<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 Rule 14(a)-11(c) or Rule 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)
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:
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(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):
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[ ] 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
previously paid. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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<PAGE>
Dear Valued Stockholders,
On behalf of everyone at Sound Source Interactive, I am pleased to report that
fiscal 1998 was our best year ever! The Company achieved record results in
revenues, profits and unit sales, while strengthening and extending the
foundation to support future growth. Product sales doubled for the third
consecutive year, producing our first fiscal year profit of five hundred
thousand dollars or $0.10 per diluted share. The very popular The Land Before
Time titles headed our successful new release schedule with over 350,000 units
sold. And our incremental operating leverage resulted in substantial decreases
in expenses as a percent of revenues. Our growth did not go unnoticed in the
industry, when in June, we were ranked by PC Data as the sixth largest developer
-------
(in revenue dollars) of educational software in the United States, surpassing
Microsoft Corporation and IBM.
Producing Record Results. Net sales for the fiscal year ended June 30, 1998 were
$8,800,000, representing an increase of 92.9 percent over net sales of
$4,500,000 in fiscal 1997. Net income for fiscal 1998 was $501,200, or $0.10
cents per diluted share, compared to a loss of $2.6 million, or $0.61 cents per
diluted share for fiscal 1997.
The profitability for the year was driven by a combination of revenue growth and
market expansion. The gross profit margin for fiscal 1998 expanded over 1000
basis points to 60 percent as compared with 49 percent for fiscal 1997. Total
operating expenses for the year increased only 16 percent over those of fiscal
1997. Most notably, general and administrative expenses decreased to 20.7
percent of net revenue from 43.2 percent in fiscal 1997 and 97 percent in fiscal
1996.
The increase in sales this year is attributable to several key elements in our
strategy. The menu of products was expanded, with the Company selling a total of
16 titles, nine of which were new releases, in fiscal 1998, as compared with 11
titles, seven of which were new releases, in fiscal 1997. Revenues from
Children's products increased approximately 135 percent to $4.7 million. The
brisk sales in Children's products reflected record sales of three The Land
Before Time titles as well as strong demand for Casper and An American Tail.
Strengthening and Expanding the Foundation for Growth. Throughout the year we
recognized that the challenge of maintaining strong growth would require a
larger and more powerful distribution network through which to sell an expanding
menu of quality products. To add the necessary muscle, we eliminated the third-
party sales function from our agreement with Simon & Schuster Interactive
Distribution Services and installed our first dedicated sales team. We also
launched a toll-free, consumer direct fulfillment service, through which the
customer can order product by telephone. Our international distribution was
bolstered by our first republishing agreement, through which we began shipping
product internationally in 14 languages during fiscal 1998. With an interest in
expanding our retail presence and building repeat business and customer loyalty,
we
<PAGE>
initiated a brand equity campaign, which began with a comprehensive repackaging
effort. Our new packages flow together with a distinctive ribbon across the
bottom, thus creating the look of "a collection" when placed side by side. The
impact of these important infrastructure improvements has been measurable
already.
With exclusive content licenses driving our product development, we were pleased
to have added one with Harvey Entertainment Company for Casper Meets Wendy and
one with Universal Studios for the Babe franchise. We renewed our original,
highly successful license with Universal Studios for The Land Before Time.
Sound Source has the right to develop and publish up to ten additional The Land
Before Time titles over the next three years.
Setting Our Sights on Fiscal 1999. Our business plan for fiscal 1999, continues
to focus on expanding our distribution network and adding new content licenses
and new titles. Fiscal 1999 will be a year of transformation. We will sell not
only licensed software, but also brand equity. We will introduce new products
with characters known around the globe to children and their parents and
grandparents. Our product objectives for fiscal 1999 include at least three new
and extended content licenses and a menu of 18 titles, including 12 new
releases. Our release schedule to date is very exciting, but as always,
continuing to evolve as we approach the content market opportunistically.
On the distribution side, we plan to add new first tier distribution partners to
expand our market worldwide. Our international efforts will focus on the more
economically stable markets. Domestically, we will be adding field merchandising
support to our brand awareness and sales programs. Field merchandising tends to
insure the strongest product displays and positions in retail stores.
