<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended December 31, 1997
---------
Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-28604
------
SOUND SOURCE INTERACTIVE, INC.
- -----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-426046
-------- ---------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26115 MUREAU ROAD, SUITE B, CALABASAS, CALIFORNIA 91302-3126
- ------------------------------------------------------------
(Address of Principal Executive Offices)
(818) 878-0505
- --------------
(Issuer's Telephone Number, Including Area Code)
_______________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be file by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___XXX____ No ___________
The number of shares outstanding of the issuer's common stock as of January
21, 1998 was 4,515,099
----------
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___XXX____
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1997 AND 1996
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - December 31, 1997 3
Condensed Consolidated Statements of Operations - Three month
periods ended December 31, 1997 and 1996, and the six month
periods ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows - Six month
periods ended December 31, 1997 and 1996 6
Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Outlook 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
Financial Data Schedule 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 46,674
Accounts receivable - net 2,750,839
Inventory - net 260,538
Prepaid royalties 1,560,141
Prepaid expenses 115,333
------------
Total current assets 4,733,525
Property and equipment - net 357,888
------------
TOTAL ASSETS $ 5,091,413
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 995,075
Accrued compensation and related taxes 288,240
Accrued royalties 1,645,547
Current portion of capital lease obligations 6,223
Deferred revenues 12,000
------------
Total current liabilities 2,947,085
------------
Capital lease obligations, net of current portion 1,009
------------
Stockholder's Equity:
Common stock - $.001 par value, 20,000,000
shares authorized, 4,412,099 shares issued
and outstanding 4,412
Warrants 1,104,925
Additional paid-in capital 13,600,988
Accumulated deficit (12,567,006)
------------
Total stockholders' equity 2,143,319
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,091,413
============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Net revenues $3,007,390 $1,510,389
Cost of sales 1,059,474 568,067
---------- ----------
Gross profit 1,947,916 942,322
---------- ----------
Operating costs and expenses:
Marketing and sales 539,941 413,049
Compensation in connection with
common stock and common stock
options issued for services
rendered 88,095 89,304
Other general and administrative (223,546) 664,030
Research and development 253,644 293,772
---------- ----------
Total operating costs and expenses 658,134 1,460,155
Operating income (loss) 1,289,782 (517,833)
Other income (expense) (16,502) 24,747
---------- ----------
Income (loss) before provision for income taxes 1,273,280 (493,086)
Provision for income taxes 800
---------- ----------
Net income (loss) $1,273,280 $ (493,886)
========== ==========
Basic earnings (loss) per share $ 0.29 $ (0.11)
========== ==========
Diluted earnings (loss) per share $ 0.27 $ (0.11)
========== ==========
Weighted average number of common
shares outstanding - Basic 4,412,099 4,370,976
========== ==========
Weighted average number of common
shares outstanding - Diluted 4,750,456 4,370,976
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $4,072,969 $2,430,246
Cost of sales 1,464,491 953,002
---------- ----------
Gross profit 2,608,478 1,477,244
---------- ----------
Operating costs and expenses:
Marketing and sales 949,885 692,752
Compensation in connection with
common stock and common stock
options issued for services
rendered 176,190 178,607
Other general and administrative 204,389 1,014,853
Research and development 574,720 568,874
---------- ----------
Total operating costs and expenses 1,905,184 2,455,086
Operating income (loss) 703,294 (977,842)
Other income (expense) (14,231) 37,007
---------- ----------
Income (loss) before provision for income taxes 689,063 (940,835)
Provision for income taxes 800
---------- ----------
Net income (loss) $ 689,063 $ (941,635)
========== ==========
Basic earnings (loss) per share $ 0.16 $ (0.22)
========== ==========
Diluted earnings (loss) per share $ 0.15 $ (0.22)
========== ==========
Weighted average number of common
shares outstanding - Basic 4,410,974 4,318,096
========== ==========
Weighted average number of common
shares outstanding - Diluted 4,746,660 4,318,096
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 689,063 $ (941,636)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 63,647 44,453
Allowance for sales returns 341,983 144,420
Allowance for bad debts (703,421)
Common stock and common stock options
issued for services rendered 176,190 178,607
