<PAGE>
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
SOUND SOURCE INTERACTIVE, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BOARD OF DIRECTORS OF SOUND SOURCE INTERACTIVE, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
----------------
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, JUNE 30, 1998
----------------
To the Stockholders of Sound Source Interactive, Inc.:
The 1998 Annual Meeting of Stockholders of Sound Source Interactive, Inc.
(the "Company") will be held on Tuesday, June 30, 1998 at 10:00 a.m. local
time at the Company's offices at 26115 Mureau Road, Suite B, Calabasas,
California, for the following purposes:
1. To elect seven directors, each to hold office for a term ending in
November 1998 or when their successors are elected and qualified.
2. To adopt an amendment to the Company's Amended and Restated 1995 Stock
Option Plan to increase the number of shares of the Company's Common Stock
reserved for issuance under such Plan from 500,000 shares to 1,000,000
shares.
3. To ratify amendments to the Company's Bylaws recently adopted by the
Board of Directors increasing the number of directors from five to seven
and permitting resigning directors to vote on the election of their
successors.
4. To ratify an amended and restated employment agreement which was
recently entered into between the Company and Vincent J. Bitetti, the
Company's Chairman of the Board and Chief Executive Officer.
5. To ratify an amendment to the employment agreement between the Company
and Ulrich E. Gottschling, the Company's President, Chief Operating
Officer, Chief Financial Officer, Secretary and Treasurer, which was
recently entered into between the Company and Mr. Gottschling.
6. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for 1998.
7. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record as shown on the books of the Company at the
close of business on May 18, 1998, the record date and time fixed by the Board
of Directors, will be entitled to vote at the meeting and any adjournment
thereof.
Ulrich E. Gottschling
President, Chief Operating Officer,
Chief Financial Officer,
Secretary and Treasurer
June 7, 1998
Calabasas, California
- ----------------------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN YOUR PROXY AS SOON AS POSSIBLE IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING
IN PERSON. STOCKHOLDERS WHO ATTEND THE ANNUAL MEETING MAY REVOKE THEIR
PROXIES AND VOTE IN PERSON IF THEY DESIRE.
- ----------------------------------------------------------------------------
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
26115 MUREAU ROAD, SUITE B
CALABASAS, CALIFORNIA 91302
----------------
PROXY STATEMENT
----------------
GENERAL INFORMATION
SOLICITATION OF PROXIES
This Proxy Statement is furnished to holders of the common stock, par value
$.001 per share, of Sound Source Interactive, Inc., a Delaware corporation
(the "Company"), in connection with the solicitation by the Company's Board of
Directors of proxies for use at the Company's 1998 Annual Meeting of
Stockholders (the "Annual Meeting") to be held on June 30, 1998 at 10:00 a.m.
local time at the Company's offices at 26115 Mureau Road, Suite B, Calabasas,
California, and any and all adjournments thereof. The purpose of the Annual
Meeting and the matters to be acted on there are set forth in the accompanying
Notice of Annual Meeting of Stockholders.
Solicitations of proxies will be made by preparing and mailing the Notice of
Annual Meeting, Proxy Statement and proxy to stockholders of record as of the
close of business on May 18, 1998. These materials are expected to be first
mailed to stockholders on or about June 7, 1998. The cost of making the
solicitation includes the cost of preparing and mailing the Notice of Annual
Meeting, Proxy Statement and proxy and the payment of charges imposed by
brokerage houses and other custodians, nominees and fiduciaries for forwarding
documents to stockholders. In certain instances, officers of the Company may
make special solicitations of proxies either in person or by telephone.
Expenses incurred in connection with special solicitations are expected to be
nominal. The Company will bear all expenses incurred in connection with the
solicitation of proxies for the Annual Meeting.
VOTING AND REVOCATION OF PROXIES
A stockholder giving a proxy on the enclosed form may revoke it at any time
prior to the actual voting at the Annual Meeting by filing written notice of
the termination of the appointment with an officer of the Company, by
attending the Annual Meeting and voting in person or by filing a new written
appointment of a proxy with an officer of the Company. The revocation of a
proxy will not affect any vote taken prior to the revocation.
Unless a proxy is revoked or there is a direction to abstain on one or more
proposals, it will be voted on each proposal and, if a choice is made with
respect to any matter to be acted upon, in accordance with such choice. If no
choice is specified, the proxies intend to vote the shares represented thereby
to approve Proposal Nos. 1, 2, 3, 4, 5 and 6 as set forth in the accompanying
Notice of Annual Meeting of Stockholders, and in accordance with their best
judgment on any other matters that may properly come before the Annual
Meeting.
VOTING AT THE MEETING
Only stockholders of record at the close of business on May 18, 1998 are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof. On May 18, 1998 there were outstanding 5,647,974 shares of Common
Stock. Each share of Common Stock is entitled to one vote on the matters to be
presented at the Annual Meeting.
A majority of the votes entitled to be cast on matters to be considered at
the Annual Meeting, present in person or by proxy, will constitute a quorum at
the Annual Meeting. If a share is represented for any purpose at
<PAGE>
the Annual Meeting, it is deemed to be present for all other matters.
Abstentions and broker nonvotes will be counted for purposes of determining
the presence or absence of a quorum. "Broker nonvotes" are shares held by
brokers or nominees which are present in person or represented by proxy, but
which are not voted on a particular matter because instructions have not been
received from the beneficial owner. Under applicable Delaware law, the effect
of broker nonvotes on a particular matter depends on whether the matter is one
as to which the broker or nominee has discretionary voting authority. The
effect of broker nonvotes on the specific items to be brought before the
Annual Meeting is discussed under each item.
A list of those stockholders entitled to vote at the Annual Meeting will be
available for a period of ten days prior to the Annual Meeting for examination
by any stockholder at the Company's principal executive offices, 26115 Mureau
Road, Suite B, Calabasas, California, and at the Annual Meeting.
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
GENERAL INFORMATION
The Bylaws of the Company provide that the Company is authorized to have
seven directors, and that stockholders will elect the directors of the Company
at each annual meeting. Directors are elected to serve a term ending on the
date of the next annual meeting of stockholders. Directors being elected at
the Annual Meeting will serve until the Company's next annual meeting of
stockholders, which is currently scheduled to be held in November 1998, or
until their successors have been duly elected and qualified.
VOTE REQUIRED
The seven nominees receiving the highest number of affirmative votes of the
shares present in person or represented by proxy and entitled to vote for
them, a quorum being present, shall be elected as directors. Only votes cast
for a nominee will be counted, except that the accompanying proxy will be
voted for all nominees in the absence of instruction to the contrary.
Abstentions, broker nonvotes and instructions on the accompanying proxy to
withhold authority to vote for one or more nominees will result in the
respective nominees receiving fewer votes. However, the number of votes
otherwise received by the nominee will not be reduced by such action.
THE BOARD RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE DIRECTOR
NOMINEES NAMED BELOW.
INFORMATION REGARDING NOMINEES
All nominees have consented to serve if elected, but if any becomes unable
to serve, the persons named as proxies may exercise their discretion to vote
for a substitute nominee. The stockholders have previously elected director
nominees Vincent J. Bitetti, Ulrich E. Gottschling and Mark A. James. Director
nominees Richard Azevedo, Samuel L. Poole, Wayne M. Rogers and John T.
Wholihan were appointed as directors as of April 27, 1998 to fill then
existing vacancies. The name, age, business experience and offices held by
each director nominee are as follows:
VINCENT J. BITETTI, age 43, founded Sound Source Interactive, Inc., a
California corporation (the "Subsidiary"), in 1989 and served as the President
of the Subsidiary from its formation. Since the Company acquired the
Subsidiary in 1994, Mr. Bitetti has served as the Chairman of the Board and
Chief Executive Officer and as a director of both 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 is primarily
responsible for
2
<PAGE>
developing the concepts for the Company's products, and maintaining the
Company's relationships and negotiating its license agreements, with the
studios. Mr. Bitetti has been a director of the Company since 1994.
ULRICH E. GOTTSCHLING, age 39, was appointed as Chief Financial Officer,
Treasurer and director of the Company on October 9, 1995, as Secretary of the
Company on November 17, 1995, and as President and Chief Operating Officer of
the Company on February 1, 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 former independent auditors.
From 1987 through May 1991, he was employed as a certified public accountant
by Deloitte & Touche LLP. 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.
RICHARD AZEVEDO, age 64, is President of Azevedo and Associates, Inc., which
was formed in June 1995 as a consulting firm to the nursing industry, and
which owns 40 percent of Unified Health Services, LLC an operator of nursing
homes, which Mr. Azevedo also founded and of which he serves as President. Mr.
Azevedo also is President of Star Nursing Home Enterprises, Inc., which he
founded in 1997 and which operates two nursing homes in northern California.
From 1991 to 1995, Mr. Azevedo was President of Jesse Lee Group, Inc., which
he also founded and which operated skilled nursing home facilities. From 1986
to 1990, Mr. Azevedo was President of Medicrest of California, a corporation
comprised of 18 skilled nursing home facilities. Prior to that Mr. Azevedo was
a real estate developer with Ron-Mar Constriction Company, Inc.
MARK A. JAMES, age 38, is a founding member of the law firm of James,
Driggs, Walch, Santoro & Thompson in Las Vegas, Nevada, where he has been a
partner since April 1996. From 1991 until the founding of James, Driggs,
Santoro & Thompson, he was a partner in the Las Vegas firm of Jolley, Urga,
Wirth & Woodbury. Mr. James also has been a member of the Nevada State Senate
since 1992, where he serves 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., a principal stockholder of
the Company. Mr. James has been a director of the Company since July 1996.
SAMUEL L. POOLE, age 50, since January 1998 has been the President and Chief
Executive Officer of Arista Learning Systems, Inc., a privately held
enterprise software publisher creating delivery and management software for
distance based learning environments. Prior to joining Arista Learning
Systems, from August 1992 until July 1997 Mr. Poole was employed by Maxis,
Inc., a publicly held entertainment software publisher, where he ultimately
served as President and Chief Executive Officer and as a director. His prior
employers include Walt Disney Software, Inc., a publisher of entertainment and
education software, where he was Director of Sales from January 1991 to August
1992; Cinemaware Corporation, a software publisher, where he was Vice
President of Marketing and Sales from January 1989 to January 1991; and
IntelliCreations, Inc., an interactive entertainment software publisher of
which he founded and served as President from 1984 to 1989. He holds a B.A.
from Thiel College and an MBA from Kent State University. Mr. Poole currently
serves on the Board of Trustees of Thiel College, and is a director of Arista
Learning Systems, Inc.
WAYNE M. ROGERS, age 64, is a well-known professional actor who has been
involved in investment activities for over 15 years. Mr. Rogers is a director
of two other publicly held companies, Global Intellicom, Inc. and Red Horse
Entertainment Corporation. He has been a director of several privately-held
companies, including Almaden Vineyards and the Pantry, Inc., since 1990. He
has also been a director of P.H.C., Inc., Electronic Data Controls, Inc.,
Extek Micro-Systems and Wadell Equipment Global. Currently, Mr. Rogers is the
general partner of Balanced Value Fund, LP, a limited partnership that advises
and invests in middle market companies. Mr. Rogers is also the general partner
of The Insight Fund, LP, and the sole stockholder of the corporate general
partner of The Pinnacle Fund, LP, and Triangle Bridge Group, LP.