Building shareholder value. We have ample evidence that our strategy is working.
Our fiscal 1998 financial performance strongly indicates that we are
successfully leveraging our core assets: our exclusive content licenses and our
comprehensive software studio. Looking forward, we will continue to develop high
quality software titles based on bankable, licensed content. We will also
continue to develop the multimedia studio, Sound Source Interactive.
We are confident that the universe for Sound Source products is vast. Our task
is to select from a wide range of opportunities, the most promising paths for
growth and profitability. Over the next year or two, we will explore the world
of platforms beyond the Personal Computer and the world of retail storefronts
beyond the local mall. Our entertainment division will produce value priced,
immersive gaming experiences for the growing base of recreational computer game
players. Make no mistake, while our feet are planted firmly on the ground, the
Company is poised for the future.
Our accomplishments are not the result of our strategy per se, but rather the
exceptional way that the strategy has been implemented by our talented and very
committed team. We are very fortunate to have attracted the fine caliber of
individual to our Company and
<PAGE>
consider our employees to be the real key to building shareholder value. All of
us are proud of what we have accomplished on behalf of our shareholders.
Vincent J. Bitetti
Chairman & CEO
Sound Source Interactive, Inc.
<PAGE>
SOUND SOURCE INTERACTIVE, INC.
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FRIDAY, DECEMBER 11, 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 Friday, December 11, 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
December 1999 or when their successors are elected and qualified.
2. To authorize the Board of Directors, in their discretion, to offer
holders of the Company's outstanding Redeemable Warrants the
opportunity to exercise such Redeemable Warrants at a reduced exercise
price and on a cashless basis.
3. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for 1999.
4. 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 November 2, 1998, the record date and time fixed by the
Board of Directors, will be entitled to vote at the meeting and any adjournment
thereof.
November 9, 1998 Ulrich E. Gottschling
Calabasas, California President, Chief Operating Officer,
Chief Financial Officer,
Secretary and Treasurer
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 December 11, 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 November 2, 1998. These materials are expected to be first
mailed to stockholders on or about November 9, 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 and 3 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 November 2, 1998
are entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof. On October 15, 1998 there were outstanding 5,884,462 shares of Common
Stock. Each share of Common Stock is entitled to one vote on the matters to be
presented at the Annual Meeting.
<PAGE>
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 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 December 1999, 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.
ASSI, Inc. and Vincent J. Bitetti, who together own 2,374,634 shares of
Common Stock (representing 40.4 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 the election of each of the director nominees named
below.
THE BOARD RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE DIRECTOR
NOMINEES NAMED BELOW.
INFORMATION REGARDING NOMINEES
<PAGE>
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, Mark A. James, Richard
Azevedo, Samuel L. Poole, Wayne M. Rogers and John T. Wholihan. 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 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 40, 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 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 1896, Mr. Gottschling held various management positions
with Westin Hotels and Marriott Corporation. Mr. Gottschling has been a
director of the Company since October 1995.
MARK A. JAMES, age 39, is a founding member of the law firm of James,
Driggs, Walch, Santoro & Thompson in Las Vegas, Nevada, where has have been a
partner since April 1996. From 1991 until the founding of James, Driggs, Walch,
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 committee.
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.
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 Construction Company, Inc. Mr. Azevedo has
been a director of the Company since April 1998.
<PAGE>
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.
Mr. Poole has been a director of the Company since April 1998.
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. Mr. Rogers has been a
director of the Company since April 1998.
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, 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. Mr. Wholihan has been a director of the
Company since April 1998.
BOARD COMMITTEES
The Board of Directors has appointed five standing committees: the Audit
Committee, the Compensation Committee, the Search Committee, the Nominating
Committee and the Strategic Planning Committee.
<PAGE>
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.
The Nominating Committee consists of Vincent, J. Bitetti, Samuel L. Poole,
Wayne Rogers and Louis Habash, who is the sole stockholder of ASSI, Inc., a
principal stockholder of the Company.
BOARD AND COMMITTEE MEETINGS
In fiscal 1998, there were four meetings held by the Board of Directors.