Changes in operating assets and liabilities:
Accounts receivable (1,028,283) (587,103)
Inventories (31,861) (50,887)
Prepaid royalties 58,423 (101,713)
Prepaid expenses and other (22,907) (43,953)
Accounts payable and accrued expenses (60,427) (359,775)
Accrued compensation and related taxes 15,482 270,573
Accrued interest (367,695)
Accrued royalties 28,195 144,100
Deferred revenues (67,704)
----------- -----------
Net cash used by operating activities (530,307) (1,738,313)
----------- -----------
Cash flows from investing activities-
Purchases of property and equipment (7,080) (266,308)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 180 7,948,373
Proceeds from issuance of warrant 341,575
Repayment of notes payable (4,987,500)
Deferred offering costs 620,904
Payments on capital lease obligations (6,580) (13,283)
Repayment of short term advance (400,000)
----------- -----------
Net cash (used in) provided by financing activities (6,400) 3,510,069
----------- -----------
Net change in cash and cash equivalents (543,785) 1,505,448
Cash and cash equivalents, beginning of period 590,459 181,985
----------- -----------
Cash and cash equivalents, end of period $ 46,674 $ 1,687,433
=========== ===========
</TABLE>
6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Supplement disclosure of cash flow information -
Cash paid during the period for:
Interest $18,501 $381,430
======= ========
Income taxes $ 0 $ 0
======= ========
Supplemental disclosure of noncash investing
and financing activities:
</TABLE>
During the six-month period ended December 31, 1996, the Company issued
2,016,657 warrants in connection with the conversion of a note payable to
related party in the amount of $500,000 and accrued interest thereon in the
amount of $4,164.
See notes to condensed consolidated financial statements.
7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its wholly
owned subsidiary (collectively referred to as the Company). The operating
results for interim periods are unaudited and are not necessarily an indication
of the results to be expected for the full fiscal year, particularly given the
seasonal nature of the Company's business. In the opinion of management, the
results of operations as reported for the interim period reflect all adjustments
which are necessary for a fair presentation of operating results.
NOTE B - INITIAL PUBLIC OFFERING (IPO)
- --------------------------------------
On July 1, 1996, the Company issued 2,400,000 shares of common stock at $4.00
per share and 1,200,000 redeemable warrants at $.25 per warrant. Net proceeds
totaled $7,973,305, net of offering costs of $1,926,695. On August 14, 1996,
the underwriters exercised a portion of their "overallotment" option, pursuant
to the underwriting agreement, which resulted in the Company issuing an
additional 160,000 shares of common stock at $4.00 per share and 171,775
redeemable warrants at $.25 per warrant. Net proceeds totaled $594,161, net of
offering costs of $88,783.
NOTE C - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTY
- ---------------------------------------------------------
On July 7, 1996, in connection with the IPO, the Company repaid notes payable
issued during fiscal 1996 aggregating $4,987,500 plus accrued interest of
$373,753.
On July 7, 1996, in connection with the IPO, the Company issued 2,016,657
warrants in connection with the conversion of a note payable to related party of
$500,000, plus accrued interest of $4,164.
NOTE D - ACCOUNTS RECEIVABLE AND SHORT TERM ADVANCE
- ---------------------------------------------------
In June 1995, the Company entered into a sales and distribution agreement with a
subsidiary of Acclaim Entertainment, Inc. (Acclaim). Under the terms of the
agreement, Acclaim was responsible for the distribution of the Company's
products on a worldwide basis to retail accounts. Effective April 1, 1996, such
agreement was terminated.
In July 1996, Acclaim submitted certain information to the Company together with
payment of $256,067 and a promissory note with a principal amount of $256,067,
maturing August 26, 1996 and bearing interest at 10% per annum. Such
represented the balances of all amounts due to the Company under the
distribution agreement, as determined by Acclaim. Included in the information
provided by Acclaim, it was noted that the Company was not obligated to repay a
short-term advance totaling $400,000 previously made by Acclaim to the Company.
On August 28, 1996, the Company received $256,067 plus accrued interest of
$2,175 pursuant to the terms of the promissory note. On December 13, 1996, the
Company filed suit in Superior Court for the County of Los Angeles, California,
against Acclaim. On January 7, 1998, the Company and Acclaim settled the
lawsuit for the payment of $1,500,000 by Acclaim without any admission of
liability. The Company will net approximately $1,050,000 after payment for
legal, accounting and other costs associated with the lawsuit.