JOHN T. WHOLIHAN, age 60, has been Dean of the College of Business
Administration at Loyola Marymount University since 1984. Previously, he
served for five years as an Associate Dean at Bradley University, where he
also served as Director of the MBA Program and as Director of the Small
Business Institute. During this period,
3
<PAGE>
he also taught in the areas of strategic management and international
business. He was a Fulbright Scholar in Brazil in 1977. Mr. Wholihan holds a
B.S. from the University of Notre Dame, an MBA from Indiana University and a
Ph.D. from The American University. He has published numerous articles and
other scholarly works. He is a member of several academic associations and
honor societies, including the Academy of Management, the Small Business
Institute Directors Association, Beta Gamma Sigma and Alpha Sigma Nu. He
currently is President of the Western Association of Collegiate Schools of
Business. He is past President of the Association of Jesuit Colleges and
Universities--Business Deans. He was the founding President of the
International Association of Jesuit Business Schools. He is a member of the
Rotary Club of Los Angeles, the Financial Executives Institute and the
Jonathan Club. He has served on the board of directors of several small
companies and currently is a member of the Board of Trustees of the TIP Funds,
a family of publicly traded mutual funds. He is the immediate past Chairman of
the Board of Notre Dame Academy in Los Angeles.
BOARD COMMITTEES
The Board of Directors has appointed four standing committees: the Audit
Committee, the Compensation Committee, the Search Committee and the Strategic
Planning Committee.
The Audit Committee consists of Richard Azevedo, Mark A. James and Samuel L.
Poole. 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 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 Richard Azevedo, Samuel L. Poole and
John T. Wholihan. It is responsible for reviewing and setting the compensation
of executive officers of the Company and for administering the Company's stock
option plans.
The Search Committee consists of Ulrich E. Gottschling, Samuel L. Poole and
John T. Wholihan. The Search Committee is responsible for recruiting a new
Chief Financial Officer for the Company.
The Strategic Planning Committee consists of Vincent J. Bitetti, Ulrich E.
Gottschling, Mark A. James, Samuel L. Poole and Wayne M. Rogers. The Strategic
Planning Committee is responsible for overseeing the development of the
Company's strategic planning process.
BOARD AND COMMITTEE MEETINGS
In fiscal 1997, there were nine meetings held by the Board of Directors.
Board committees met as follows during fiscal 1997: The Audit Committee, two
times, and the Compensation Committee, two times. The Search Committee and
Strategic Planning Committee were formed in May 1998 and did not meet in
fiscal 1997. The total combined attendance for all Board and Committee
meetings was 97 percent. All directors attended at least 88 percent of the
meetings of the Board and of the committees on which they served.
RELATIONSHIPS WITH OUTSIDE FIRMS
Mark A. James is a director of the Company and in fiscal 1997 was a member
of the law firm of James, Driggs, Walch, Santoro & Thompson, which performed
legal services for the Company during 1997 and is expected to perform such
services for the Company during 1998.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation of the Company's Chairman of the Board and Chief Executive
Officer and each of the Company's other executive officers, and one other
employee, who received compensation from the Company in excess of $100,000 for
the
4
<PAGE>
fiscal year ended June 30, 1997 (the "Named Executives"). Messrs. Bitetti,
Gottschling and Winston were the Company's only executive officers during
fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
SUMMARY ANNUAL ------------------------
COMPENSATION STOCK
----------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) (SHARES) COMPENSATION(2)
--------------------------- ---- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti.............. 1997 $205,077 $14,029 0 $19,872
Chairman of the Board and 1996 187,500 31,874 0 19,018
Chief Executive Officer 1995 150,000 75,000 0 6,200
Ulrich Gottschling.............. 1997 126,295 8,602 0 9,145
President, Chief Operating 1996 80,134 1,500 200,000 5,909
Officer, Chief Financial
Officer, Treasurer and
Secretary
Steve Kleckner, Sr. ............ 1997 118,583 0 150,000 8,074
Vice President, Sales and
Marketing(3)
Eric Winston.................... 1997 140,000 0 0 17,040
Former President and Chief 1996 168,750 31,874 0 21,141
Operating Officer(4) 1995 175,000 15,000 0 9,600
</TABLE>
- --------
(1) The bonuses accrued for fiscal year 1995 were fully paid in December 1995.
(2) The amounts in this column consist of the following: (a) personal use of
Company car: Mr. Bitetti--$9,130 (1997), $9,576 (1996), $4,800 (1995), Mr.
Winston--$12,000 (1997), $9,302 (1996), $4,800 (1995), Mr. Gottschling--
$4,600 (1997), $2,500 (1996), Mr. Kleckner--$5,500 (1997); (b) life
insurance premiums: Mr. Bitetti--$5,370 (1997), $4,311 (1996), $1,400
(1995), Mr. Winston--$0 (1997), $4,750 (1996), Mr. Kleckner--$0 (1997);
and (c) medical insurance premiums: Mr. Bitetti--$5,372 (1997), $5,131
(1996), $0 (1995), Mr. Winston--$5,040 (1997), $7,089 (1996), $4,800
(1995), Mr. Gottschling--$4,545 (1997), $3,409 (1996), Mr. Kleckner--
$2,574 (1997).
(3) Mr. Kleckner became an employee on August 1, 1996, and terminated his
employment with the Company on August 31, 1997. He was not an executive
officer.
(4) Mr. Winston terminated his employment with the Company effective November
1, 1996.
Option Grants. The following table sets forth information concerning grants
to and exercises by the Named Executives of options during the fiscal year
ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES IN OR EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR BASE PRICE DATE
---- --------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Vincent J. Bitetti...... 0 0% -- --
Ulrich E. Gottschling... 0 0% -- --
Steve Kleckner(1)....... 150,000 37% $4.00 3/28/06
Eric Winston............ 0 0% -- --
</TABLE>
- --------
(1) Mr. Kleckner terminated his employment with the Company on August 31,
1997, and all of his stock options subsequently expired unexercised.
5
<PAGE>
Option Exercises and Holdings. The following table sets forth information
concerning each exercise of a stock option during the fiscal year ended June
30, 1997 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, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 6/30/97 6/30/97(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Vincent J. Bitetti...... 0 $ 0 0/0 $ 0/0
Ulrich E. Gottschling... 0 0 200,000/0 0/0
Eric Winston(3)......... 10,000 39,600 282,838/0 230,513/0
</TABLE>
- --------
(1) Market value on the date of exercise of shares covered by options
exercised, less option exercise price.
(2) Market value of the shares covered by in-the-money options on June 30,
1997, less the option exercise price.
(3) 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.
COMPENSATION OF DIRECTORS
The Company pays each director who is not an employee of the Company a
director's fee of $15,000 per year, and reimburses them for out-of-pocket
expenses incurred in connection with their attendance at meetings. In
addition, the Company's Amended and Restated 1995 Stock Option Plan (the
"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 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 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
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 earlier of ten years
from the date the option was granted, upon expiration of the 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 Plan.
EMPLOYMENT AGREEMENTS
The Company entered into a Second Amended and Restated Employment Agreement
(the "Second Bitetti Employment Agreement") with Vincent J. Bitetti, Chairman
of the Board and Chief Executive Officer, dated as of April 30, 1996 for a
term ending on September 15, 1998. Pursuant to a predecessor employment
agreement, commencing September 15, 1995, Mr. Bitetti was entitled to receive
an annual base compensation of $200,000. Pursuant to the Second Bitetti
Employment Agreement, the predecessor 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.
During the three months ended December 31, 1996, the Company realized net
sales in excess of $1,500,000, and accordingly Mr. Bitetti's compensation was
reinstated to $200,000 per annum. The Second Bitetti Employment Agreement
provided that Mr. Bitetti's annual base compensation also was subject to
escalation annually in accordance with the Consumer Price Index (the "CPI")
effective May 1, 1997 and 1998. In addition, the Second Bitetti Employment
Agreement entitled Mr. Bitetti 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 acquired any
new
6
<PAGE>
businesses in the future, the related revenues and profits were not be taken
into account in determining entitlements to these bonuses.
The Second Bitetti Employment Agreement entitled Mr. Bitetti to receive a
bonus in the following amounts if the following gross revenues had been
attained for the fiscal year ending June 30, 1997:
<TABLE>
<CAPTION>
GROSS REVENUES CUMULATIVE CASH BONUS
-------------- ---------------------
<S> <C>
$12,000,000........................................ $ 25,000
16,000,000........................................ 75,000
24,000,000........................................ 125,000
</TABLE>
The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year were to have been increased by 60 percent
annually.
The Second Bitetti Employment Agreement entitled 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) had been attained
for the fiscal year ending June 30, 1997:
<TABLE>
<CAPTION>
GROSS PROFITS CUMULATIVE CASH BONUS
------------- ---------------------
<S> <C>
$3,200,000......................................... $ 50,000
3,600,000......................................... 75,000
4,000,000......................................... 100,000
</TABLE>
The gross profit levels required to receive each bonus level for each
subsequent fiscal year were to have been increased by 60 percent annually.
The Second Bitetti Employment Agreement entitled Mr. Bitetti to receive a
bonus in 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) were attained for any fiscal year
during the term of Mr. Bitetti's employment agreement:
<TABLE>
<CAPTION>
PROFITABILITY CUMULATIVE CASH BONUS
------------- ---------------------
<S> <C>
10%............................................... $ 50,000
15%............................................... $100,000
</TABLE>
None of the three foregoing bonus milestones were attained by the Company
for fiscal 1997, and accordingly no bonus amounts were due to Mr. Bitetti for
fiscal 1997.
Pursuant to the Second Bitetti Employment Agreement, Mr. Bitetti was
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 could 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. The Second Bitetti Employment Agreement
further provided that following the voluntary or involuntary termination of
his employment by the Company, Mr. Bitetti was entitled to two demand
registration rights with respect to the Common Stock held by or issuable to
him. These registration rights could only become effective upon the voluntary
or involuntary termination of Mr. Bitetti's employment with the Company. The
Second Bitetti Employment Agreement further provided that if the Company
employs a new Chief Executive Officer, Mr. Bitetti's salary could not be less
than that of such new Chief Executive Officer, up to a maximum of $300,000.
The Company has entered into a Third Amended and Restated Employment
Agreement (the "Third Bitetti Employment Agreement") with Mr. Bitetti dated as
of April 24, 1998. Information concerning such Third Bitetti Employment
Agreement is set forth below under Proposal No. 4, Ratification of Third
Bitetti Employment Agreement.
7
<PAGE>
The Company entered into an Employment Agreement with Ulrich E. Gottschling,
as Chief Financial Officer, Treasurer and Secretary, dated as of October 9,
1995, for a term ending October 9, 1997. The Employment Agreement entitled Mr.
Gottschling to receive annual cash compensation of $110,000. Pursuant to his
employment agreement, on October 9, 1995 Mr. Gottschling also was granted
options to purchase 100,000 shares of Common Stock at an exercise price of
$5.00 per share. Pursuant to an amendment to his Employment Agreement dated as
of 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 became exercisable as to an
additional 100,000 shares on September 30, 1997 at a purchase price of $4.00
per share. The original Gottschling Employment Agreement further provided that
following the voluntary or involuntary termination of his employment by the
Company, Mr. Gottschling was entitled to a single demand registration right
with respect to the Common Stock held by or issuable to him pursuant to his
original Employment Agreement.
Effective February 1, 1997, Mr. Gottschling was appointed as President and
Chief Operating Officer in addition to his then existing positions as Chief
Financial Officer, Treasurer and Secretary. Simultaneously, the Company and
Mr. Gottschling entered into an Amended and Restated Employment Agreement (the
"Gottschling Employment Agreement"), for a two-year term expiring January 31,
1999. Pursuant to the Gottschling Agreement, Mr. Gottschling was entitled to
receive annual base compensation of $150,000 for the duration of the
agreement. Mr. Gottschling's base compensation also was subject to escalation
annually in accordance with the CPI. In addition, the Gottschling Employment
Agreement entitled him to receive bonuses based on the same three criteria as
applicable to Mr. Bitetti under the Second Bitetti Employment Agreement,
except that the amounts of the bonus as payable to Mr. Gottschling were equal
to 80 percent of the bonuses payable to Mr. Bitetti. None of the bonus
milestones were attained for fiscal 1997, and accordingly, no bonus amounts
were due to Mr. Gottschling.
