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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NO. 0-28604
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SOUND SOURCE INTERACTIVE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C>
DELAWARE 95-4264046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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26115 MUREAU ROAD, SUITE B
CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 878-0505
(ISSUER'S TELEPHONE NUMBER
INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE
ON WHICH REGISTERED:
COMMON STOCK, PAR VALUE $.001 NASDAQ SMALLCAP MARKET
REDEEMABLE WARRANTS
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Check whether the Issuer (1) filed all reports required to be filed by
Section 12 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and such disclosure will not be contained, to
the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal year were $8,867,490.
As of August 31, 1998, the aggregate market value of the shares of the
Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$4,635,420, and the number of outstanding shares of the Issuer's common stock,
par value $.001, was 5,701,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of its fiscal year ended June
30, 1998 are incorporated by reference into Part III of this Form 10-KSB.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
Sound Source Interactive, Inc. (the "Company"), which was incorporated on
March 8, 1990, is engaged primarily in developing, publishing and marketing of
interactive computer software primarily based on well recognized intellectual
content. The Company produces educational software and entertainment software.
Educational software consists principally of children's edutainment products
including Interactive MovieBooks(TM), Activity Centers and Learning
Adventures(TM) for children ages three to 12. Entertainment software consists
principally of interactive games. In July 1996, the Company created a "Games"
division and currently has under development several games and in February
1998 acquired Biological Weapons Testing Laboratories, Inc. ("BWT Labs,
Inc."), formerly known as Asylum Entertainment, Inc., to further establish a
core competency in game development.
The Company's objective is to be a leading publisher of high quality,
competitively priced, consumer-oriented software. To achieve this objective,
the Company intends to (i) focus primarily on developing products with
educational and/or entertainment value which are based on popular movies,
videos and other intellectual characters or brands, and are easy to use and
install, (ii) develop a broad line of products, upgrade successful products
and develop product line extensions and complementary products, (iii) leverage
studio relationships to develop cross-marketing promotional programs, (iv)
promote tradename recognition, (v) leverage its licensed content to develop
products intended for the game market, and (vi) pursue strategic alliances and
acquisitions.
Many of the Company's products are based on the licensed content of major
motion picture studios including Viacom Consumer Products (as agent for
Paramount Pictures Corp.), Twentieth Century Fox Licensing, New Line Cinema,
Harvey Entertainment, Warner Bros. Consumer Products, MCA/Universal
Merchandising, Inc., MGM/UA Merchandising, Inc. and others. The Company's
license agreements for existing products include Babe(TM), The Land Before
Time(TM), Babylon 5(TM), Free Willy(TM), Star Trek(TM), I Love Lucy(TM),
Casper(TM), Lost In Space(TM), An American Tail(TM) and other popular titles.
The Company also holds licenses for new products based on, Babe: A Pig In The
City(TM), The Abyss(TM), Casper Meets Wendy(TM), Berenstain Bears(TM), The
King and I(TM) and Maisy(TM). The Company is continuing the negotiation of
additional licenses for its children's products and games. Management believes
the Company is capable of continuing to obtain new licenses and developing
new, high quality software products using content from these entertainment
properties.
The licensing contracts with the studios are usually three to five years in
duration. The licenses are exclusive, worldwide and typically allow for
multiple titles to be produced in all applicable localized languages to suit
market needs by territory. The Company seeks licenses that have strong brand
awareness worldwide and franchises that receive studio support.
In addition to CD-ROM, many of the licenses allow for digital videodisk
("DVD") and compact disk ("CD") consoles such as the Sony(TM) Playstation(TM)
As of August 1998, the Company became a Sony(TM) Playstation(TM) publishing
licensee.
The Company believes that as of August 31, 1998, its products were in
distribution to approximately 8,000 retail outlets. Retailers currently
selling one or more of the Company's products include Toys R Us, Office Depot,
Office Max, Staples, Future Shops, CompUSA, Best Buy, BJ's, Electronics
Boutique, Babbages, Etc., Kmart, Barnes & Noble, Sam's Club, Zainy Brainy,
Hastings, Virgin Megastores, Fry's Electronics and others.
The Company is located at 26115 Mureau Road, Suite B, Calabasas, California,
91302. Its telephone number is (818) 878-0505, and its facsimile number is
(818) 878-0007.