8
<PAGE>
As of December 31, 1997, $2,354,217 of the accounts receivable balance is due
from Simon & Schuster Interactive Distribution Services (SSIDS) and $703,421 is
due from Acclaim pursuant to the settlement noted above. SSIDS is the consumer
software distribution unit of Simon & Schuster, Inc., the publishing operations
of Viacom, Inc. Pursuant to a distribution agreement between the Company and
SSIDS, which expires on May 31, 1998, SSIDS will provide distribution,
warehousing and order fulfillment services for all of the Company's products
throughout the United States and Canada.
NOTE E - CASH AND CASH EQUIVALENTS
- ----------------------------------
The Company invests all excess cash in working capital asset management accounts
with Merrill Lynch and Company. All such amounts are 100% federally insured at
all times.
NOTE F - DETERMINATION OF EARNINGS PER SHARE COMPUTATION
- --------------------------------------------------------
<TABLE>
<CAPTION>
First Second Six Month
Quarter Quarter Period
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS Computation
Numerator $ (584,215) $1,273,280 $ 689,063
Denominator 4,409,849 4,412,099 4,410,974
Basic EPS $ (0.13) $ 0.29 $ 0.16
<CAPTION>
First Second Six Month
Quarter Quarter Period
---------- ---------- ----------
<S> <C> <C> <C>
Diluted EPS Computation
Numerator $ (584,215) $1,273,280 $ 689,063
Denominator
Common shares outstanding 4,409,849 4,412,099 4,410,974
Options 338,357 335,686
---------- ---------- ----------
4,409,849 4,750,456 4,746,660
Diluted EPS $ (0.13) $ 0.27 $ 0.15
</TABLE>
As of December 31, 1997, the Company has issued options to purchase a total of
873,773 shares of the Company's common stock. Of such amount, options to
purchase 584,923 shares of common stock are included in the above diluted
earnings per share computation. Of the remaining 288,850 outstanding options to
purchase shares of common stock, 268,850 options were excluded from the above
diluted earnings per share computation as they were not vested as of December
31, 1997, and 20,000 options to purchase shares of common stock were excluded as
inclusion would be anti-dilutive.
As of December 31, 1997, the Company has issued warrants to purchase a total of
11,078,097 shares of the Company's common stock. All of such warrants have been
excluded from the above diluted earnings per share computation, as inclusion
would be anti-dilutive
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1997 Compared to the Three Months Ended December
31, 1996
Net Sales. Net sales increased by 99.1 percent from $1,510,389 for the three
months ended December 31, 1996 to $3,007,390 for the three months ended December
31, 1997. This increase is primarily attributable to increased distribution by
the Company's North American distributor, Simon and Schuster Interactive
Distribution Services, Inc. (SSIDS) and other direct sales in North America.
Sales to international distributors for the three months ended December 31, 1997
were approximately $223,625, as compared to $419,268 during the same period
during fiscal 1996. This decrease is principally due to the Company entering
into a republishing agreement with One Stop, Ltd., the Company's primary
international distributor. Under the terms of the republishing agreement, One
Stop, LTD is responsible for all manufacturing, marketing and sales costs and
pays the Company a republishing fee rather than purchasing product directly from
the Company. Sales to SSIDS for the three-month period ended December 31, 1997,
were approximately $2,633,508, as compared to $706,034 during the same period
during fiscal 1996.
Cost of Sales. Cost of sales increased by 86.5 percent from $568,067 for the
three months ended December 31, 1996 to $1,059,474 for the three months ended
December 31, 1997. However, cost of sales as a percentage of sales decreased
from 37.6 percent to 35.2 percent during these respective periods. The increase
in total cost of sales is due to the above noted 99.1 percent increase in net
revenues. The decrease in cost of sales as a percentage of revenues is
primarily due to changes in product mix to higher priced products and continued
reductions in manufacturing costs, specifically decreased disc replication costs
and decreased product packaging costs. The Company does not believe that
further significant decreases in cost of sales as a percentage of net sales can
be achieved as the Company currently receives volume discounts. The Company
believes that any further volume discounts related to manufacturing costs would
be insignificant as a percentage of net sales. During the third fiscal quarter
of fiscal 1998, the Company anticipates introducing new upscale packaging for
its children's products. Not only will newly introduced products have the new
packaging, but previously introduced products will also be converted to the new
packaging. As of December 31, 1997, the Company has both finished goods and raw
materials in inventory of the current packaging style. Although the Company
intends to fully utilize all such packaging prior to the introduction of the new
packaging, there can be no assurance that such will occur. The Company does not
believe that any costs associated with the disposal of any outdated packaging
will have a material impact on the consolidated financial statements in the
future.