Pursuant to the Gottschling Employment Agreement, Mr. Gottschling was
entitled to certain other fringe benefits including use of a Company
automobile or automobile allowance and the right to participate in the
Company's customary benefit plans. The Gottschling Employment Agreement
further provided that following the voluntary or involuntary termination of
his employment by the Company, Mr. Gottschling was 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. Gottschling's employment with the Company.
The Gottschling Employment Agreement was amended pursuant to an Employment
Memorandum (the "Gottschling Employment Memorandum") dated as of April 24,
1998. Except as amended by the Gottschling Employment Memorandum, the
Gottschling Employment Agreement remains in full force and effect. Information
concerning the Gottschling Employment Memorandum is set forth below under
Proposal No. 5, Ratification of Amendments to Gottschling Employment
Agreement.
TERMINATION AGREEMENT
The Company entered into a Second Amended and Restated Employment Agreement
with Eric H. Winston, the Company's former President and Chief Operating
Officer, dated as of April 30, 1996, for a term ending on September 15, 1998.
Pursuant to a predecessor employment agreement, commencing September 15, 1995,
Mr. Winston was entitled to receive annual base compensation of $175,000.
Pursuant to the Second Amended and Restated Employment Agreement the
predecessor employment agreement was amended to provide that effective July 2,
1996, Mr. Winston's base compensation was reduced to $140,000 per annum,
subject to an increase of $35,000 per annum at such time as the Company
realized net sales of $1,500,000 or more for any three consecutive calendar
months. This Second Amended and Restated Employment Agreement also made
Mr. Winston's salary subject to escalation annually in accordance with the
CPI. Mr. Winston's Second Amended and Restated Employment Agreement entitled
him to receive annual bonuses based on the same three criteria,
8
<PAGE>
and payable in accordance with the same provisions, described above with
respect to Mr. Bitetti's Second Amended and Restated Employment Agreement. Mr.
Winston also was entitled to the same fringe benefits as Mr. Bitetti.
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, Mr. Winston ceased to be an officer, employee and
director of the Company, but remains entitled to receive salary compensation
at the rate of $140,000 per annum, an automobile allowance at the rate of
$12,000 per annum and certain other benefits as provided in the agreement,
through September 15, 1998.
Pursuant to a prior employment agreement, the Company granted Mr. Winston
options to purchase 292,838 shares of Common Stock at an exercise price of
$0.06 per share, of which Mr. Winston exercised options to purchase 10,000
shares during fiscal 1997. Mr. Winston remains entitled to two demand
registration rights with respect to the Common Stock held by or issuable to
him pursuant to such options. The registration rights became effective upon
the termination of Mr. Winston's employment with the Company. Mr. Bitetti has
separately granted Mr. Winston a presently exercisable option to acquire
100,000 shares of Common Stock from him at a purchase price of $2.00 per
share.
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.
9
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Common Stock of the Company by (i) each person who is known to the
Company to own, of record or beneficially, more than five percent of the
Common Stock, (ii) each of the Company's, directors director nominees and
Named Executives and (iii) all directors and executive officers as a group.
Where the persons listed have the right to acquire additional shares of Common
Stock through the exercise of options or warrants within 60 days, such
additional shares are deemed to be outstanding for the purpose of computing
the percentage of outstanding shares owned by such persons, but are not deemed
to be outstanding for the purpose of computing the percentage ownership
interests of any other person. Unless otherwise indicated, each of the
stockholders shown in the table below has sole voting and investment power
with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT(1)
------------------------------------ --------- ----------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVES
Vincent J. Bitetti(1)................................. 1,284,634 22.6%
26115 Mureau Road, Suite B,
Calabasas, California 91302
Ulrich E. Gottschling(2).............................. 255,000 4.3
26115 Mureau Road, Suite B,
Calabasas, California 91302
Richard Azevedo....................................... 0 0
1104 Humbug Way
Auburn, California 95603
Mark A. James(3)...................................... 5,000 *
3404 Costa Verde Drive
Las Vegas, Nevada 89102
Steve Kleckner........................................ 0 0
29221 Heather Cliff
Unit 13
Malibu, California 90265
Samuel L. Poole....................................... 0 0
60 Sugarloaf Lane
Alamo, California 94507
Wayne M. Rogers....................................... 0 0
11828 Lagrange
Santa Monica, California 90025
John T. Wholihan...................................... 1,000 0
7300 West 88th Place
Los Angeles, California 90045
All directors, director nominees and executive
officers as a group (seven persons)(2)............... 1,495,634 25.1
OTHER BENEFICIAL OWNERS(4)
Louis A. Habash(5).................................... 1,140,000 20.2
5075 Spyglass Hill Drive
Las Vegas, Nevada 89122
Eric H. Winston(6).................................... 321,338 5.5
5567 Springhill Court
Westlake Village, California 91362
</TABLE>
- --------
* Less than 1%
10
<PAGE>
(1) Includes 50,000 shares of Common Stock issuable to Mr. Bitetti under
presently exercisable options. Also includes 100,000 shares of Common
Stock which Mr. Winston is entitled to acquire from Mr. Bitetti pursuant
to a presently exercisable option. Does not include up to 282,838 shares
that may be acquired by Mr. Winston from the Company pursuant to the
options described in (6) below, as to all of which Mr. Bitetti has a right
of first refusal. Excludes 1,140,000 shares of Common Stock held by ASSI,
Inc. as to which Mr. Bitetti has shared voting rights.
(2) Includes 250,000 shares of Common Stock issuable to Mr. Gottschling under
presently exercisable options.
(3) Includes 5,000 shares of Common Stock issuable to Mr. James upon exercise
of presently exercisable options.
(4) Information below is based on reports filed by the identified beneficial
owners with the Securities and Exchange Commission pursuant to Sections
13(d) and 13(g) of the Securities Exchange Act of 1934, as amended.
(5) All such Common Stock is owned of record by ASSI, Inc., of which Mr.
Habash is the sole beneficial owner. Excludes 1,284,634 shares of Common
Stock held by Vincent J. Bitetti as to which ASSI, Inc. has shared voting
rights.
(6) Includes 182,838 shares of Common Stock issuable under stock options
granted by the Company to Mr. Winston, which are presently exercisable.
Also includes 100,000 shares of Common Stock which Mr. Winston is entitled
to acquire from Mr. Bitetti pursuant to a presently exercisable option.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company conducted a private offering (the "Private Placement") during
September and October 1995, pursuant to which it sold 52.5 units (the "Units")
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 "Notes")
and warrants to purchase 100,000 shares of Common Stock (the "Private
Warrants"). ASSI, Inc. purchased a total of 11 Units pursuant to such Private
Placement, comprising $1,045,000 in principal amount of Notes and Private
Warrants to purchase 1,100,000 shares of Common Stock. Upon the closing date
of the Company's initial public offering on July 8, 1996, all of the Notes
were repaid in full. The Company paid ASSI, Inc. $1,122,588 in satisfaction of
the Notes held by it. In addition, the Private Warrants were converted to
redeemable warrants, as more fully described below.
Contemporaneously with the 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. ASSI,
Inc. purchased 40,000 of such shares for total cash consideration of $200,000.
The Company entered into a Consulting Agreement with ASSI, Inc. dated April
30, 1996. Pursuant to that agreement, ASSI, Inc. agreed to provide certain
consulting services to the Company, including advising the Company regarding
executive recruiting. In consideration of the services to be provided by ASSI,
Inc. pursuant to the Consulting Agreement, on April 30, 1996 the Company
issued to ASSI, Inc. warrants to purchase 2,000,000 shares of Common Stock at
an exercise price of $4.40 per share. 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.
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 was due in full on the earlier of September 1, 1996 or the
closing date of the Company's initial public offering, which occurred on July
8, 1996. Upon the closing of the Company's initial public offering, ASSI, Inc.
exercised its option to convert all of the ASSI Convertible Loan into warrants
to purchase Common Stock at a conversion price of $.25 per warrant. Warrants
to purchase a total of 2,016,657 shares of Common Stock were issued upon the
conversion of the ASSI Convertible Loan.
11
<PAGE>
Upon the closing of the Company's initial public offering on July 8, 1996,
the terms of all of the warrants held by ASSI, Inc. became substantially the
same as those of the redeemable warrants issued by the Company in the initial
public offering except that (i) they became exercisable October 1, 1996, (ii)
they were not mandatorily redeemable by the Company and (iii) they were
subject to separate registration rights, including one demand registration
right and unlimited piggy-back registration rights for as long as they were
held by ASSI, Inc. or one of its affiliates. Upon a transfer of the ASSI
warrants to any nonaffiliate of ASSI, Inc., the terms of such transferred ASSI
warrants were to become identical to those of the Company's redeemable
warrants. The demand registration rights were to expire on August 31, 2001.
Until and unless exercised, the holders of the ASSI warrants were to have no
voting, dividend or other rights as stockholders of the Company.
On April 27, 1998 the Company entered into a Settlement Agreement (the
"Settlement Agreement") dated as of April 24, 1998 with ASSI, Inc., NCD, Inc.,
The Boston Group, L.P., Vincent J. Bitetti, Ulrich E. Gottschling, Mark A.
James and Robert G. Kalik. Pursuant to the Settlement Agreement, the Company
settled with prejudice two legal proceedings which were pending against it,
its Chairman and Chief Executive Officer Vincent J. Bitetti, and its President
and Chief Operating Officer Ulrich E. Gottschling, in Los Angeles Superior
Court and which related to an attempted expansion of the Company's Board of
Directors and the election of four persons to fill the expansion seats. In
connection with the Settlement Agreement, the Company (a) exchanged 1,100,000
shares of its Common Stock for the 4,816,657 common stock purchase warrants
held by ASSI, Inc.; (b) amended its Bylaws to provide for a seven-member Board
of Directors and to permit resigning directors to vote on the appointment of
their successors, as described below under Proposal No. 3, Ratification of
Bylaw Amendments; (c) appointed Richard Azevedo, Samuel L. Poole, Wayne M.
Rogers and John T. Wholihan to fill vacancies on the Board of Directors; and
(d) entered into certain related agreements described below.
Pursuant to the Settlement Agreement, ASSI, Inc., NCD, Inc., Louis Habash
and the Company entered into a Lock-Up Agreement. Such agreement provides that
during the year ending May 30, 1999, ASSI, Inc., NCD, Inc. and Louis Habash
(who is the beneficial owner of all of the voting securities of ASSI, Inc. and
NCD, Inc.) may not sell shares of the Common Stock beneficially owned by them
in an aggregate amount in excess of an amount determined by a formula, which
equates to the product of approximately 94,620 shares times the number of full
months, commencing with the month of May 1998, elapsed since the settlement.
Pursuant to the Settlement Agreement, the Company entered into a Third
Amended and Restated Employment Agreement (the "Third Bitetti Employment
Agreement," as previously defined) with Vincent J. Bitetti. The Third Bitetti
Employment Agreement, which amends and restates Mr. Bitetti's prior employment
agreement, is described below under Proposal No. 4, Ratification of Third
Bitetti Employment Agreement. The Company also and entered into an Employment
Memorandum (the "Gottschling Employment Memorandum," as previously defined)
with Ulrich E. Gottschling. The Gottschling Memorandum, which amends
Mr. Gottschling's existing employment agreement, is described below under
Proposal No. 5, Ratification of Amendments to Gottschling Employment
Agreement.
VOTING AGREEMENTS
Pursuant to the Underwriting Agreement (the "Underwriting Agreement") dated
July 1, 1996 pertaining to the Company's initial public offering, the Company
granted the underwriters for such offering, The Boston Group, L.P. and Joseph
Stevens & Co., L.P., each 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. In addition, Vincent J. Bitetti and Eric H.