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INDUSTRY BACKGROUND
In recent years, the installed base of multimedia personal computers
("Multimedia PCs") in households has grown as prices have declined and as
improvements in computing power and capability have been achieved. There are a
number of factors driving the increased demand and use of Multimedia PCs in
U.S. and foreign households beyond the general impact of falling prices and
increased performance. Enabling technologies and standards, such as graphical
user interfaces and the Internet have made Multimedia PCs easier to use for a
broad range of applications, resulting in the transformation of Multimedia PCs
into general-purpose tools. In addition, today's Multimedia PCs feature high-
speed microprocessors, large amounts of memory, high-resolution monitors and
enhanced sound, speaker and graphics capabilities. These advanced capabilities
have allowed software developers to produce more engaging software with
advanced three-dimensional graphics, realistic sound and full-motion video.
In response to these developments, increasing numbers of consumer software
products are being developed to address a broad range of consumer interests
and everyday tasks. The Company believes that consumers are more frequently
purchasing software on impulse in the same way that they often buy books,
music CDs and motion picture videos. With the increasing consumerization of
the software market, the Company believes that the prices for consumer
software products will fall. The Company believes that as this occurs, the
distribution channels for consumer software will continue to expand to include
book and music stores, video outlets and supermarkets. See Part I, Item 1,
"Description of Business--Risk Factors--Forward-Looking Statements."
As consumer software becomes a mass-market product, the Company believes it
will become increasingly important for consumer software companies to have
direct relationships with retailers to effectively market their products to
consumers. The Company believes that in order to be successful, consumer
software companies must have a consumer-driven focus, a broad offering of
category-leading products, close relationships with retailers, a recognized
brand name and a cost-efficient business model. In an effort to incrementally
increase the Company's revenues, as well as create new revenue sources, the
Company is active in searching for new ways to market the Company's products.
Included in these non-traditional methods is the placement of coupons in
videos, coupons in complimentary products, "unlockable" discs, and enhanced
upsell programs.
The CD console market is currently dominated by Sony(TM) and Nintendo(TM).
The Company is currently evaluating this marketplace, and intends to enter
this market sometime in fiscal 2000.
CORE COMPETENCE
To achieve its objectives, the Company believes that a high quality product
with solid playability is critical to consumer acceptance and repeat
purchases. The Company's products are produced in sustainable categories by
product development departments that have achieved or acquired a core
competence in those categories. The education products are produced in the
Company's Calabasas, California offices or by qualified outside developers
that are managed by Company personnel. As of July 1998, PC Data, Inc., a
qualified industry source, ranked the Company as the seventh largest
educational software publisher in the United States.
To acquire a core competence in entertainment software categories, in
February 1998, the Company acquired Biological Weapons Testing Labs, Inc.; a
Berkeley, California based game developer formerly known as Asylum
Entertainment, Inc. As of August 1998, all of the Company's entertainment
product development assets have been relocated to the Berkeley office. BWT
Labs, Inc. is a qualified developer for PC and console based games, having
produced a large variety of titles on various platforms, including sports
games for Nintendo GameBoy(TM) and strategy games for the PC. All
entertainment software products for the Company are being produced or managed
by the Berkeley office. Entertainment software near completion includes The
Abyss: Incident at Europa, an adventure game, and Olympus: War of the Gods, a
strategy game. Other Entertainment software under development includes Star
Trek--The Game Show Volume II and Zuul.
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PRODUCTS
Educational Software
The Company has divided its educational software products into the following
categories:
Interactive Storybooks--The Company has created interactive storybooks that
it markets as Interactive MovieBooks(TM) for children as they contain full
motion video based on the licensed property. Interactive MovieBooks(TM) are
marketed as reading aids for young children, generally for ages three through
six. This product category provides options for automatic reading by the
computer, user reading, a dictionary invoked by "clicking" on a dictionary
book icon, actual full motion video taken from the motion picture that
coincides with the text pages, high-quality sound, art and animation as well
educational games related to the story. Currently, the products are sold at a
suggested retail price of $20 each, a price point intended to generate impulse
purchases among consumers at the retail level. To date, the Company has
released 11 Interactive MovieBooks(TM) based on licenses such as Babe(TM), The
Land Before Time(TM) and An American Tail(TM). According to PC Data, the
electronic book category accounts for approximately five percent of the
educational software market.