Marketing and Sales. Marketing and sales expenses increased by 30.7 percent
from $413,049 for the three months ended December 31, 1996 to $539,941 for the
three months ended December 31, 1997, and decreased as a percentage of sales
from 27.3 percent to 18.0 percent, respectively. The change in dollar amount is
principally related to increased marketing and sales efforts to support new
product releases during the quarter and increased salaries due to additional
sales personnel. The decrease as a percentage of sales is due to the above
noted 99.1 percent increase in sales. The Company believes that marketing and
sales expenses will continue to increase as the Company continues to introduce
new products and as the Company attempts to obtain greater market share and
brand loyalty.
10
<PAGE>
Research and Development. Research and Development costs decreased 13.7 percent
from $293,772 during the three months ended December 31, 1996 to $253,644 for
the three months ended December 31, 1997, and decreased as a percentage of sales
from 19.5 percent to 8.4 percent, respectively. The decrease in costs is due to
the Company's increased efficiency in its internal development activities,
reduced external development costs due to excess availability of computer
animators, illustrators, artists and code personnel. The Company anticipates
that Research and Development costs will increase as the Company hires
additional personnel to support an increase in the number of products under
development, particularly as the Company will begin development of its
"Christmas" 1998 products during the March 1998 quarter.
General and Administrative. General and administrative expenses decreased from
$664,030 during the three months ended December 31, 1996 to $(223,546) for the
three months ended December 31, 1997. Included in general and administrative
expenses for the three months ended December 31, 1997 is a one-time recovery of
$703,421 related to the collection of accounts receivable that had been
previously reserved in full. Included in general and administrative expenses
for the three months ended December 31, 1996 is a one-time charge of $329,644
related to the departure of the Company's former president/chief operating
officer. Excluding the two above noted events, general and administrative
expenses increased from $334,386 during the three months ended December 31, 1996
to $479,875 during the three months ended December 31, 1997, primarily due to
the Company recording management performance bonuses of $75,000 and the Company
incurring approximately $26,000 in consulting fees related to the management of
the Company's rapid growth. No such expenses were incurred during the three
months ended December 31, 1996.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $88,095
and $89,304 for the three months ended December 31, 1997 and 1996, respectively,
and relate to the vesting of common stock options issued during fiscal 1994.
Six Months Ended December 31, 1997 Compared to the Six Months Ended December 31,
1996
Net Sales. Net sales increased by 67.6 percent from $2,430,246 for the six
months ended December 31, 1996 to $4,072,969 for the six months ended December
31, 1997. This increase is primarily attributable to increased distribution by
the Company's North American distributor, Simon and Schuster Interactive
Distribution Services, Inc. (SSIDS) and other direct sales in North America.
Sales to international distributors for the six months ended December 31, 1997
were approximately $308,869, as compared to $435,131 for the six months ended
December 31, 1996. Sales to SSIDS for the six-month period ended December 31,
1997 were approximately $3,361,640, as compared to $1,525,907 during the six
months ended December 31, 1996.
Cost of Sales. Cost of sales increased by 53.7 percent from $953,002 for the
six months ended December 31, 1996 to $1,464,491 for the six months ended
December 31, 1997. However, cost of sales as a percentage of sales decreased
from 39.2 percent to 36.0 percent during these respective periods. The increase
in total cost of sales is due to the above noted 67.6 percent increase in net
revenues. The decrease in cost of sales as a percentage of revenues is
primarily due to changes in product mix to higher priced products and continued
reductions in manufacturing costs. The Company does not believe that further
significant decreases in cost of sales as a percentage of net sales can be
achieved.