Winston agreed to vote all of their Common Stock in favor of the two director
nominees selected by the underwriters. The voting agreement with the
underwriters will terminate on July 8, 2001. Effective November 20, 1997,
Joseph Stevens & Co., L.P. assigned to The Boston Group, L.P. its director
nomination rights under the foregoing agreement.
Pursuant to a Stockholder Voting Agreement (the "Stockholder Voting
Agreement") dated as of April 30, 1996 among Vincent J. Bitetti, Eric H.
Winston and ASSI, Inc., Messrs. Bitetti and Winston agreed to vote all of
their Common Stock in favor of one director nominee selected by ASSI, Inc. and
in favor of an amendment to
12
<PAGE>
the Company's Bylaws providing that the number of directors would be five,
which provision could not be amended except with the consent of ASSI, Inc. In
addition, ASSI, Inc. agreed to vote all of its shares of Common Stock for two
directors nominated by Mr. Bitetti as long as he held at least 20 percent of
the outstanding Common Stock, and for one director nominated by Mr. Bitetti
for as long as he held at least ten percent but less than 20 percent of the
outstanding Common Stock. The Stockholder Voting Agreement will terminate on
the earlier of July 1, 2001 or the date when Messrs. Bitetti and Winston
together cease to own at least ten percent of the outstanding Common Stock.
Pursuant to the Settlement Agreement, the Company received the consent (the
"Consent") of ASSI, Inc. to certain matters relating to the Stockholder Voting
Agreement. Among other things, the Consent provides that as between the
Company, ASSI, Inc., The Boston Group, L.P. and Vincent J. Bitetti, the
nominees for the seven-person Board of Directors will be determined as
follows: two persons may be nominated by Bitetti as long as he holds 750,000
or more shares of the Common Stock (but only one person, if Bitetti holds more
than 500,000 and less than 750,000 shares, and no person if Bitetti holds
500,000 or fewer shares); one person may be nominated by ASSI, Inc. as long as
it holds 500,000 or more shares of the Common Stock (but no person if ASSI,
Inc. holds fewer than 500,000 shares); up to two persons may be nominated by
The Boston Group, L.P. (including as assignee of the rights of Joseph Stevens
& Co., L.P.) pursuant to the Underwriting Agreement so long as it may be in
effect in pertinent part; one person (an "Expansion Member") may be nominated
by Mr. Bitetti (subject to approval of such person by ASSI, Inc. (unless a
renomination of a presently serving nominee)); and one person (another
"Expansion Member") may be nominated by ASSI, Inc. (subject to approval of
such person by Mr. Bitetti (unless a renomination of a presently serving
nominee)). Each Expansion Member must be independent of the Company and the
person nominating such Expansion Member, and must meet certain other
requirements set forth in the Consent.
The Consent is terminable at the option of ASSI, Inc. in the event of a
breach of the Stockholder Voting Agreement, the Settlement Agreement or the
Consent by the Company, Vincent J. Bitetti or Ulrich E. Gottschling prior to
the termination of the Stockholder Voting Agreement. In the event of such
termination, the authorized number of directors will be automatically reduced
from seven to five at the next annual meeting of stockholders, and nominations
and elections for the resulting five-member Board will be governed by the
Stockholder Voting Agreement and the Underwriting Agreement, without regard to
the Consent.
Pursuant to the Settlement Agreement, the parties further agreed that the
director nominees for the forthcoming Annual Meeting would be the nominees
identified in this Proxy Statement, determined as follows:
<TABLE>
<C> <S>
Vincent J. Bitetti...... as a nominee of Vincent J. Bitetti to the extent
permitted by the Stockholder Voting Agreement and
Consent
Ulrich E. Gottschling... as a second nominee of Vincent J. Bitetti to the
extent permitted by the Stockholder Voting
Agreement and the Consent
Richard Azevedo......... as a nominee of The Boston Group, L.P. under the
Underwriting Agreement
Samuel L. Poole......... as a second nominee of The Boston Group, L.P. under
the Underwriting Agreement
Mark A. James........... as a nominee of ASSI, Inc. to the extent permitted
by the Stockholder Voting Agreement and the
Consent
Wayne M. Rogers......... as the Expansion Member nominee of Vincent J.
Bitetti as provided in the Consent
John T. Wholihan........ as the Expansion Member nominee of ASSI, Inc. as
provided in the Consent
</TABLE>
13
<PAGE>
The Stockholder Voting Agreement further provides that the director nominees
for the next annual meeting of stockholders, expected to be held in November
1998, will be as follows:
<TABLE>
<C> <S>
Vincent J. Bitetti...... as a nominee of Vincent J. Bitetti to the extent
permitted by the Stockholder Voting Agreement and
the Consent
a person nominated by
Vincent J. Bitetti..... as a second nominee of Vincent J. Bitetti to the
extent permitted by the Stockholder Voting
Agreement and the Consent
Richard Azevedo......... as a nominee of The Boston Group, L.P. under the
Underwriting Agreement
Samuel L. Poole......... as a second nominee of The Boston Group, L.P. under
the Underwriting Agreement
a person nominated by
ASSI, Inc.............. as a nominee of ASSI, Inc. to the extent permitted
by the Stockholder Voting Agreement and the
Consent
Wayne M. Rogers......... as the Expansion Member nominated by Vincent J.
Bitetti as provided in the Consent
John T. Wholihan........ as the Expansion Member nominated by ASSI, Inc. as
provided in the Consent
</TABLE>
AMENDMENT TO THE 1995 AMENDED AND RESTATED STOCK OPTION PLAN
(PROPOSAL NO. 2)
GENERAL
On October 9, 1995, the Board of Directors of the Company adopted the
Company's 1995 Stock Option Plan. The Board of Directors adopted the Company's
Amended and Restated 1995 Stock Option Plan (the "Plan," as previously
defined) on May 15, 1996. The Plan was approved by the stockholders at the
Company's 1996 Annual Meeting of Stockholders held on December 8, 1996. The
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 Plan and
the stockholders of the Company in its long term growth, profitability and
financial success by offering stock options. The Plan empowers the Company to
award or grant from time to time until September 30, 2005 to eligible
participants incentive and nonqualified stock options ("Options") authorized
by the Compensation Committee, which administers the Plan.
A copy of the Plan as proposed to be amended, is attached hereto as exhibit
A. The following summary of the material provisions of the Plan is qualified
in its entirety by the terms of the Plan.
PROPOSED AMENDMENT
On April 24, 1998, the Board of Directors adopted, subject to stockholder
approval, an amendment to the Plan increasing the number of shares of Common
Stock reserved for issuance under the Plan from 500,000 to 1,000,000. The
Board of Directors believes that approval of the amendment to increase the
aggregate number of shares which may be granted under the Plan will serve the
best interests of the Company and its stockholders by permitting the Company
to utilize stock options as a means to attract and retain key employees,
directors and consultants who are in a position to contribute materially to
the successful conduct of the business and affairs of the Company and, in
addition, to stimulate in such individuals an increased desire to render
greater service to the Company. The Board believes that it requires additional
shares for future grants under the Plan to meet the Company's needs,
particularly in light of the Company's current efforts to recruit additional
personnel. Through
14
<PAGE>
May 18, 1998, options to purchase an aggregate of 571,594 shares have been
granted under the Plan. The closing price for a share of Common Stock on the
NASDAQ SmallCap Market on May 20, 1998 was $1.50.
ADMINISTRATION
The Plan is administered by the Compensation Committee. The Plan provides
that the Compensation Committee must consist of at least two directors of the
Company who are "Non-Employee Directors" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Compensation Committee has the sole authority to construe and interpret
the Plan, to make rules and procedures relating to the implementation of the
Plan, to select participants, to establish the terms and conditions of Options
and to grant Options. The Compensation Committee has 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 Compensation
Committee are not eligible to receive discretionary Options under the Plan.
SHARES SUBJECT TO THE PLAN
The maximum number of shares of Common Stock in respect of which Options may
be granted under the Plan (the "Plan Maximum") is currently 500,000. If the
proposed amendment to the Plan is adopted, the Plan Maximum will be increased
by 500,000 shares to a total of 1,000,000 shares of Common Stock. For purposes
of computing the total number of shares of Common Stock available for Options
under the 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 Plan. The shares of Common Stock which may be issued
to participants in the 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 Plan.
The maximum number of shares of Common Stock issuable upon exercise of
Options granted under the 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 antidilution
protection.
TRANSFERABILITY
No Option granted under the Plan, and no right or interest therein, shall be
assignable or transferable by a participant except by will or the laws of
descent and distribution.
TERM, AMENDMENT AND TERMINATION
The Plan will terminate on September 30, 2005 except with respect to Options
then outstanding. The Board of Directors may suspend, terminate, modify or
amend the Plan at any time without stockholder approval, except to the extent
such approval is necessary or appropriate under applicable laws or
regulations.
INCENTIVE STOCK OPTIONS
Under the 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"), 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 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
15
<PAGE>
as Incentive Stock Options that are first exercisable by any optionee during
any calendar year exceed $100,000, the excess amount shall be treated as
Nonqualified 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 Compensation Committee.
NONQUALIFIED STOCK OPTIONS
Nonqualified stock options ("Nonqualified 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 for such period or periods of exercisability, as
the Compensation Committee shall determine.
OPTIONS TO NONEMPLOYEE DIRECTORS
The Plan also provides for the grant of Nonqualified Stock Options to
nonemployee directors of the Company without any action on the part of the
Board or the Compensation Committee, only upon the terms and conditions set
forth in the Plan. Each nonemployee director shall automatically receive
Nonqualified Stock Options to acquire 10,000 shares of Common Stock upon
appointment, and shall receive Nonqualified 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 such
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 as to the
remaining 50 percent on the second anniversary date of the grant, and will
expire on the earlier of ten years from the date the Option was granted, upon
expiration of the 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 such option shall be
subject to the other provisions of the 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. Nonqualified Stock
Options may be granted to any person. Nonemployee directors are only eligible
to receive Nonqualified Stock Options under the Plan. Except for Nonqualified
Stock Options granted to nonemployee directors, to whom Option grants are
automatic the selection of recipients of, and the nature and size of, Options
granted under the Plan will be wholly within the discretion of the
Compensation 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 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.
OPTION EXERCISE PRICES
The exercise price of any Option granted under the 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
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 shall be as
quoted by the Nasdaq SmallCap Market, or as determined in good faith by the
Compensation 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 Compensation Committee, by
instruction to a broker directing the
16
<PAGE>
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 Common Stock then owned by the
optionee (at the fair market value thereof at exercise date).
PLAN BENEFITS
It is impossible to determine the future awards that will be made under the
Plan to persons other than nonemployee directors. Each nonemployee director
will automatically be granted 10,000 Nonqualified Stock Options for each year
of service as a director.
During the fiscal year ended June 30, 1997, the Company granted Incentive
Stock Options to purchase 365,857 shares of Common Stock at an average
exercise price of $4.00 per share to 15 of its nonofficer employees (of which
154,258 have expired unexercised), and granted Nonqualified Stock Options to
purchase 40,000 shares of Common Stock at an average exercise price of $4.42
per share to four nonemployees directors (of which 30,000 have expired
unexercised). No Options were granted to officers during fiscal 1997.
During its current fiscal year, the Company thusfar has granted Incentive
Stock Options to purchase 200,000 shares of Common Stock at an average
exercise price of $2.04 per share to eight of its nonofficer employees (of
which none have expired unexercised), and has granted Nonqualified Stock
Options to purchase 70,000 shares of Common Stock at an average exercise price
of $1.62 per share to seven nonemployee directors (of which 20,000 have
expired unexercised). In addition, pursuant to the Settlement Agreement, on
April 27, 1998 the Company granted Nonqualified Stock Options to purchase
25,000 shares of Common Stock to each of Vincent J. Bitetti and Ulrich E.