Activity Centers and Learning Adventures--This product line contains
activities intended teach young children logic, language skills, arithmetic
and reading comprehension, along with developmental challenges such as
multiple choice questions, rhyme and motor basics while entertaining and
captivating the players. Currently, the products are sold at suggested retail
prices of up to $30 each. To date, the Company has released six activity
centers and learning adventures based on licenses such as The Land Before
Time(TM), Casper(TM), Free Willy(TM) and Hercules(TM) and Xena(TM). According
to PC Data, the activity center category accounts for approximately ten
percent of the educational software market.
During fiscal 1998, the Company introduced both subject specific and multi-
subject children's products such as The Land Before Time(TM) Math Adventure
and The Land Before Time(TM) Kindergarten Adventure. Currently, the products
are sold at suggested retail prices of up to $30 each. To date, the Company
has released two subject specific or multi-subject educational products and
has under development and additional four products that are scheduled for
release prior to November 1998. According to PC Data, Inc., multi-subject
products account for approximately 25 percent of the educational software
market and math and reading products each account for approximately ten
percent of the educational software market.
Entertainment Software
During July, 1996, the Company created a game division and began development
of a PC game sequel to the 1989 theatrical release The Abyss(TM), under a
license from Twentieth Century Fox Licensing and Merchandising. Additionally,
the Company acquired the rights to a game developed by another developer and
created a third game internally. In February 1998, the Company acquired BWT
Labs, Inc. as a wholly owned subsidiary. As of August 1998, internal game
development and all game development management and oversight are conducted
through BWT Labs, Inc. at its Berkeley, California offices. Currently the
Company is continuing development of The Abyss: Incident at Europa game
project, which is scheduled for completion in September 1998, and has formed a
joint venture with an outside developer for a strategy based game titled
Olympus: War of the Gods scheduled for release in the first calendar quarter
of 1999. The Company has also begun development of two additional games
scheduled for release in fall 1999. The Company plans to focus its game
development in the following sustainable categories: family entertainment,
adventure games and strategy games.
The Company's entertainment computer software utilities, which it refers to
as Limited Edition Entertainment Utilities(TM), incorporate screen savers,
sound clips and other content, including mini arcade games, into a desktop
diversion. The entertainment utilities are based on licensed entertainment
properties and are marketed as limited edition, serialized collector editions.
The Company does not intend to release any additional limited edition
entertainment utilities.
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PRODUCT DISTRIBUTION
North American Retail
On June 1, 1996 the Company entered into a Distribution Services Agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS") which
expired on May 31, 1998. SSIDS is the consumer software distribution unit of
Simon & Schuster, Inc., the publishing operation of Viacom Inc. Pursuant to
this distribution agreement, SSIDS provided sales, marketing, distribution,
warehousing and order fulfillment services for all of the Company's products
throughout the United States. SSIDS made a monthly payment to the Company in
an amount equal to its "gross revenues" from the Company's products, less a
distribution fee and reserve for returns equal to stated percentages of the
gross revenues and less certain other items, including out-of-pocket costs
associated with inventory maintenance and order fulfillment. "Gross revenues"
were defined as amounts actually billed by SSIDS to its customers for Company
products sold by it. The payments by SSIDS were due not later than 75 days
after each calendar month end. Under the SSIDS distribution agreement the
Company was responsible for both bad debts and product returns. The Company
maintained reserves for bad debts and product returns based upon its prior
experience and current market conditions against which credits for actual bad
debts and returns were applied. The reserve for product returns was netted
against revenues as reported by SSIDS.
The Company is currently negotiating with SSIDS with a view to entering into
a new agreement, whereby SSIDS would provide only distribution, warehousing,
order fulfillment and accounts collection services. It is anticipated that
such agreement, which would be nonexclusive, would require the Company to be
responsible for all other aspects of marketing its products. There can be no
assurance that the Company will enter into any such agreement with SSIDS.
Moreover, there can be no assurance that the Company can successfully
undertake the other marketing responsibilities previously assumed by SSIDS
pursuant to the expired agreement. Pending the execution of such agreement,
the Company continues to distribute its products through SSIDS on the basis
anticipated to be reflected in the agreement. See Part I, Item 1, "Description
of Business--Risk Factors--Product Distribution" and, "Description of
Business--Risk Factors--Product Returns and Bad Debts."