Board committees met as follows during fiscal 1998: The Audit Committee, one
time, and the Compensation Committee, one time. The Search Committee and
Strategic Planning Committee were formed in May 1998 and did not meet in fiscal
1998. The Nominating Committee was formed in September 1998 and did not meet in
fiscal 1998. The total combined attendance for all Board and Committee meetings
was 100 percent. All directors, or their representatives, attended 100 percent
of the meetings of the Board and of the committees on which they served.
RELATIONSHIPS WITH OUTSIDE FIRMS
Mark A. James is a current director of the Company and in fiscal 1998 was a
member of the law firm of James, Driggs, Walch, Santoro & Thompson, which
performed legal services for the Company. Amounts paid to such law firm by the
Company during fiscal 1998 amounted to $206,485.
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 two
other employees and one former employee, each of whom received compensation from
the Company in excess of $100,000 for the fiscal year ended June 30, 1998 (the
"Named Executives").
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
SUMMARY ANNUAL
COMPENSATION LONG-TERM 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, Chairman of the 1998 $210,466 $79,000 50,000 $22,543
Board and Chief Executive Officer 1997 205,077 14,029 0 19,872
1996 187,500 31,874 0 19,018
Ulrich E. Gottschling, President,
Chief Operating Officer, Chief 1998 151,125 58,600 50,000 10,47
Financial Officer, Treasurer and 1997 126,295 8,602 0 9,145
Secretary 1996 80,134 1,500 200,000 5,909,
Patricia Brown, Senior Vice President 1998 100,000 2,500 6,000
of New Business Development 1997 41,025 0 50,000 3,000
Tim Murphy, Senior Vice President 1998 155,561 2,500 0 6,447
of Sales and Marketing 1997 51,084 150,000 1,495
Eric H. Winston, Former President 1998 140,000 0 0 17,178
and Chief Operating Officer (4) 1997 140,000 0 0 17,040
1996 168,750 31,874 0 21,141
</TABLE>
(1) The bonuses accrued for fiscal year 1998 will be paid in fiscal year 1999.
The bonuses paid in fiscal year 1996 were earned and accrued in fiscal year
1995.
(2) The amounts in this column consist of the following: (a) personal use of
Company car: Mr. Bitetti -- $12,000 (1998), $9,130 (1997),$9,576 (1996),
Mr. Winston -- $12,000 (1998), $12,000 (1997), $9,302 (1996), Mr.
Gottschling -- $6,000 (1998), $4,600 (1997), $2,500 (1996), Ms. Brown --
$6,000 (1998), $3,000 (1997), Mr. Murphy -- $0 (1998), $0 (1997); (b) life
insurance premiums: Mr. Bitetti $6,143 (1998), $5,370 (1997), $4,311
(1996), Mr. Winston -- $0 (1998), $0 (1997), $4,750 (1996), and (c) medical
insurance premiums: Mr. Bitetti -- $4,400 (1998), $5,372 (1997), $5,131
(1996), Mr. Winston -- $5,178 (1998), $5,040 (1997), $7,089 (1996), Mr.
Gottschling -- $4,647 (1998), $4,545 (1997), $3,409 (1996), Ms. Brown -- $0
(1998), $0 (1997), Mr. Murphy -- $4,647 (1998), $1,495 (1997).
(4) Ms. Brown became an employee of the Company on January 5, 1997. Prior to
that time, she was a consultant to the Company whereby she was paid a
monthly fee of $3000 plus royalties based on the sales of certain of the
Company's products.
(5) Mr. Murphy became an employee of the Company on February 5, 1997. Mr.
Murphy is paid a base salary plus commissions based on sales of the
Company's products.
(6) Mr. Winston terminated his employment with the Company effective November
1, 1996. The amounts set forth in the table for the period subsequent to
such date were paid pursuant to a Separation and Release Agreement. See
"Election of Directors Termination Agreement".