Gottschling at an exercise price of $2.50 per share, and granted Nonqualified
Stock Options to purchase an additional 25,000 shares of Common Stock to each
of Vincent J. Bitetti and Ulrich E. Gottschling at an exercise price of $5.00
per share.
On December 27, 1997 the Company repriced all then outstanding Options
(other than Options held by nonemployee directors) theretofore granted under
the Plan to have an exercise price of $1.11 per share. Thus, all Options
granted pursuant to the Plan now have an exercise price of $1.19 per share,
except for the 100,000 Options granted to Messrs. Bitetti and Gottschling on
April 27, 1998 and the options held by the nonemployee directors.
The table below sets forth information as to Options outstanding under the
Plan as of May 18, 1998.
<TABLE>
<CAPTION>
NUMBER OPTION AGGREGATE
OF EXERCISE DOLLAR
NAME SHARES PRICE RANGE BENEFIT(1)
---- ------- ----------- ----------
<S> <C> <C> <C>
Vincent J. Bitetti........................... 50,000 $2.50-$5.00 $ 0.00
Ulrich E. Gottschling........................ 50,000 $2.50-$5.00 $ 0.00
Richard Azevedo.............................. 10,000 $2.09 $ 0.00
Mark A. James................................ 20,000 $1.00-$4.56 $ 0.00
Samuel L. Poole.............................. 10,000 $2.09 $ 0.00
Wayne M. Rogers.............................. 10,000 $2.09 $ 0.00
John T. Wholihan............................. 10,000 $10,000 $ 0.00
All executive officers....................... 100,000 $2.50-$5.00 $ 0.00
All nonemployee directors.................... 60,000 $1.00-$2.09 $ 5,000.00
All employees................................ 511,594 $1.19-$5.00 $77,795.00
</TABLE>
- --------
(1) Based on the difference between the fair market value of the Common Stock
on May 20, 1998 and the exercise price of all vested and unvested Options.
17
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The grant of an Incentive Stock Option or a Nonqualified Stock Option will
not result in income for the grantee or in a deduction for the Company.
The exercise of a Nonqualified Stock Option will result in ordinary income
for the grantee and a deduction for the Company measured by the difference
between the option price and the fair market value of the shares received at
the time of exercise. Income tax withholding will be required.
The exercise of an Incentive Stock Option will not result in income for the
grantee. If the grantee (i) does not dispose of the shares within two years
after the date of grant or one year after the transfer of shares upon exercise
and (ii) is an employee of the Company or a subsidiary of the Company from the
date of grant until three months before the exercise date, then (a) the basis
of the shares upon later disposition will be the option price, (b) any gain
will be taxed to the employee as long-term capital gain and (c) the Company
will not be entitled to a deduction. The excess of the market value on the
exercise date over the option price is an item of tax preference, potentially
subject to the alternative minimum tax.
If the grantee disposes of the shares prior to the expiration of either of
the holding periods, the grantee will recognize ordinary income and the
Company would be entitled to a deduction equal to the lesser of the fair
market value of the shares on the exercise date minus the option price or the
amount realized on disposition minus the option price. Any gain in excess of
the ordinary income portion would be taxable as long-term or short-term
capital gain.
VOTE REQUIRED
The affirmative vote of holders of a majority of the Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting, a quorum
being present, is required to approve Proposal No. 2. Broker nonvotes with
respect to this matter will be treated as neither a vote "for" nor a vote
"against" the matter, although they will be counted in determining if a quorum
is present. However, abstentions will be considered in determining the number
of votes required to attain a majority of the shares present or represented at
the Annual Meeting and entitled to vote. Accordingly, an abstention from
voting by a stockholder present in person or by proxy at the Annual Meeting
has the same legal effect as a vote "against" the matter because it represents
a share present or represented at the Annual Meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
ASSI, Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of
Common Stock (representing 42.0 percent of the issued and outstanding Common
Stock), have both advised the Company that they intend to vote all of their
Common Stock in favor of Proposal No. 2.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO THE SOUND
SOURCE INTERACTIVE, INC. AMENDED AND RESTATED 1995 STOCK OPTION PLAN DESCRIBED
IN THIS PROPOSAL NO. 2.
PROPOSALS RELATING TO THE SETTLEMENT AGREEMENT
On April 27, 1998, the Company entered into a Settlement Agreement (the
"Settlement Agreement," as previously defined) dated as of April 24, 1998 with
ASSI, Inc., NCD, Inc., The Boston Group, L.P., Vincent J. Bitetti, Ulrich E.
Gottschling, Mark A. James and Robert G. Kalik. Pursuant to the Settlement
Agreement, the Company settled with prejudice two legal proceedings which were
pending against it, its Chairman and Chief Executive Officer Vincent J.
Bitetti, and its President and Chief Operating Officer Ulrich E. Gottschling,
in Los Angeles Superior Court and which related to an attempted expansion of
the Company's Board of Directors and the election of four persons to fill the
expansion seats. Pursuant to the Settlement Agreement, the Company effectuated
a number of transactions, and agreed to seek stockholder approval of the
following three such
18
<PAGE>
transactions: (a) certain amendments to the Company's Bylaws (Proposal No. 3);
(b) the adoption of the Third Bitetti Employment Agreement, which amends and
restates the previously existing employment agreement of Vincent J. Bitetti
(Proposal No. 4); and (c) the adoption of the Gottschling Employment
Agreement, which amends the previously existing employment agreement of Ulrich
E. Gottschling (Proposal No. 5). Each of these three proposals is described in
detail below. For additional information concerning the Settlement Agreement
and related transactions, see "ELECTION OF DIRECTORS--Certain Relationships
and Transactions" and "--Voting Agreements."
RATIFICATION OF BYLAW AMENDMENTS
(PROPOSAL NO. 3)
GENERAL
Pursuant to the Settlement Agreement, the Board of Directors have amended
the Company's Bylaws in two respects. The first amendment was to Article III,
Section 2 of the Bylaws. Previously, this Section provided as follows:
SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be five.
Article III, Section 2 of the Bylaws has been amended to provide as follows:
SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be seven subject to automatic reduction to five pursuant
to the provisions of that certain Stockholder Voting Agreement dated as of
April 30, 1996 (and the Consent dated April 24, 1998 executed in connection
therewith) to which the corporation is a party.
The Consent is terminable at the option of ASSI, Inc. in the event of an
uncured breach of the Stockholder Voting Agreement, the Settlement Agreement
or the Consent by the Company, Vincent J. Bitetti or Ulrich E. Gottschling
prior to the termination of the Stockholder Voting Agreement. In the event of
such termination, pursuant to the foregoing Bylaw provision and the Consent
the authorized number of directors will be automatically reduced from seven to
five at the next annual meeting of stockholders, and nominations and elections
for the resulting five-member Board will be governed by the Stockholder Voting
Agreement and the Underwriting Agreement, without regard to the Consent.
The primary effects of this Bylaw amendment, and the related voting
arrangements agreed to in connection with the Settlement Agreement as
described above under "ELECTION OF DIRECTORS--Voting Agreements," have been to
expand the size of the Board from five to seven directors, and to fill the two
additional Board positions with persons jointly acceptable to the Company's
two principal stockholders, Vincent J. Bitetti and ASSI., Inc., and in the
event of uncured breaches of the governing agreements as described above, to
provide for a reversion to the five-member Board elected in the manner that
applied prior to the Settlement Agreement.
The second Bylaw amendment adopted by the Board of Directors was to add the
following provision to Article III, Section 4 of the Bylaws:
When one or more directors shall resign from the board, effective at a
future date, a majority of the directors then in office, including those
who have resigned, shall have the power to fill such vacancy or vacancies,
the vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office as provided
under these bylaws.
The foregoing amendment enables directors who resign as of a future date to
vote upon the selection of the persons to be appointed to fill the vacancies
resulting from their resignations, as permitted by Delaware law. The purpose
of this amendment is to provide a more orderly directorship succession in the
event of future
19
<PAGE>
resignations, and further to ensure that the composition of the Board will
remain as specified in the Settlement Agreement and in the related agreements
as described above.
VOTE REQUIRED
The Board is submitting the Bylaw amendments to the stockholders for
ratification because the Company is required to do so pursuant to the
Settlement Agreement. Stockholder ratification of the Bylaw amendments,
however, is not required by the Settlement Agreement, the Bylaws themselves or
otherwise. Therefore, there will be presented at the Annual Meeting a proposal
for the ratification of the Bylaw amendments. If the Bylaw amendments are not
ratified, the matter of such amendments will be considered by the Board of
Directors.
The affirmative vote of holders of a majority of the Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting, a quorum
being present, is required to approve Proposal No. 3. Broker nonvotes with
respect to this matter will be treated as neither a vote "for" nor a vote
"against" the matter, although they will be counted in determining if a quorum
is present. However, abstentions will be considered in determining the number
of votes required to attain a majority of the shares present or represented at
the Annual Meeting and entitled to vote. Accordingly, an abstention from
voting by a stockholder present in person or by proxy at the Annual Meeting
has the same legal effect as a vote "against" the matter because it represents
a share present or represented at the Annual Meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
The Board of Directors believes that the increase in the size of the Board,
and the addition of two neutral directors, will lead to a more balanced and
effective Board and reduce the likelihood of deadlocks in the future. ASSI,
Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of Common Stock
(representing 42.0 percent of the issued and outstanding Common Stock), have
both advised the Company that they intend to vote all of their Common Stock in
favor of Proposal No. 3. The Board also believes that permitting resigning
directors to vote upon the selection of their successors will provide for a
more orderly directorship succession. The Board therefore believes that the
proposed amendments to the Bylaws are advisable and in the best interests of
the stockholders.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENTS TO THE
COMPANY'S BYLAWS DESCRIBED IN THIS PROPOSAL NO. 3.
RATIFICATION OF THIRD BITETTI EMPLOYMENT AGREEMENT
(PROPOSAL NO. 4)
GENERAL
Pursuant to the Settlement Agreement, the Company has entered into a Third
Amended and Restated Employment Agreement (the "Third Bitetti Employment
Agreement," as previously defined) with Vincent J. Bitetti, Chairman of the
Board and Chief Executive Officer, dated as of April 24, 1998. The Third
Bitetti Employment Agreement amends and restates in its entirety the Second
Amended and Restated Employment Agreement between the Company and Vincent J.
Bitetti, dated as of April 30, 1996 (the "Second Bitetti Employment
Agreement," as previously defined).
The Third Bitetti Employment Agreement is based upon the Second Bitetti
Employment Agreement and restates a number of its provisions. The following
paragraphs describe the principal changes to the Second Bitetti Employment
Agreement made by the Third Bitetti Employment Agreement. The other provisions
of the Second Bitetti Employment remain substantially unchanged. Additional
information concerning the Second Bitetti Employment Agreement is set forth
above under "ELECTION OF DIRECTORS--Employment Agreements."
The Third Bitetti Employment Agreement extends the term of the Second
Bitetti Employment Agreement from September 15, 1998 to December 31, 2000.
Certain provisions of the Second Bitetti Employment
20
<PAGE>
Agreement whereby Mr. Bitetti acknowledged that the Company was searching for
a new Chief Executive Officer and agreed to resign as such (but not as
Chairman of the Board or as a Company employee) upon the hiring of a new Chief
Executive Officer have been deleted from the Third Bitetti Employment
Agreement.
The Third Bitetti Employment Agreement modifies a number of the provisions
of the Second Bitetti Employment Agreement governing Mr. Bitetti's
compensation. First, pursuant to the Third Bitetti Employment Agreement Mr.
Bitetti has been granted options to purchase 25,000 shares of Common Stock at
$2.50 per share, and options to purchase 25,000 shares at $5.00 per share. All
such options were vested and exercisable on their date of grant, which was
April 27, 1998.