International Retail
The Company utilizes several international distributors to actively promote
and sell the Company's English language products throughout most of the
English speaking countries including Canada, Taiwan, Singapore, Australia,
Malaysia and Hong Kong. Additionally, the Company has entered into a
republishing agreement with IONA Software, Ltd. ("IONA") of Dublin, Ireland to
translate certain of the Company's products into as many as 14 different
languages for sale in up to 35 countries. Under the terms of this agreement,
the Company is paid a republishing fee on each product sold. All costs of
localization of the product, product boxes and collateral materials, as well
as all costs or replication, marketing, warehousing and fulfillment, are borne
by IONA. The success of this localization will be dependent upon the
international appeal of certain of the Company's products, growth of the PC
market internationally, the ability of IONA to successfully localize the
products and the ability of the Company to continue to obtain licenses with
worldwide appeal. The Company is currently negotiating with several other
international distributors to increase sales of the Company's products on a
worldwide basis.
SALES AND MARKETING
By offering a wide variety of products, the Company believes that it can
provide retailers with an assortment of titles in categories of interest to
consumers. The Company also supports its retailers by setting up special
displays, end caps and kiosks, executing targeted promotions and analyzing
sales trends to help build incremental sales. The Company is currently
developing a variety of cross-marketing promotional programs with its movie
studio licensors and other licensees of movie and direct to video titles.
These promotional programs may include discount coupons for products in
videocassettes, movie trailers in the Company's software products, and
promotional contests with various motion picture studios. During June 1998,
the Company completed one of such promotions through the sale of CDs to
Universal Home Video resulting in net sales by the Company in the amount of
$1,957,500. The Company is actively seeking additional cross-promotion
opportunities. The Company
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believes that a significant amount of revenues during the upcoming fiscal year
could be generated through the Company's involvement in cross-promotional
efforts with other studio partners and direct sale programs, although there
can be no assurance that such will occur.
Drawing upon established consumer marketing techniques, the Company's
marketing department creates and executes high-impact merchandising programs
with the goal of maximizing each product's retail exposure. The Company
believes that its consumer-driven marketing, the high perceived value and
competitive price points of its products, and easily identifiable packaging
emphasizing high-impact design and concise, nontechnical product information,
lead to higher visibility and impulse purchases of its products in retail
stores.
In September 1998, the Company entered into an agreement with Digital River
to provide certain Internet sales and marketing services. This is the first
phase in the Company's strategy to begin selling its products via the
Internet.
The Company provides technical support to its customers by telephone. The
Company has installed a telephone system and a call-handling center to
facilitate its response to customer inquiries. Customer feedback is shared
among other support representatives and made available to product managers for
development of product enhancements and upgrades.
DEVELOPMENT
The Company seeks to develop a broad line of products in sustainable market
categories in which a reasonable market share can be obtained. The Company
believes that its efficient development model has certain key advantages
including consistent product quality, reliable delivery schedules, cost
containment and controlled capital investment risk.
The Company's product managers oversee the development of various products
from conception through completion, and control the content, design, scope and
development schedule. New product ideas are evaluated with each studio partner
based upon upcoming theatrical releases, detailed market research on the
subject matter, the type and demographics of the target consumer, and the
existence and characteristics of competitive products. The Company seeks to
design new products, which incorporate all of the important functions and
features of the leading competitive products. Once a product is approved for
development, a detailed design specification is created that includes the
product's features and a user interface that is consistent with other Company
products. Whenever possible, the software is designed to incorporate
technology used in existing Company products in an effort to shorten the
development cycle and improve quality and consistency. The overall product,
including documentation, is designed to meet a manufacturing specification
that will meet the Company's margin requirements at consumer price points.
The product managers then execute the development project with a team that
includes programmers, sound engineers, artists, animators, designers, writers
and testers. The Company's internal development efforts are focused primarily
on product design and features, consistent user interfaces and product quality
consistency. The Company supplements its internal product development
resources by utilizing existing technologies and externally developed
programming when such utilization can result in a more efficient method of
creating a higher quality product. Using this method, the Company maintains
internal control over the creative and market-driven aspects of product
development while using external resources to shorten development time and
lower development risks. Development costs associated with externally licensed
technology are generally partially paid by royalties based on net sales, which
lowers the Company's investment risk. The Company's agreements with its
external developers typically grant the Company an exclusive worldwide license
to use the developers' source code. The agreements typically have three-year
terms, with renewal provisions upon mutual agreement of the parties.