11
<PAGE>
Marketing and Sales. Marketing and sales expenses increase by 37.1 percent from
$692,752 for the six months ended December 31, 1996 to $949,885 for the six
months ended December 31, 1997, and decreased as a percentage of sales from 28.5
percent to 23.3 percent, respectively. The change in dollar amount is
principally related to increased marketing and sales efforts to support new
product releases during the six-month period and increased salaries due to
additional sales personnel. The decrease as a percentage of sales is due to the
above noted 67.6 percent increase in sales. The Company believes that marketing
and sales expenses will continue to increase as the Company continues to
introduce new products and as the Company attempts to obtain greater marked
share and brand loyalty.
Research and Development. Research and Development costs increased by 1.0
percent from $568,874 during the six months ended December 31, 1996 to $574,720
for the six months ended December 31, 1997, and decreased as a percentage of
sales from 23.4 percent to 14.1 percent, respectively. The increase in costs is
primarily associated with increased quantity and quality of products under
development. The Company anticipates that Research and Development costs will
continue to increase as the Company hires additional personnel to support an
increase in the number of products under development and to perform certain
development activities internally.
General and Administrative. General and administrative expenses decreased by
79.9 percent from $1,014,853 during the six months ended December 31, 1996 to
$204,389 for the six months ended December 31, 1997, and decreased as a
percentage of sales from 41.8 percent to 5.0 percent, respectively. Included in
general and administrative expenses for the six months ended December 31, 1997
is a one-time recovery of $703,421 related to the collection of accounts
receivable that had been previously reserved in full. Included in general and
administrative expenses for the six months ended December 31, 1996 is a one-time
charge of $329,644 related to the departure of the Company's former
president/chief operating officer. Excluding the two above noted events,
general and administrative expenses increased from $685,209 during the six
months ended December 31, 1996 to $907,810 during the six months ended December
31, 1997, primarily due to the Company recording management performance bonuses
of $100,000 and the Company incurring approximately $26,000 in consulting fees
related to related to the management of the Company's rapid growth. No such
expenses were incurred during the six months ended December 31, 1996.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $176,190
and $178,607 for the six month periods ended December 31, 1997 and 1996,
respectively, and relate to the vesting of common stock options issued during
fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had working capital of $1,786,440 in
comparison with $851,290 at June 30, 1997, an increase of $935,150. Cash and
cash equivalents decreased $543,785. Accounts receivable increased $1,389,721
due to increased sales of products to the Company's North American distributor
and an accounts receivable in the amount of $703,421 from the Company's former
distributor which had been previously deemed uncollectible.
During the six months ended December 31, 1997, current liabilities decreased by
$15,015 from $2,962,100 at June 30, 1997 to $2,947,085 at December 31, 1997.
This change is not considered significant.
12
<PAGE>
During September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides the Company with borrowing availability of up to
85% of the Company's qualified gross domestic accounts receivable, not to exceed
$1,500,000 in the aggregate, at a rate of 1.75% per month of the average gross
daily factoring account balance. The credit is secured by all the assets of the
Company and matures one year from the date of the agreement. As of December 31,
1997, the Company had outstanding borrowings under the agreement aggregating
$460,768, all of which were fully repaid on January 9, 1998. Such borrowing
have been recorded as an offset to accounts receivable in the accompanying
condensed consolidated balance sheet.
The Company has experienced a significant increase in growth during the last
six-month period, as compared to the same period of time in the prior fiscal
year. The Company continues to search for new opportunities to obtain licenses,
develop and sell products, and to purchase products that are at or near
completion of development. Additionally, the Company is seeking new and
innovative ways to deliver its products to consumers, some of which may require
large up-front cash resources. If the Company enters into agreements in such
business opportunities in the future, the Company may require additional
financing to fund its growth.
OUTLOOK
The statements contained in this report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include, but are not limited to: statements regarding the Company's sales and
future revenues, statements regarding future research and development costs and
products, and statements regarding the future flexibility of the Company's cash
reserves. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below. Please consult the
risk factors listed from time to time in the Company's reports on Form 10-QSB
and 10-KSB and Annual Reports to Stockholders.
Sound Source Interactive, Inc. does not provide forecasts of potential future
financial performance. While management of the Company is optimistic about the
Company's long-term prospects, the following issues and uncertainties among
others, should be considered in evaluating its growth outlook.