Pursuant to the Third Bitetti Employment Agreement Mr. Bitetti's base salary
has been increased to $240,000 effective April 27, 1998. The base salary will
remain subject to annual increases in accordance with the CPI in the same
manner as under the Second Bitetti Employment Agreement, commencing on April
27, 1999. The Third Bitetti Employment Agreement also modifies the bonus
structure applicable under the Second Bitetti Employment Agreement.
The Second Bitetti Employment Agreement would have entitled Mr. Bitetti to
receive a bonus in the following amounts if the following gross revenues had
been attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
CUMULATIVE
GROSS REVENUES CASH BONUS
-------------- ----------
<S> <C>
$19,200,000................................................... $ 25,000
25,600,000................................................... 75,000
38,400,000................................................... 125,000
</TABLE>
Pursuant to the Third Bitetti Employment Agreement, Mr. Bitetti will be
entitled to receive a bonus in the following amounts if the following gross
revenues are attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
CUMULATIVE
GROSS REVENUES CASH BONUS
-------------- ----------
<S> <C>
$ 7,500,000................................................... $ 25,000
10,000,000................................................... 75,000
15,000,000................................................... 125,000
</TABLE>
The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year will be increased by 60 percent annually, in the
same manner as under the Second Bitetti Employment Agreement.
The Second Bitetti Employment Agreement would have entitled 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) had been
attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
CUMULATIVE
GROSS PROFITS CASH BONUS
------------- ----------
<S> <C>
$5,120,000.................................................... $ 50,000
5,760,000.................................................... 75,000
6,400,000.................................................... 100,000
</TABLE>
21
<PAGE>
Pursuant to the Third Bitetti Employment Agreement, Mr. Bitetti will be
entitled to receive a bonus in the following amounts if the following gross
profits are attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
CUMULATIVE
GROSS PROFITS CASH BONUS
------------- ----------
<S> <C>
$2,000,000.................................................... $ 50,000
2,250,000.................................................... 75,000
2,500,000.................................................... 100,000
</TABLE>
The gross profit attainment levels required to receive each bonus level for
each subsequent fiscal year will be increased by 60 percent annually, in the
same manner as under the Second Bitetti Employment Agreement.
The Second Bitetti Employment Agreement entitled Mr. Bitetti to receive a
bonus if specified levels of pre-tax profitability were attained for any
fiscal year during the term of Mr. Bitetti's employment agreement. These
levels have remained unchanged pursuant to the Third Bitetti Employment
Agreement.
VOTE REQUIRED
The Board is submitting the Third Bitetti Employment Agreement to the
stockholders for ratification because the Company is required to do so
pursuant to the Settlement Agreement. Stockholder ratification of the Third
Bitetti Employment Agreement, however, is not required by the Settlement
Agreement or otherwise. Therefore, there will be presented at the Annual
Meeting a proposal for the ratification of the Third Bitetti Employment
Agreement. If the Third Bitetti Employment Agreement is not ratified, the
matter of such amendment will be considered by the Board of Directors.
The affirmative vote of holders of a majority of the Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting, a quorum
being present, is required to approve Proposal No. 4. Broker nonvotes with
respect to this matter will be treated as neither a vote "for" nor a vote
"against" the matter, although they will be counted in determining if a quorum
is present. However, abstentions will be considered in determining the number
of votes required to attain a majority of the shares present or represented at
the Annual Meeting and entitled to vote. Accordingly, an abstention from
voting by a stockholder present in person or by proxy at the Annual Meeting
has the same legal effect as a vote "against" the matter because it represents
a share present or represented at the Annual Meeting and entitled to vote,
thereby increasing the number of affirmative votes required to approve this
proposal.
The Board believes that the lack of a long-term employment contract with
Vincent J. Bitetti, the Company's founder, Chairman of the Board and Chief
Executive Officer, has for some time posed a significant risk to the Company.
The Board therefore believes that the Third Bitetti Employment Agreement is
advisable and in the best interests of the stockholders.
ASSI, Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of
Common Stock (representing 42.0 percent of the issued and outstanding Common
Stock), have both advised the Company that they intend to vote all of their
Common Stock in favor of Proposal No. 4.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE THIRD BITETTI
AGREEMENT DESCRIBED IN THIS PROPOSAL NO. 4.
22
<PAGE>
RATIFICATION OF AMENDMENTS TO GOTTSCHLING EMPLOYMENT AGREEMENT
(PROPOSAL NO. 5)
GENERAL
Pursuant to the Settlement Agreement, the Company has entered into an
Employment Memorandum (the "Gottschling Memorandum," as previously defined)
with Ulrich E. Gottschling, President, Chief Operating Officer, Chief
Financial Officer, Secretary and Treasurer, dated as of April 24, 1998. The
Gottschling Memorandum amends the Amended and Restated Employment Agreement
(the "Gottschling Agreement," as previously defined) between the Company and
Ulrich E. Gottschling.
The following paragraphs describe the principal changes to the Gottschling
Agreement made by the Gottschling Memorandum. Additional information
concerning the Gottschling Agreement and the Gottschling Memorandum is set
forth above under "ELECTION OF DIRECTORS--Employment Agreements."
The Gottschling Memorandum extends the term of the Gottschling Agreement
from January 31, 1999 until January 31, 2000.
The Gottschling Memorandum modifies a number of the provisions of the
Gottschling Agreement governing Mr. Gottschling's compensation. First,
pursuant to the Gottschling Memorandum Mr. Gottschling has been granted
options to purchase 25,000 shares of Common Stock at $2.50 per share, and
options to purchase 25,000 shares at $5.00 per share. All such options were
vested and exercisable on their date of grant, which was April 27, 1998.
Second, pursuant to the Gottschling Memorandum, Mr. Gottschling's base salary
will be increased to $180,000 effective January 1, 1999. The base salary will
remain subject to annual increases in accordance with the CPI in the same
manner as under the Gottschling Agreement. Previously, Mr. Gottschling was
entitled to receive bonuses based on the same three criteria as Mr. Bitetti's
Second Bitetti Employment Agreement, except that Mr. Gottschling's bonus
amounts were at 80 percent of those of Mr. Bitetti. Pursuant to the
Gottschling Memorandum, Mr. Gottschling is now entitled to receive bonuses
based on the same three criteria as Mr. Bitetti's Third Bitetti Employment
Agreement, again at 80 percent of the bonuses payable to Mr. Bitetti.
VOTE REQUIRED
The Board is submitting the amendment to the Gottschling Agreement to the
stockholders for ratification because the Company is required to do so
pursuant to the Settlement Agreement. Stockholder ratification of the
amendment to the Gottschling Employment Agreement, however, is not required by
the Settlement Agreement or otherwise. Therefore, there will be presented at
the Annual Meeting a proposal for the ratification of the amendment to the
Gottschling Agreement. If the amendment to the Gottschling Agreement is not
ratified, the matter of such amendment will be considered by the Board of
Directors.
The affirmative vote of holders of a majority of the Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting, a quorum
being present, is required to approve Proposal No. 5. Broker nonvotes with
respect to this matter will be treated as neither a vote "for" nor a vote
"against" the matter, although they will be counted in determining if a quorum
is present. However, abstentions will be considered in determining the number
of votes required to attain a majority of the shares present or represented at
the Annual Meeting and entitled to vote. Accordingly, an abstention from
voting by a stockholder present in person or by proxy at the meeting has the
same legal effect as a vote "against" the matter because it represents a share
present or represented at the Annual Meeting and entitled to vote, thereby
increasing the number of affirmative votes required to approve this proposal.
ASSI, Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of
Common Stock (representing 42.0 percent of the issued and outstanding Common
Stock), have both advised the Company that they intend to vote all of their
Common Stock in favor of Proposal No. 5.
23
<PAGE>
The Board of Directors believes that the Gottschling Employment Memorandum
is advisable and in the best interests of the stockholders.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO THE
GOTTSCHLING EMPLOYMENT AGREEMENT DESCRIBED IN THIS PROPOSAL 5.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS FOR FISCAL 1998
(PROPOSAL NO. 6)
The Board of Directors, upon recommendation of its Audit Committee, composed
of independent members of the Board, has appointed Deloitte & Touche LLP as
independent auditors of the Company with respect to its operations for fiscal
1998, and has further directed that management submit such appointment for
ratification by the holders of the Common Stock. In taking this action, the
members of the Board and the Audit Committee considered carefully Deloitte &
Touche LLP's reputation in providing accounting services to other companies in
the software industry, its independence with respect to the services to be
performed, its general reputation for adherence to professional auditing
standards and the performance of Deloitte & Touche LLP during the audit of the
Company's consolidated financial statements for fiscal 1997. Representatives
of the firm will be present at the Annual Meeting to make a statement if they
desire to do so and to answer appropriate questions that may be asked by
stockholders.
On August 27, 1997, management of the Company, as directed by the Board of
Directors, engaged the accounting firm of Deloitte & Touche LLP as its
independent auditors and dismissed the firm of Corbin & Wertz, which was the
Company's independent auditors. The decision to change independent auditors
was recommended by the Company's Audit Committee and approved by the Company's
Board of Directors. In connection with the audits for the two fiscal years
ended June 30, 1996 and 1995, respectively, and the subsequent period through
the date of their dismissal, there were no disagreements between the Company
and Corbin & Wertz on any matters of accounting principles, financial
statement disclosure, auditing scope or procedure or any reportable events.
Corbin & Wertz's report on the Company's financial statements for fiscal year
1996 contained no adverse opinion or disclaimer of opinion. Corbin & Wertz's
report on the Company's financial statements for fiscal year 1995 contained an
uncertainty paragraph regarding the Company's ability to continue as a going
concern.
VOTE REQUIRED
Stockholder ratification of the selection of Deloitte & Touche LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. The Board, however, is submitting the selection of Deloitte &
Touche LLP to the stockholders for ratification as a matter of good corporate
practice. Therefore, there will be presented at the Annual Meeting a proposal
for the ratification of this appointment, which the Board of Directors
believes is advisable and in the best interests of the stockholders. If the
appointment of Deloitte & Touche LLP is not ratified, the matter of the
appointment of independent public accountants will be considered by the Board
of Directors.
The affirmative vote of holders of a majority of the Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting, a quorum
being present, is required to approve Proposal No. 6. Broker nonvotes with
respect to this matter will be treated as neither a vote "for" nor a vote
"against" the matter, although they will be counted in determining if a quorum
is present. However, abstentions will be considered in determining the number
of votes required to attain a majority of the shares present or represented at
the Annual Meeting and entitled to vote. Accordingly, an abstention from
voting by a stockholder present in person or by proxy at the meeting has the
same legal effect as a vote "against" the matter because it represents a share
present or represented at the Annual Meeting and entitled to vote, thereby
increasing the number of affirmative votes required to approve this proposal.
24
<PAGE>
ASSI, Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of
Common Stock (representing 42.0 percent of the issued and outstanding Common
Stock), have both advised the Company that they intend to vote all of their
Common Stock in favor of Proposal No. 6.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF
DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR FISCAL 1998 AS
DESCRIBED IN THIS PROPOSAL NO. 6.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR 1998
The rules of the Securities and Exchange Commission permit stockholders of
the Company, after notice to the Company, to present proposals for stockholder
action in the Company's proxy statement where such proposals are consistent
with applicable law, pertain to matters appropriate for stockholder action and
are not properly omitted by Company action in accordance with the proxy rules
published by the Securities and Exchange Commission. The Company's 1998 annual
meeting of stockholders is expected to be held on or about November 19, 1998,
and proxy materials in connection with that meeting are expected to be mailed
on or about October 20, 1998. Stockholder proposals prepared in accordance
with the proxy rules must be received by the Company on or before September 1,
1998.