Products under development are extensively tested by the quality assurance
department, and must be approved by the licensor before being released for
production. The department tests for bugs, functionality, ease-of-use and
compatibility with the many popular Multimedia PC configurations that are
available to consumers.
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Product managers are also responsible for reviewing customer feedback,
competitive products, product performance and market positioning in order to
introduce features that keep abreast of consumer tastes and trends.
In order to supplement the Company's development activities, the Company has
begun to acquire products developed by unrelated third parties. The Company
anticipates that as opportunities to acquire products become available, the
Company will evaluate its current and future product mix to determine if the
acquisition of an additional title will provide a benefit to the Company.
Under the terms of the current agreements, the Company generally provides
either funds to complete development of the product or an advance against
future royalties. In either case, such advances are recouped by the Company
against royalties owed to the developer upon sales of the completed products.
The Company currently is the licensee under technology licenses with Apple
Computer, Inc., Qsound Labs, Inc., EchoMedia, Inc. and Rhode Island Soft
Systems, Inc. The Company utilizes technology provided by these licensors to
develop and operate several of its products. With the exception of the Apple
Computer, Inc. license, there are alternative products for each of the
technologies now licensed by the Company. Therefore, the Company believes that
it could readily obtain licenses to comparable products from other sources at
comparable costs.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent contractors in accordance with the
Company's specifications. The Company intends to continue to invest in
additional management information systems and other capital equipment, which
it believes to be necessary to achieve operational efficiencies and support
increasing sales volumes.
The Company prepares master software disks, user manuals and packaging
designs. CD duplication, printing of documentation and packaging, as well as
the assembly of purchased components and the shipment of finished products,
are performed by third parties in accordance with the Company's
specifications. The Company has multiple sources for all components, with
assembly and shipping currently performed by several independent fulfillment
houses. To date, the Company has not experienced any material difficulties or
delays in the production and assembly of its products.
COMPETITION
The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater
financial, technical and marketing resources than those of the Company.
Existing consumer software companies may broaden their product lines to
compete with the Company's licensed products, and potential new competitors,
including computer hardware and software manufacturers, diversified media
companies and toy companies, may enter or increase their focus on the consumer
software market, resulting in greater competition for the Company. See Part I,
Item 1, "Description of Business--Risk Factors--Competition."
Only a small percentage of products introduced in the consumer software
market achieve any degree of or have sustained market acceptance. Principal
competitive factors in marketing consumer software include product features,
quality, reliability, trade name and licensed title recognition, ease-of-use,
merchandising, access to distribution channels and retail shelf space,
marketing, price and the availability and quality of support services. The
Company believes that it continues to compete effectively in these areas,
particularly in the areas of quality, brand recognition, ease-of-use,
merchandising, access to distribution channels and retail shelf space and
price.
The Company considers The Learning Company, Cendant, Disney and GT
Interactive Software Corp. its chief competitors. See Part I, Item 1,
"Description of Business--Risk Factors--Competition."
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PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's current products are CD-ROM based, and hence are
difficult to copy. During the fiscal years ended June 30, 1998, 1997 and 1996,
the Company was unaware of any significant amount of unauthorized copying of
its products.
The Company's products are based upon licensed content of major motion
picture studios under license and/or development agreements. All of such
license and development agreements to which the Company currently is a party
are for fixed terms, which will expire over the next five years. Additionally,
the Company attempts to obtain in all of its agreements automatic renewals
based on achievement of certain milestones, and the right of first refusal for
additional products utilizing the same intellectual characters. The Company
anticipates that in most cases the licenser under each agreement will extend
its terms, although no licensor is required to extend any license. Provided
that the Company is in compliance with all requirements of each license,
including most significantly that the Company has satisfied the applicable
minimum royalty guarantees, the licenser can not prematurely cancel a license.
EMPLOYEES
As of August 31, 1998, the Company had 42 full-time employees, including
five employees in sales and marketing, 28 employees in development and
customer support, seven employees in administration and finance and two
employees in licensing. None of the Company's employees are represented by a
labor union or are subject to a collective bargaining agreement. From time to
time the Company will engage consultants and independent contractors.