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, 1998.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE OR
NAME OPTIONS GRANTED (1) FISCAL YEAR BASE PRICE EXPIRATION DATE
---- ------------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
Vincent J. Bitetti 50,000 6% $2.50-$5.00 4/27/08
Ulrich E. Gottschling 100,000 13% $1.19 4/30/06
100,000 13% $1.19 9/30/07
50,000 6% $2.50-$5.00 4/27/08
Patricia Brown 50,000 6% $1.19 1/5/07
Tim Murphy 150,000 19% $1.19 3/1/07
Eric Winston 0 0% __ __
</TABLE>
(1) Options issued in the December 1997 option exchange program are shown as
new grants (the "Repriced Options"). The terms of the Repriced Options are
based on the expiration dates of the options surrendered; therefore, the
terms of the Repriced Options have a ten-year term. Other options have a
ten-year term.
OPTION EXERCISES AND HOLDINGS. The following table sets forth information
concerning each exercise of a stock option during the fiscal year ended June 30,
1998 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,
1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED IN-
NUMBER OF UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT 6/30/98 6/30/98 (2)
ACQUIRED ON ------------------------- -------------------------
NAME EXERCISE VALUE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Vincent J. Bitetti 0 $ 0 50,000/0 $ 0/0
Ulrich E. Gottschling 0 0 250,000/0 12,000/0
Patricia Brown 6,275 7,656 42,092/10,000 4,889/600
Tim Murphy 0 0 60,000/90,000 3,600/5,400
Eric H. Winston (3) 100,000 131,500 182,838/0 217,577/0
</TABLE>
- --------------
(1) Market value on the date of exercise of shares covered by options
exercised, less option exercise price.
<PAGE>
(2) Market value of the shares covered by in-the-money options on June 30,
1998, 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 has entered into a Third Amended and Restated Employment
Agreement with Vincent J. Bitetti, its Chairman of the Board and Chief Executive
Officer, dated as of April 24, 1998 (the "Third Bitetti Employment Agreement").
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").
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 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.
Pursuant to the Third Bitetti Employment Agreement Mr. Bitetti's annual base
salary has been increased from $203,800 to $240,000 effective April 27, 1998.
The base salary is subject to annual increases in accordance with the Consumer
Price Index (the "CPI") commencing on April 27, 1998, in the same manner as
under the Second Bitetti Employment Agreement. The Third Bitetti Employment
Agreement also modified the bonus structure applicable under the Second Bitetti
Employment Agreement.
<PAGE>
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>
GROSS REVENUES CUMULATIVE 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 became
entitled to receive a bonus in the following amounts if the following gross
revenues were attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
GROSS REVENUES CUMULATIVE CASH BONUS
-------------- ---------------------
<S> <C>
$ 7,500,000 $ 25,000
10,000,000 75,000
15,000,000 125,000
</TABLE>
The gross revenue attainment levels required to receive each bonus level
for each subsequent fiscal year increase 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, 1998:
<TABLE>
<CAPTION>
GROSS PROFITS CUMULATIVE CASH BONUS
------------- ---------------------
<S> <C>
$ 5,120,000 $ 50,000
5,760,000 75,000
6,400,000 100,000
</TABLE>
Pursuant to the Third Bitetti Employment Agreement, Mr. Bitetti became
entitled to receive a bonus in the following amounts if the following gross
profits were attained for the fiscal year ending June 30, 1998:
<TABLE>
<CAPTION>
GROSS PROFITS CUMULATIVE CASH BONUS
------------- ---------------------
<S> <C>
$ 2,000,000 $ 50,000
2,250,000 75,000
2,500,000 100,000
</TABLE>
<PAGE>
The gross profit levels required to receive each bonus level for each
subsequent fiscal year increase 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>
The foregoing levels of pre-tax profitability required to achieve each
bonus level remain unchanged pursuant to the Third Bitetti Employment Agreement.
For the fiscal year ended June 30, 1998, the Company achieved revenues of
$8,867,490 and gross profits of $5,293,322, thereby qualifying Mr. Bitetti for
bonuses totaling $125,000. Mr. Bitetti has agreed to forego $60,000 of his
earned bonus. The remaining $65,000 was accrued at June 30, 1998 in the
Company's consolidated financial statements and will be paid in fiscal year
1999.