FILINGS UNDER SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons holding ten percent or more of a registered class of the
Company's equity securities, to file reports regarding their ownership and
regarding their acquisitions and dispositions of the Company's equity
securities with the Securities and Exchange Commission. Officers, directors
and greater than ten-percent beneficial owners are required by applicable
regulations to furnish the Company with copies of any Section 16(a) forms they
file.
Based solely upon a review of the copies of the forms furnished to the
Company and written representations of the Company's directors and executive
officers, the Company believes that all filing requirements applicable to its
officers, directors and ten-percent beneficial owners were complied with
during fiscal 1997.
OTHER MATTERS
The Board of Directors of the Company does not intend to present any
business at the Annual Meeting other than the matters specifically set forth
in this Proxy Statement and knows of no other business to come before the
Annual Meeting. However, on all matters properly brought before the Annual
Meeting by the Board or by others, the persons named as proxies in the
accompanying proxy will vote in accordance with their best judgment.
It is important that your shares are represented and voted at the Annual
Meeting, whether or not you plan to attend. Accordingly, we respectfully
request that you sign, date and mail your Proxy in the enclosed envelope as
promptly as possible.
BY ORDER OF THE BOARD OF DIRECTORS
Ulrich E. Gottschling
President, Chief Operating Officer
Chief Financial Officer,
Secretary and Treasurer
25
<PAGE>
Sound Source Interactive, Inc.
26115 Mureau Road, Suite B
Calabasas, California 91302
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Vincent J. Bitetti and Ulrich E. Gottschling,
and each of them with full power of substitution, as his or her Proxies to
represent and vote, as designated below, all of the shares of the Common Stock
of Sound Source Interactive, Inc., registered in the name of the undersigned on
May __, 1998, with the powers the undersigned would posses if personally present
at the 1998 Annual Meeting of Stockholders to be held at the Company's offices
at 26115 Mureau Road, Suite B, Calabasas, California at 10:00 a.m. on June __,
1998, and at any adjournment thereof, hereby revoking any proxy or proxies
previously given.
<TABLE>
<S> <C> <C>
1. ELECTION OF DIRECTORS:
FOR all nominees listed below [_] WITHHOLD AUTHORITY [_]
(except as marked to the contrary below) to vote for all nominees listed below
</TABLE>
(To withhold authority to vote for any individual nominee strike a line through
--------
the nominee's name below)
Vincent J. Bitetti Ulrich E. Gottschling Wayne M. Rogers
Mark A. James John T. Wholihan Richard Azevedo
Samuel L. Poole
2. Proposal to amend the Amended and Restated 1995 Stock Option Plan.
[_] For [_] Against [_] Abstain
3. Proposal to ratify Bylaw Amendments.
[_] For [_] Against [_] Abstain
4. Proposal to ratify Bitetti Employment Agreement Amendments.
[_] For [_] Against [_] Abstain
5. Proposal to ratify Gottschling Employment Agreement Amendments.
[_] For [_] Against [_] Abstain
6. Proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for fiscal 1998.
[_] For [_] Against [_] Abstain
Discretionary authority is hereby granted with respect to such other
matters as may properly come before the Annual Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS GIVEN, THE PROXY WILL BE VOTED "FOR" ALL NOMINEES FOR DIRECTOR, "FOR"
PROPOSAL #2, #3, #4, #5 AND #6 AND IN THE PROXY'S DISCRETION ON ANY OTHER
MATTERS TO COME BEFORE THE MEETING.
Dated: , 1998
------------------------
------------------------------------
(Signature)
------------------------------------
(Second signature)
PLEASE DATE AND SIGN ABOVE exactly
as your name appears at left, indicating
where appropriate, official position or
representative capacity.
<PAGE>
EXHIBIT 99
AMENDED AND RESTATED
1995 STOCK OPTION PLAN
OF SOUND SOURCE INTERACTIVE, INC.
1. Purpose
Sound Source Interactive, Inc. (the "Company") desires to attract and retain
the best available talent and encourage the highest level of performance in
order to continue to serve the best interests of the Company and its
stockholders. By affording key personnel the opportunity to acquire
proprietary interests in the Company and by providing them incentives to put
forth maximum efforts for the success of the business, the Amended and
Restated 1995 Stock Option Plan of Sound Source Interactive, Inc. (the "Plan")
is expected to contribute to the attainment of those objectives.
2. Scope and Duration
Options under the Plan may be granted in the form of incentive stock options
("Incentive Options") as provided in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), or in the form of non-qualified stock
options ("Non-qualified Options") (unless otherwise indicated, references in
the Plan to "options" include Incentive Options and Non-qualified Options.)
The maximum aggregate number of shares as to which options may be granted from
time to time under the Plan is 1,000,000 shares of the Company's Common Stock,
par value $.001 per share (the "Common Stock"), which shares may be, in whole
or in part, authorized but unissued shares or shares reacquired by the
Company. If an option shall expire, terminate or be surrendered for
cancellation for any reason without having been exercised in full, the shares
represented by the option or portion thereof not so exercised shall (unless
the Plan shall have been terminated) become available for subsequent option
grants under the Plan. As provided in Paragraph 13, the Plan shall become
effective on November 1, 1995, and unless terminated sooner pursuant to
Paragraph 14, the Plan shall terminate on October 31, 2005, and no option
shall be granted hereunder after that date.
3. Administration
The Plan shall be administered by the Board of Directors of the Company, at
their discretion, by a committee which is appointed by the Board of Directors
to perform such function (the "Committee"). The Committee shall consist of not
less than two members of the Board of Directors, each of whom shall serve at
the pleasure of the Board of Directors and shall be a "Non-Employee Director"
as defined in Rule 16b-3 pursuant to the Securities Exchange Act of 1934.
Vacancies occurring in the membership of the Committee shall be filled by
appointment by the Board of Directors.
The Board of Directors or the Committee, as the case may be, shall have
plenary authority in its discretion, subject to and not inconsistent with the
express provisions of the Plan, to grant options, to determine the purchase
price of the Common Stock covered by each option, the term of each option, the
persons to whom, and the time or times at which, options shall be granted and
the number of shares to be covered by each option; to designate options as
Incentive Options; to interpret the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of the option agreements (which need not be identical) entered into
in connection with options under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan. The Board of Directors or the Committee, as the case may be, may
delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable, and the Board of Directors or
the Committee, as the case may be, or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with
respect to any responsibility the Board of Directors or the Committee, as the
case may be; or such person may have under the Plan.
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4. Eligibility; Factors to be Considered in Granting Options
Incentive Options shall be limited to persons who are employees of the
Company or its present and future subsidiaries and at the grant of any option
are in the employ of the Company or its subsidiaries. In determining the
employees to whom Incentive Options shall be granted and the number of shares
to be covered by each Incentive Option, the Board of Directors or the
Committee, as the case may be, shall take into account the nature of the
employees' duties, their present and potential contributions to the success of
the Company and such other factors as it shall deem relevant in connection
with accomplishing the purposes of the Plan. An employee who has been granted
an option or options under the Plan may be granted an additional option or
options, subject, in the case of Incentive Options, to such limitations as may
be imposed by the Code on such options. Except as provided below, a Non-
qualified Option may be granted to any person, including, but not limited to,
employees, independent agents, consultants and attorneys, who the Board of
Directors or the committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company.
5. Option Price
The purchase price of the Common Stock covered by each option shall be
determined by the Board of Directors or the Committee, as the case may be, and
in the case of Incentive Options shall not be less than 100% of the Fair
Market Value (as defined in Paragraph 15(a) below) of a share of Common Stock
on the date on which the option is granted; provided, however, that the
purchase price of Common Stock covered by an Incentive Option granted to an
employee who, at the date of grant, owns more than 10% of the total combined
voting power of all classes of stock of the Company or of its subsidiaries
("10% Stockholder") may not be less than 110% of the Fair Market Value of a
share of Common Stock on the date on which the Incentive Option is granted.
The purchase price of the Common Stock covered by each option shall be subject
to adjustment as provided in Paragraph 12 below. The Board of Directors or the
Committee, as the case may be, shall determine the date on which an option is
granted; in the absence of such a determination, the date on which the Board
of Directors or the Committee, as the case may be, adopts a resolution
granting an option shall be considered the date on which such option is
granted.
6. Term of Options
The term of each option shall be not more than ten years from the date of
grant, as the Board of Directors or the Committee, as the case may be, shall
determine, subject to earlier termination as provided in Paragraphs 10, 11,
and 14 below. Notwithstanding the foregoing, an Incentive Option granted to a
10% Stockholder shall have a term of no more than five years.
7. Exercise of Options
(a) Subject to the provisions of the Plan and unless otherwise provided in
the option agreement, options granted under the Plan shall become exercisable
as determined by the Board of Directors or the Committee, as the case may be.
In its discretion, the Board of Directors or the Committee, as the case may
be, may, in any case or cases, prescribe that options granted under the Plan
become exercisable in installments or provide that an option may be
exercisable in full immediately upon the date of its grant. The Board of
Directors or the Committee, as the case may be, may, in its sole discretion,
also provide that an option granted pursuant to the Plan shall immediately
become exercisable in full upon the happening of any of the following events:
(i) the first purchase of shares of Common Stock pursuant to a tender offer or
exchange offer (other than an offer by the Company) for all, or a majority of,
the Common Stock, (ii) the approval by the stockholders of the Company of an
agreement of a merger in which the Company will not survive as an independent,
publicly-owned company, a consolidation, or a sale, exchange or other
disposition of all or substantially all of the Company's assets, (iii) with
respect to an employee, on his 65th birthday, or (iv) with respect to an
employee, on the employee's involuntary termination from employment, subject
to the limitations set forth in Paragraph 10. In the event of a question or
controversy as to whether or not any of the events hereinabove described has
taken place, a determination by the Board of Directors or the Committee, as
the case may be, that such event has or has not occurred shall be conclusive
and binding upon the Company and the participants in the Plan.
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<PAGE>
(b) Any option at any time granted under the Plan may contain a provision to
the effect that the optionee (or any persons entitled to act under Paragraph
11 hereof) may, at any time at which the Fair Market Value is in excess of the
exercise price and prior to exercising the option, in whole or in part,
request that the Company purchase all or any portion of the option as shall
then be exercisable at a price equal to the difference between (i) an amount
equal to the option price multiplied by the number of shares subject to that
portion of the option in respect of which such request shall be made and (ii)
an amount equal to such number of shares multiplied by the Fair Market Value
of the Company's Common Stock on the date of purchase. The Company shall have
no obligation to make any purchase pursuant to such request, but if it elects
to do so, such portion of the option as to which the request is made shall be
surrendered to the Company. The purchase price for the portion of the option
to be so surrendered shall be paid by the Company, at the election of the
Board of Directors or the Committee, as the case may be, either in cash or in
shares of Common Stock (valued as of the date and in the manner provided in
clause (ii) above), or in any combination of cash and Common Stock which may
consist, in whole or in part, of authorized but unissued shares of Common
Stock held in the Company's treasury. No fractional share of Common Stock
shall be issued or transferred and any fractional share shall be disregarded.
Shares covered by that portion of any option purchased by the Company pursuant
hereto and surrendered to the Company shall not be available for the granting
of further options under the Plan. All determinations to be made by the
Company hereunder shall be made by the Board of Directors or the Committee, as
the case may be.