RISK FACTORS
Product Distribution
On June 1, 1996 the Company entered into a Distribution Services Agreement
SSIDS which expired on May 31, 1998. SSIDS is the consumer software
distribution unit of Simon & Schuster, Inc., the publishing operation of
Viacom Inc. Pursuant to this distribution agreement, SSIDS provided sales,
marketing, distribution, warehousing and order fulfillment services for all of
the Company's products throughout the United. SSIDS made a monthly payment to
the Company in an amount equal to its "gross revenues" from the Company's
products, less a distribution fee and reserve for returns equal to stated
percentages of the gross revenues and less certain other items, including out-
of-pocket costs associated with inventory maintenance and order fulfillment.
"Gross revenues" were defined as amounts actually billed by SSIDS to its
customers for Company products sold by it. The payments by SSIDS were due not
later than 75 days after each calendar month end. Under the SSIDS distribution
agreement the Company was responsible for both bad debts and product returns.
The Company maintained reserves for bad debts and product returns based upon
its prior experience and current market conditions against which credits for
actual bad debts and returns were applied. The reserve for product returns was
netted against revenues as reported by SSIDS.
The Company is currently negotiating with SSIDS with a view to entering into
a new agreement, whereby SSIDS would provide only distribution, warehousing,
order fulfillment and accounts collection services. It is anticipated that
such agreement, which would be nonexclusive, would require the Company to be
responsible for all other aspects of marketing its products. There can be no
assurance that the Company will enter into any such agreement with SSIDS.
Moreover, there can be no assurance that the Company can successfully
undertake the other marketing responsibilities previously assumed by SSIDS
pursuant to the expired agreement. Pending the execution of such agreement,
the Company continues to distribute its products through SSIDS on the basis
anticipated to be reflected in the agreement.
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Product Returns and Bad Debts
Although SSIDS is responsible for the collection of accounts, the Company is
responsible for bad debts and product returns. The Company maintains reserves
for bad debts and product returns based upon its prior experience and current
market conditions. The reserve for bad debts is netted against accounts
receivable and the reserve for product returns is netted against revenues.
Although the Company believes that these reserves are adequate, there can be
no assurance that its actual losses due to bad debts and product returns will
not exceed the reserved amounts.
Competition
The market for the Company's consumer software products is intensely and
increasingly competitive. Existing consumer software companies may broaden
their product lines to compete with the Company's products, and potential new
competitors may enter or increase their focus on the consumer software market,
resulting in even greater competition for the Company. Many of the companies
with which the Company currently competes, including The Learning Company,
Cendant, Disney and GT Interactive Software Corp., have greater financial,
technical, marketing, sales and customer support resources, as well as greater
name recognition and better access to consumers, than the Company. To the
extent that competitors achieve performance, price or other selling
advantages, the Company could be materially adversely affected. There can be
no assurance that the Company will have the resources required to respond
effectively to market or technological changes or to compete successfully in
the future. In addition, increasing competition in the consumer software
market may cause prices to fluctuate, which may materially adversely affect
the Company's business, operating results and financial condition.
Control of the Company by Officers and Directors and ASSI, Inc.
As of August 31, 1998, the Company had 5,701,624 outstanding shares of
Common Stock. Vincent J. Bitetti, who is the Company's largest shareholder,
owned of record 1,234,684 shares (21.7%) of the outstanding Common Stock; and
ASSI, Inc. owned of record 1,140,000 shares (20.0%) of Common Stock. Louis
Habash of Las Vegas, Nevada, is the ultimate beneficial owner of all of the
Common Stock and ASSI Warrants owned by ASSI, Inc. ASSI, Inc. has indicated to
the Company that it acquired the Common Stock beneficially owned by it as an
investment and with a view to long-term capital appreciation.
Possible Need For Additional Financing
The Company heretofore has been substantially dependent on the net proceeds
of its securities offerings, including its initial public offering, to fund
its working capital requirements. As of June 30, 1998, the Company has working
capital of $1,684,546 and cash of $693,741. The Company has experienced a
significant increase in growth during the year ended June 30, 1998, as
compared to the prior fiscal year. The Company may require additional
financing to fund its growth and to meet all of its obligations in a timely
manner. Effective September 1997, the Company entered into a factoring
agreement with Silicon Valley Financial Services, a division of Silicon Valley
Bank. The factoring agreement provides up to $1,500,000 of the Company's
qualified gross domestic accounts receivable, as defined in the agreement. The
credit is secured by all the assets of the Company. As of August 31, 1998, no
amounts were drawn under this facility. See Part II, Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity."