Mr. Bitetti remains entitled to receive the same fringe benefits under the
Third Bitetti Employment Agreement as applied under the Second Bitetti
Employment Agreement. These benefits include use of a Company automobile or
automobile allowance, $5,000,000 in life insurance coverage (provided that in no
event may 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. 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 only become effective upon the voluntary or involuntary
termination of Mr. Bitetti's employment with the Company.
Finally, 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 of Common Stock at $5.00 per share.
All such options were vested and exercisable on their date of grant, which was
April 27, 1998.
The Company entered into an Amended and Restated Employment Agreement with
Ulrich E. Gottschling, as Chief Financial Officer, Treasurer and Secretary,
dated as of February 1, 1997 (the "Gottschling Employment Agreement"), for a
two-year term ending January 31, 1999. The Company entered into an Employment
Memorandum with Mr. Gottschling dated as of April 24, 1998 (the "Gottschling
Employment Memorandum"), which amends certain provisions of the Gottschling
Employment Agreement. Pursuant to the Gottschling Employment Agreement, Mr.
Gottschling initially was entitled to receive annual base compensation of
$150,000, subject to escalation annually in accordance with the CPI. Pursuant
to the Gottschling Employment Memorandum, Mr. Gottschling's base salary will be
increased to $180,000 per annum effective January 1, 1999, and will remain
subject to escalation in accordance with the CPI. The Gottschling Employment
Agreement entitled Mr. Gottschling to receive bonuses based on the same
<PAGE>
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. Pursuant to the
Gottschling Employment 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.
Pursuant to the Gottschling Employment Agreement, Mr. Gottschling is
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. Following the voluntary or involuntary termination of his
employment by the Company, Mr. Gottschling is entitled to two demand
registration rights with respect to the Common Stock held by or issuable to him.
These registration rights only become effective upon the voluntary or
involuntary termination of Mr. Gottschling's employment with the Company.
Pursuant to the Gottschling Employment 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 of Common Stock at $5.00 per share. All
such options were vested and exercisable on their date of grant, which was April
27, 1998.
For the fiscal year ended June 30, 1998, the Company achieved revenues of
$8,867,490 and gross profits of $5,293,322, thereby qualifying Mr. Gottschling
for bonuses totaling $100,000. Mr. Gottschling has agreed to forego $50,000 of
his earned bonus. The remaining $50,000 was accrued at June 30, 1998 in the
Company's consolidated financial statements and will be paid in fiscal year
1999.
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, and payable in accordance with the same provisions,
described above with respect to the Second Bitetti 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 remained 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. All of the Company's obligations to Mr. Winston under the
Separation and Release Agreement have now terminated.
<PAGE>
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 and 100,000 shares during fiscal 1998. During October 1998,
Mr. Winston exercised an option to purchase 182,838 shares. 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.
REPORT ON REPRICING OF OPTIONS
In December 1997, the Board of Directors approved an option exchange
program, whereby all employees, including the Named Executives (excluding
Vincent J. Bitetti and Eric H. Winston) were entitled to exchange their
outstanding options for new options to be granted at fair marked value on
December 27, 1997.
The following Option Repricing Table shows options repriced in the December
1997 option exchange program for the Names Executives (other than Vincent J.
Bitetti and Eric H. Winston). The Company did not reprice any options prior to
December 1997.
OPTION REPRICING TABLE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING MARKET PRICE OF EXERCISE PRICE
DATE OF OPTIONS STOCK AT TIME OF AT TIME OF NEW EXERCISE
NAME REPRICING REPRICED REPRICING REPRICING PRICE
---- --------- ----------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Ulrich E. Gottschling 12/27/97 100,000 $1.19 $4.00 $1.19
100,000 $1.19 $3.40 $1.19
Patricia Brown 12/27/97 50,000 $1.19 $4.00 $1.19
Tim Murphy 12/27/97 150,000 $1.19 $4.00 $1.19
</TABLE>
<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 (excluding Eric H. Winston) 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 (1) Shares Percent
- ----------------------- ------------- -------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVES
- ------------------------------
Vincent J. Bitetti(2) 1,284,634 22.3%
Ulrich E. Gottschling(3) 255,000 4.3%
Richard Azevedo 0 0%
1104 Humbug Way
Auburn, California 95603
Mark A. James(4) 15,000 *
3404 Costa Verde Drive
Las Vegas, Nevada 89102
Patricia Brown 60,367 0.1%
Tim Murphy 150,000 2.6%
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 *
7300 West 88th Place
Los Angeles, California 90045
All directors, director nominees 1,766,001 28.3%
and executive officers as a
group (nine persons)(2)(3)(4)
</TABLE>
<PAGE>
<TABLE>
OTHER BENEFICIAL OWNERS (5)
- ---------------------------
<S> <C> <C>
Louis A. Habash(6) 1,140,000 20.2
5075 Spyglass Hill Drive
Las Vegas, Nevada 89122
Eric H. Winston(7) 321,338 5.5
5567 Springhill Court
Westlake Village, California 91362
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise noted, the address of the listed beneficial owners is
