is delayed beyond April
1, 1997 as a result of delays caused solely by Landlord, as reasonably
determined by Landlord ("Landlord Delays"), then the Lease Commencement Date
specified in Section 1(A) of the Basic Lease Provisions shall be extended by
the number of days of Landlord Delays, provided, however, that if the
Landlord Delays result in an extension of the Lease Commencement Date to a
date other than the first day of the month, the Lease Commencement Date shall
be deemed to be the earlier of (i) the first day of the next month, or (ii)
the date upon which Tenant commences its business operations in the Premises.
SECTION 6
MISCELLANEOUS
6.1 Tenant's Representative. Tenant has designated Ulrich Gottschling
as its sole representative with respect to the matters set forth in this
Tenant Work Letter, who, until further notice to Landlord, shall have full
authority and responsibility to act on behalf of the Tenant as required in
this Tenant Work Letter.
6.2 Landlord's Representative. Prior to commencement of construction of
the Tenant Improvements, Landlord shall designate a representative with
respect to the matters set forth in this Tenant Work Letter, who, until
further notice to Tenant, shall have full authority and responsibility to act
on behalf of the Landlord as required in this Tenant Work Letter.
6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer
to calendar days.
EXHIBIT "D"
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6.4 Tenant's Entry Into the Premises Prior to Substantial Completion.
Provided that Tenant and its agents do not interfere with Contractor's work
in the Project and the Premises, Contractor shall allow Tenant access to the
Premises fifteen (15) days prior to the Substantial Completion of the
Premises for the purpose of Tenant installing overstandard equipment or
fixtures (including Tenant's data and telephone equipment) in the Premises.
Prior to Tenant's entry into the Premises as permitted by the terms of this
Section 6.4, Tenant shall submit a schedule to Landlord and Contractor, for
their approval, which schedule shall detail the timing and purpose of
Tenant's entry. Tenant shall hold Landlord harmless from and indemnify,
protect and defend Landlord against any loss or damage to the Project or
Premises and against injury to any persons caused by Tenant's actions
pursuant to this Section 6.4.
EXHIBIT "D"
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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
March ___, 1997