(c) An option may be exercised, at any time or from time to time (subject,
in the case of Incentive Options, to such restrictions as may be imposed by
the Code), as to any or all full shares as to which the option has become
exercisable until the expiration of the period set forth in Paragraph 6
hereof, by the delivery to the Company, at its principal place of business in
Los Angeles, California, of (i) written notice of exercise in the form
specified by the Board of Directors or the Committee, as the case may be,
specifying the number of shares of Common Stock with respect to which the
option is being exercised and signed by the person exercising the option as
provided herein, (ii) payment of the purchase price, and (iii) in the case of
Non-qualified Options, payment in cash of all withholding tax obligations
imposed on the Company by reason of the exercise of the option. Upon
acceptance of such notice, receipt of payment in full, and receipt of payment
of all withholding tax obligations, the Corporation shall cause to be issued a
certificate representing the shares of Common Stock purchased. In the event
the person exercising the option delivers the items specified in (i) and (ii)
of this Subsection (b), but not the item specified in (iii) hereof, if
applicable, the option shall still be considered exercised upon acceptance by
the Corporation for the full number of shares of Common Stock specified in the
notice of exercise but the actual number of shares issued shall be reduced by
the smaller number of whole shares of Common Stock which, when multiplied by
the Fair Market Value of the Common Stock as of the date the option is
exercised, is sufficient to satisfy the required amount of withholding tax.
(d) The purchase price of the shares as to which an option is exercised
shall be paid in full at the time of exercise. Payment shall be made in cash,
which may be paid by check or other instrument acceptable to the Corporation;
in addition, subject to a compliance with applicable laws and regulations and
such conditions as the Board of Directors or the Committee, as the case may
be, may impose, the Board of Directors or the Committee, as the case may be,
in its sole discretion, may, on a case-by-case basis, elect to accept payment
in shares of Common Stock of the Corporation which are already owned by the
option holder, valued at the Fair Market Value thereof (as defined in
Paragraph 15 below) on the date of exercise; provided, however, that no such
discretion may be exercised unless the option agreement permits the payment of
the purchase price in that manner.
(e) Except as provided in Paragraphs 10 and 11 below, no option granted to
an employee may be exercised at any time by such employee unless such employee
is then an employee of the Company or a subsidiary.
8. Incentive Options
(a) With respect to Incentive Options granted, the aggregate Fair Market
Value (determined in accordance with the provisions of Paragraph 15 at the
time the Incentive Option is granted) of the Common Stock or any other stock
of the Company or its current or future subsidiary companies with respect to
which incentive stock
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<PAGE>
options, as defined in Section 422 of the Code, are exercisable for the first
time by any employee during any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary companies, as those
terms are defined in Section 425 of the Code) shall not exceed $100,000.
(b) No Incentive Option may be awarded to a 10% Stockholder unless the
exercise price under the Incentive Option is at least 110% of the Fair Market
Value and the option expires within 5 years from the date of grant.
(c) In the event of amendments to the Code or applicable regulations
relating to Incentive Options subsequent to the date hereof, the Company may
amend the provisions of the Plan, and the Company and the employees holding
options may agree to amend outstanding option agreements, to conform to such
amendments.
9. Non-Transferability of Options
Options granted under the Plan shall not be transferable except upon death
as provided in Paragraph 11 below, and options may be exercised during the
lifetime of the optionee only by the optionee. Any purported transfer in
violation of the foregoing prohibition shall be void and of no force and
effect.
10. Termination of Employment
In the event that the employment of an employee to whom an option has been
granted under the Plan shall be terminated (except as set forth in Paragraph
11 below) such option may, subject to the provisions of the Plan, be exercised
(to the extent that the employee was entitled to do so at the termination of
his employment) at any time within 30 days after such termination, but not
later than the date on which the option terminates; provided, however, that
any option which is held by an employee whose employment is terminated for
cause shall, to the extent not theretofore exercised, automatically terminate
as of the date of termination of employment. As used herein, "cause" shall
mean conduct amounting to fraud, dishonesty, negligence, or engaging in
competition or solicitations in competition with the Company and breaches of
any applicable employment agreement between the Company and the holder.
Options granted to employees under the Plan shall not be affected by any
change of duties or position so long as the holder continues to be a regular
employee of the Company or any of its current or future subsidiaries. Any
option agreement or any rules and regulations relating to the Plan may contain
such provisions as the Board of Directors or the Committee, as the case may
be, shall approve with reference to the determination of the date employment
terminates and the effect of any leave of absence. Nothing in the Plan or in
any option granted pursuant to the Plan shall confer upon any employee any
right to continue in the employ of the Company or any of its subsidiaries or
parent or affiliated companies or interfere in any way with the right of the
Company or any such subsidiary or parent or affiliated companies to terminate
such employment at any time.
11. Death or Disability of Employee
(a) If an employee to whom an option has been granted under the Plan shall
die or become permanently disabled while employed by the Company or a
subsidiary or within 30 days after the termination of such employment (other
than termination for cause), such option may be exercised, to the extent
exercisable by the employee on the date of death or permanent disability, at
any time within one year after the date on which the employee died or became
permanently disabled, but not later than the date on which the option
terminates in accordance with its terms.
(b) Upon the death of an employee while an option held by such employee is
exercisable, such option may be exercised, to the extent exercisable by the
employee on the date of death, by the beneficiary specified by such employee
in writing to the Company prior to his death or, in case no such beneficiary
shall have been specified, by a legatee or legatees of the employee under the
employee's last will, or by the employee's personal representatives or
distributees. No transfer of an option by the optionee by will or by the laws
of descent and distribution shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of
the will and such other evidence as the Company may deem necessary to
establish
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<PAGE>
the validity of the transfer and the acceptance by the transferor or
transferees of the terms and conditions of such option.
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the Plan, the Board of Directors or
the Committee, as the case may be, may, at any time, make or provide for such
adjustments to the Plan, to the number and class of shares issuable thereunder
or to any outstanding options as it shall deem appropriate to prevent dilution
or enlargement of rights, including adjustments in the event of changes in the
outstanding Common Stock by reason of stock dividends, split-ups,
recapitalizations, mergers, consolidations, combinations or exchanges of
shares, separations, reorganizations, liquidations and the like. In the event
of any offer to holders of Common Stock generally relating to the acquisition
of their shares, the Board of Directors or the Committee, as the case may be,
may make such adjustment as it deems equitable in respect of outstanding
options and rights, including in its discretion revision of outstanding
options and rights so that they may be exercisable for the consideration
payable in the acquisition transaction. Any such determination by the Board of
Directors or the Committee, as the case may be, shall be conclusive. Any
fractional shares resulting from such adjustments shall be eliminated.
13. Effective Date
The Plan shall become effective on May 15, 1996, subject to approval by the
stockholders of the Company on or before May 14, 1997.
14. Amendments and Termination
The Board of Directors may suspend, terminate, modify or amend the Plan
without stockholder approval, unless such approval is necessary or appropriate
under any Federal, state or other applicable law, rule or regulation. No
suspension, termination, modification or amendment of the Plan may, without
the consent of the employee to whom an option shall theretofore have been
granted, affect the rights of such employee under such option.
15. Miscellaneous
(a) As said term is used in the Plan, the "Fair Market Value" of a share of
Common Stock on any day means: (i) if the principal market for the Common
Stock is a national securities exchange or if the Common Stock is quoted on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the closing sales price of the Common Stock on such day as
reported by such exchange or NASDAQ, or on a consolidated tape reflecting
transactions on such exchange or NASDAQ; or (ii) if the principal market for
the Common Stock is not a national securities exchange and the Common Stock is
not quoted on NASDAQ, the mean between the highest bid and lowest asked prices
for the Common Stock on such day as reported by the National Quotation Bureau,
Inc.; provided that if clauses (i) and (ii) of this paragraph are all
inapplicable, or if no trades have been made or no quotes are available for
such day, the Fair Market Value of the Common Stock shall be determined by the
Board of Directors or the Committee, as the case may be, which determination
shall be conclusive as to the Fair Market Value of the Common Stock.
(b) The Board of Directors or the Committee, as the case may be, may
require, as a condition to the exercise of any options granted under the Plan,
that to the extent required at the time of exercise, (i) the shares of Common
Stock reserved for purposes of the Plan shall be duly listed, upon official
notice of issuance, upon stock exchange(s) or automated quotation system on
which the Common Stock is listed, (ii) a registration statement under the
Securities Act of 1933, as amended with respect to the shares of Common Stock
to be issued upon exercise shall be effective, and/or (iii) the person
exercising such option delivers to the Corporation such documents, agreements
and investment and other representations as the Board of Directors or the
Committee, as the case may be, shall determine to be in the best interests of
the Corporation. All certificates for shares of stock delivered under the Plan
shall be subject to such stop transfer orders and other restrictions as the
Board of
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Directors or the Committee, as the case may be, may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange or association upon which the Common Stock is
then listed or traded, any applicable federal or state securities law, and any
applicable corporate law, and the Board of Directors or the Committee, as the
case may be, may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions.
(c) During the term of the Plan, the Board of Directors or the Committee, as
the case may be, in its discretion, may offer one or more option holders the
opportunity to surrender any or all unexpired options for cancellation or
replacement. If any options are so surrendered, the Board of Directors or the
Committee, as the case may be, may then grant new Non-qualified or Incentive
Options to such holders for the same or different numbers of shares at higher
or lower exercise prices than the surrendered options and for the same or a
different exercise period. Such new options shall otherwise be subject to the
provisions of the Plan the same as any other option.
(d) Not later than the date as of which an amount first becomes includable
in the gross income of the optionee for federal income tax purposes with
respect to any option under the Plan, the optionee shall pay to the Company,
or make arrangements satisfactory to the Board of Directors or the Committee,
as the case may be, regarding the payment of, any federal, state and local
taxes of any kind required by law to be withheld or paid with respect to such
amount. If permitted by the Board of Directors or the Committee, as the case
may be, tax withholding or payment obligations may be settled with Common
Stock, including Common Stock that is subject to the option that gives rise to
the withholding requirement. The obligations of the Company under the Plan
shall be conditional upon such payment or arrangements and the Company or the
optionee's employer (if not the Company) shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the optionee from the Company or any of its subsidiaries.
(e) The Plan and all options granted and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware
(without regard to choice of law provisions).
(f) Any option granted under the Plan shall not be deemed compensation for
purposes of computing benefits under any retirement plan of the Company or any
of its subsidiaries and shall not affect any benefits under any other benefit
plan now or subsequently in effect under which the availability or amount of
benefits is related to the level of compensation (unless required by specific
reference in any such other plan to awards under this Plan).
(g) A leave of absence, unless otherwise determined by the Board of
Directors or the Committee, as the case may be, prior to the commencement
thereof, shall not be considered a termination of employment. Any option
granted under the Plan shall not be affected by any change of employment, so
long as the holder continues to be an employee of the Company or any of its
subsidiaries.
(h) If any of the terms or provisions of the Plan conflict with the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934, as in
effect from time to time, while the Plan is subject to such Rule, or with the
requirements of any other applicable law, rule or regulation, and with respect
to Incentive Options, Section 422 of the Code, then such terms or provisions
shall be deemed inoperative to the extent they so conflict with the
requirements of said Rule 16b-3 (if the Board of Directors or the Committee,
as the case may be, determines that the Plan should be in compliance with such
Rule) or any such other law, rule, or regulation, and with respect to
Incentive Options, Section 422 of the Code. With respect to Incentive options,
if this Plan does not contain any provision required to be included herein
under Section 422 of the Code, such provision shall be deemed to be
incorporated herein with the same force and effect as if such provision had
been set out at length herein.
(i) The Board of Directors or the Committee, as the case may be, may
terminate any option granted under the Plan if a written agreement relating
thereto is not executed and returned to the Corporation within 30 days after
such agreement has been delivered to the optionee for his or her execution.
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16. Automatic Grants to Nonemployee Directors
Each nonemployee director of the Company shall automatically be granted
options to purchase 10,000 shares of Common Stock for each full year that he
or she serves as a director of the Company. Such options will be Non-Qualified
Options; will 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; will expire on the earlier of ten years from the date the option was
granted, upon expiration of the 1995 Stock Option Plan, or three weeks after
the optionee ceases to be a director of the Company; and will have an exercise
price equal to 100% of the Fair Market Value of the Common Stock on the date
of grant.
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