26115 Mureau Road, Suite B, Calabasas, California 91302.
(2) 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
acquired by Mr. Winston from the Company pursuant to the options described
in (7) below, as to all of which Mr. Bitetti had 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.
(3) Includes 250,000 shares of Common Stock issuable to Mr. Gottschling under
presently exercisable options.
(4) Includes 10,000 shares of Common Stock issuable to Mr. James upon exercise
of presently exercisable options.
(5) 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.
(6) 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.
(7) Includes 182,838 shares of Common Stock issued under stock options granted
by the Company to Mr. Winston, which were exercised during October 1998.
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.
<PAGE>
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.
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; (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 A.
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 A. 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
<PAGE>
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, which amends and
restates Mr. Bitetti's prior employment agreement. The Company also and entered
into an Employment Memorandum (the "Gottschling Employment Memorandum," as
previously defined) with Ulrich E. Gottschling, which amends Mr. Gottschling's
existing employment agreement. See "Election of Directors Employment
Agreements" above.
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 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.
<PAGE>
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 1997 Annual Meeting of Stockholders that was held on
June 30, 1998 would be determined as follows:
<TABLE>
<S> <C>
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>
<PAGE>
The Stockholder Voting Agreement further provides that the director
nominees for the 1998 Annual Meeting of Stockholders, to which this proxy
statement relates, will be as follows:
<TABLE>
<S> <C>
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 as a second nominee of Vincent J. Bitetti to the extent permitted by the
by Vincent J. Bitetti 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 as a nominee of ASSI, Inc. to the extent permitted by the Stockholder Voting
by ASSI, Inc. 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>
AUTHORIZATION OF CHANGE IN TERMS OF REDEEMABLE WARRANTS
(PROPOSAL NO. 2)
General
The Company currently has issued and outstanding publicly traded redeemable
warrants (the "Redeemable Warrants") to purchase 5,961,440 shares of the
Company's Common Stock. Each Redeemable Warrant entitles the holder to purchase
one share of Common Stock for $4.40 during the period from July 1, 1997 to
January 1, 2002. The Redeemable Warrants are subject to redemption by the
Company at any time after July 2, 1997, at a price of $.25 per Redeemable
Warrant, if the average closing bid price of the Common Stock equals or exceeds
$5.60 per share for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date the Company
issues notice of redemption.
The Board of Directors believes that the existence of the Redeemable
Warrants historically has depressed the market value of the Common Stock, and
inhibited the ability of the Company to raise needed equity capital. In an
effort to rectify these problems associated with the Redeemable Warrants, the
Board of Directors has determined to seek the approval of the Company's
<PAGE>
stockholders of a temporary change in the terms of the Redeemable Warrants
intended to induce the holders of the Redeemable Warrants to exercise them on a
"cashless" basis, and thereby to reduce the total number of shares of Common
Stock issuable upon exercise of all of the presently outstanding Redeemable
Warrants (the "Warrant Proposal").