Qualification Requirements for Nasdaq Securities; Risk of Low Priced
Securities
In order for the Company's securities to continue to be listed on the Nasdaq
SmallCap Market, (I) the Company must have either (A) net tangible assets
(defined as total assets, excluding goodwill, minus total liabilities) of at
least $2,000,000, (B) a market capitalization of at least $35,000,000 or (C)
net income in its latest fiscal year or in two of its last three fiscal years
of at least $500,000, (ii) a public float (defined as shares not held directly
or indirectly by any officer, director or ten percent or greater stockholder
of the Company) of at
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least 500,000 shares having a market value of at least $1,000,000, (iii) a
minimum bid price of at least $1, (iv) at least two market makers, and (v) at
least 300 stockholders that each own 100 or more shares. If the bid price for
the Common Stock falls below $1 for 30 days, it has 90 days to come back into
compliance (by closing at or above $1 for ten consecutive days) before being
subject to delisting.
The Company does not know at this time if it will maintain its listing on
Nasdaq SmallCap Market; however, in the event the Company experiences losses
from operations or material adverse trading conditions, the Common Stock and
Redeemable Warrants could be subject to delisting from Nasdaq. It is
anticipated that if the Common Stock and Redeemable Warrants are delisted from
the Nasdaq SmallCap Market, trading, if any, therein would be conducted in the
over-the-counter market on the NASD OTC Electronic Bulletin Board established
for securities that do not meet the listing requirements or the Company's
securities would be quoted in what are commonly referred to as the "pink
sheets". In such event, an investor may find it more difficult to dispose of,
or to obtain accurate price quotations and volume information concerning, the
Common Stock and Redeemable Warrants.
Forward-Looking Statements
A number of the matters and subject areas discussed in the foregoing "Risk
Factors" section and elsewhere in this Annual Report that are not historical
or current facts deal with potential future circumstances and developments.
The discussion of such matters and subject areas is qualified by the inherent
risks and uncertainties surrounding future expectations generally, and also
may materially differ from the Company's actual future experience involving
any one or more of such matters and subject areas. The Company has attempted
to identify, in context, certain of the factors that it currently believes may
cause actual future experience and results to differ from the Company's
current expectations regarding the relevant matter or subject area. The
operation and results of the Company's business also may be subject to the
effects of other risks and uncertainties in addition to the relevant
qualifying factors identified elsewhere in the foregoing "Risk Factors"
section, including, but not limited to, general economic conditions in the
geographic markets served, changes in technological developments related to
the personal computer software industry, delays in product ship schedules,
changes in consumer preferences regarding entertainment and edutainment
software, potential limitations regarding the acquisition of quality and
quantity licenses, and other risks and uncertainties described from time to
time in Company reports filed with the Commission.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions with
the Company as of August 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Vincent J. Bitetti............... 43 Chairman of the Board, Chief
Executive Officer and Director
Ulrich E. Gottschling............ 40 President, Chief Operating Officer
Chief Financial Officer, Treasurer,
Secretary and Director
</TABLE>
Vincent J. Bitetti founded Sound Source Interactive, Inc., a California
corporation (the "Subsidiary"), in 1988 and served as the President of the
Subsidiary from its formation. Since the Company acquired the Subsidiary in
1994, Mr. Bitetti has served as the Chairman of the Board and Chief Executive
Officer and as a director of the Company and the Subsidiary. Prior to founding
the Subsidiary, from 1986 to 1988 Mr. Bitetti was President of Fantastic
Planet Consultants, a sound and musical instrument design consulting company.
Mr. Bitetti is a published music composer and lyricist. From 1986 to 1993, Mr.
Bitetti was a consultant to manufacturers of keyboard synthesizers in the
music industry. Mr. Bitetti 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.