Employment of Vincent J. Bitetti. Vincent J. Bitetti, Chairman of the Board and
Chief Executive Officer of the Company, is employed under an employment
agreement, which expires on September 15, 1998. The Company's success depends
to a significant extent on the performance and continued service of its senior
management and certain key employees. In particular, the loss of the services
of Vincent J. Bitetti without appropriate planning could have a material adverse
effect on the Company. In addition to his duties as Chairman of the Board and
Chief Executive Officer, Mr. Bitetti is the executive producer of all Company
products, conceptualizes reviews and "green lights" all title development, and
has led the negotiations for all studio license and promotional/partnership
agreements.
Technological Developments. The personal computer software industry is
characterized by rapid technological advancement and the uncertainty of new
breakthroughs and developments in emerging areas such as the Internet and DVD-
ROM.
13
<PAGE>
Distribution Channels. Traditional retail distribution channels have been
experiencing a major restructuring and are fostering the development of
alternative distribution outlets. The Company intends to explore new and
innovative distribution methods, the success of which cannot be assured. In the
traditional retail distribution channel, there continues to be an excess of
companies and products competing for available retail shelf space. Accordingly,
retail shelf space is extremely difficult and expensive to obtain and maintain.
Products that do not immediately sell well are removed from the retail shelves
and returned to the publisher.
Licensed Properties. There is a risk factor inherent in any venture involving
licensed properties. Not every licensed product is guaranteed success; only the
software consumer can ultimately determine the outcome. Additionally, there is
no guarantee that the Company can obtain future licenses of either the quality
or the quantity necessary for the Company to reach its goals.
Product Ship Schedules. Delays in product ship schedules can cause problems
with product fulfillment, revenue recognition and retailer orders.
Research and Development. Research and development costs can vary significantly
depending on the products currently in development and potential products the
Company may choose to develop.
Consumer Preferences. Consumers ultimately determine the success of software
products. Not every product will be a hit and residual inventory may exist
depending on actual sell through. Games, in particular, can have very wide
degrees of success or failure in terms of customer acceptance. The Company has
entered the Games market for the first time during the three-month period ended
December 31, 1997. Actual sell through of the games published by the Company
can not be determined at this time. The Company recorded a reserve for returns
based upon its prior experience in the consumer software industry and current
market conditions. There can be no assurance that its actual losses due to
returns will not exceed the reserved amount.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors may be involved in suits and actions
incidental to the Company's business.
On December 13, 1996, the Company filed suit in Superior Court for the County of
Los Angeles, California, against its former distributor, Acclaim Entertainment,
Inc. On January 7, 1998, the Company and Acclaim settled the lawsuit for the
payment of $1,500,000 by Acclaim without any admission of liability. The
Company will net approximately $1,050,000 after payment for legal, accounting
and other costs associated with the lawsuit. Of such amount, $703,421 is
included in accounts receivable as of December 31, 1997 in the accompanying
consolidated condensed balance sheet.
ITEM 5. OTHER INFORMATION
None
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
27 Financial Data Schedule, filed herewith
</TABLE>
(b) Reports on Form 8-K
On December 8, 1997, the Company filed a report on Form 8-K which included the
Company's unaudited consolidated condensed balance sheet as of October 31, 1997.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/Vincent J. Bitetti Date: February 2, 1998
---------------------- ----------------
Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ulrich E. Gottschling Date: February 2, 1998
------------------------ ----------------
Ulrich E. Gottschling
President, Chief Operating Officer,
Chief Financial Officer, Treasurer and Corporate Secretary
(Chief Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUND SOURCE
INTERACTIVE, INC. AND SUBSIDIARY FOR THE PERIOD JULY 1, 1997 THROUGH DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 46,674
<SECURITIES> 0
<RECEIVABLES> 2,750,607
<ALLOWANCES> 0
<INVENTORY> 260,538
<CURRENT-ASSETS> 4,733,525
<PP&E> 659,496
<DEPRECIATION> (301,608)
<TOTAL-ASSETS> 5,091,413
<CURRENT-LIABILITIES> 2,947,085
<BONDS> 0
0
0
<COMMON> 4,412
<OTHER-SE> 2,138,907
<TOTAL-LIABILITY-AND-EQUITY> 2,143,319
<SALES> 3,007,390
<TOTAL-REVENUES> 3,007,390
<CGS> 1,059,474
<TOTAL-COSTS> 658,134
<OTHER-EXPENSES> (16,502)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,501
<INCOME-PRETAX> 1,273,280
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,273,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,273,280
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