The Warrant Proposal would involve the following general terms, with the
specific terms to be determined by the Board of Directors. Subject to
stockholder approval, the Board of Directors would be granted discretionary
authority to reduce the exercise price of the Redeemable Warrants for a stated
period of up to 90-days, to an exercise price equal to not less than 90% of the
average closing bid price of the Common Stock for a specified period the date on
which the price reduction is publicly announced; provided, that in connection
with such offer the holders of Redeemable Warrants would be entitled to exercise
their Redeemable Warrants solely on a "cashless" basis by surrendering
Redeemable Warrants having a fair market value equal to the applicable exercise
price. For such purposes, the fair market value of the Redeemable Warrants
would be deemed to equal the average closing bid price for the Redeemable
Warrants for a stated period of up to 90 days preceding the date on which the
Warrant Proposal and the amount of the related exercise price reduction is
publicly announced. The Company would pay cash in lieu of issuing fractional
shares of Common Stock in connection with any cashless exercise.
For example, if for the applicable-day measurement period the average
closing bid price of the Common Stock was $1.00, and the average closing bid
price of the Redeemable Warrants was $.10, the exercise price of the Redeemable
Warrants would be $.90, which could be paid only by the surrender of nine
Redeemable Warrants.
Approval of the Warrant Proposal by the stockholders would authorize, but
not obligate, the Board of Directors to offer holders of the Redeemable Warrants
the opportunity to exercise such Redeemable Warrants at a reduced exercise price
and on a cashless basis, as described above. If the Board of Directors then
exercised their authority to extend such offer to the holders of the Redeemable
Warrants, such holders in their sole discretion would be free to accept or
reject the offer.
VOTE REQUIRED
Stockholder approval of the Warrant Proposal would be required pursuant to
the Rule 4460(I) promulgated by the National Association of Securities Dealers,
Inc., to which the Company is subject by virtue of its Common Stock being listed
on the Nasdaq SmallCap Market, but only if the Warrant Proposal involved the
issuance of Common Stock equal to 20% or more of the Common Stock outstanding
before the issuance. If the exchange ratio applicable to a cashless exercise
were less than approximately 5.25-to-1, acceptance of the Warrant Proposal by
the holders of all Redeemable Warrants on a cashless basis would result in the
Company issuing a number of shares of Common Stock in excess of 20% of the
number of shares of Common Stock that are presently issued and outstanding. The
exchange ratio that would apply to cashless exercises under the Warrant Proposal
can not be ascertained in advance of the date on which the Warrant Proposal is
publicly announced. Moreover, there can be no assurance as to how many, if any,
of the holders of the Redeemable Warrants would accept such offer, if made.
Therefore, it is not possible to determine in advance whether Rule 4460(I) would
require stockholder approval of the Warrant Proposal.
<PAGE>
In view of the foregoing, the Board of Directors has determined that the
Warrant Proposal should be implemented only if the stockholder approval
requirements of Rule 4460(I) are satisfied, even though they may not actually be
applicable to the Warrant Proposal. Accordingly, 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 40.4 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 AUTHORIZATION OF CHANGE IN TERMS OF
REDEEMABLE WARRANTS AS DESCRIBED IN THIS PROPOSAL NO. 2.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS FOR FISCAL 1999
(PROPOSAL NO. 3)
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 1999, 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 years 1998 and 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.
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
<PAGE>
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 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 40.4 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 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. 3.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR 1999
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 1999 annual
meeting of stockholders is expected to be held on or about December 6, 1999, and
proxy materials in connection with that meeting are expected to be mailed on or
about October 15, 1999. Stockholder proposals prepared in accordance with the
proxy rules must be received by the Company on or before September 1, 1999.
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 1998.
<PAGE>
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
Sound Source Interactive, Inc.
26115 Mureau Road, Suite B
Calabasas, California 91302
<PAGE>
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
November 2, 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
December 11, 1998, and at any adjournment thereof, hereby revoking any proxy or
proxies previously given.
<TABLE>
<CAPTION>
<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
(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 authorize the Board of Directors, in their discretion, to offer holders of Redeemable Warrants the
opportunity to exercise such Redeemable Warrants at a reduced exercise price and on a cashless basis.
[_] For [_] Against [_] Abstain
3. Proposal to rectify the appointment of Deloitte & Touche LLP as the Company's independent auditors for fiscal 1999.
[_] For [_] Against [_] Abstain
Discretionary authority is hereby granted with respect to such other matters as may properly come before the Annual Meeting.
</TABLE>
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"
PROPOSALS #2 AND #3 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.