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<PAGE>
Ulrich E. Gottschling was appointed as Chief Financial Officer, Treasurer
and director of the Company on October 9, 1995, as Secretary of the Company on
November 17, 1995 and as President and Chief Operating Officer of the Company
on February 1, 1997. Prior to joining the Company, Mr. Gottschling was
employed from June 1991 through September 1995 as a certified public
accountant with Corbin & Wertz, who previously was the Company's independent
auditors. From 1987 through May 1991, he was employed as a certified public
accountant by Deloitte & Touche LLP. From 1980 through 1986, Mr. Gottschling
held various management positions with Westin Hotels and Marriott Corporation.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 8,613 square feet of office and warehousing
space in Calabasas, Los Angeles County, California under a lease, which
expires on May 31, 2002, and leases 1,500 square feet of office space in
Berkeley, Alameda County, California under a lease which expires on October
31, 1999. The Company currently expects that these facilities will be
sufficient for its needs at least through the term of the leases. The Company
may lease additional space as its needs require, which it believes will be
available on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its officers and directors have been, and in the future the
Company and/or its officers and directors may be, involved in suits and
actions incidental to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were voted upon at the Annual Meeting of Stockholders
held on June 30, 1998, and received the votes set forth below:
1. All of the following persons nominated were elected to serve as
directors and received the number of votes set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NAME FOR ABSTAIN
---- --------- -------
<S> <C> <C>
Richard Azevedo........................................ 2,757,834 96,210
Vincent J. Bitetti..................................... 2,757,834 96,210
Ulrich E. Gottschling.................................. 2,757,834 96,210
Mark A. James.......................................... 2,757,834 96,210
Samuel L. Poole........................................ 2,757,834 96,210
Wayne M. Rogers........................................ 2,757,834 96,210
John T. Wholian........................................ 2,757,834 96,210
</TABLE>
2. A proposal to adopt amendments to the Company's 1995 Stock Option Plan
received 2,717,702 votes FOR, and 124,742 votes AGAINST, with 11,600
abstentions.
3. A proposal to ratify amendments to the Company's Bylaws received
2,737,570 FOR, and 106,242 AGAINST, with 10,232 abstentions.
4. A proposal to amend and restate employment agreement with Vincent J.
Bitetti received 2,732,670 FOR, and 109,942 AGAINST, with 11,432
abstentions.
5. A proposal to ratify an amendment to the employment agreement of
Ulrich E. Gottschling received 2,730,770 FOR, and 109,842 AGAINST, with
13,432 abstentions.
6. A proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for 1998 received 2,820,312 FOR, and 22,832
AGAINST, with 10,900 abstentions.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Redeemable Warrants have been traded on the
NASDAQ SmallCap Market under the symbols "SSII" and "SSIIW," respectively,
since July 2, 1996, and were not traded on any market or exchange prior to
that date. Therefore, no information is available as to the range of sales
prices for these securities for any period prior to July 2, 1996. The
following table sets forth the range of the bid prices for the Common Stock
and Redeemable Warrants during the periods indicated, and represents
interdealer prices, without retail mark-ups, mark-downs or commissions to the
broker-dealer, and may not represent actual transactions.
<TABLE>
<CAPTION>
NASDAQ
SYMBOL HIGH LOW
------ ----- -----
<S> <C> <C> <C>
Common Stock................................................ SSII
1996
Third Calendar Quarter.................................... $6.25 $4.00
Fourth Calendar Quarter................................... $5.75 $4.00
1997
First Calendar Quarter.................................... $4.31 $1.38
Second Calendar Quarter................................... $1.62 $0.44
Third Calendar Quarter.................................... $1.56 $0.75
Fourth Calendar Quarter................................... $1.81 $0.97
1998
First Calendar Quarter.................................... $2.38 $1.00
Second Calendar Quarter................................... $2.50 $0.97
Third Calendar Quarter (through 9/22/98).................. $1.44 $0.63
Redeemable Warrants......................................... SSIIW
1996
Third Calendar Quarter.................................... $2.38 $1.00
Fourth Calendar Quarter................................... $1.88 $1.00
1997
First Calendar Quarter.................................... $1.00 $0.31
Second Calendar Quarter................................... $0.56 $0.13
Third Calendar Quarter.................................... $0.25 $0.13
Fourth Calendar Quarter................................... $0.25 $0.03
1998
First Calendar Quarter.................................... $0.31 $0.03
Second Calendar Quarter................................... $0.31 $0.09
Third Calendar Quarter (through 9/22/98).................. $0.16 $0.06
</TABLE>
As of August 31, 1998, there were approximately 156 holders of record of the
Common Stock and 38 holders of record of the Redeemable Warrants. Most such
securities are held in street name by nominees who hold stock certificates for
an unknown number of beneficial owners.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its operations and does
not anticipate payment of cash dividends in the foreseeable future.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended June 30, 1998,
1997 and 1996, and certain factors that are expected to affect the Company's
prospective financial condition. See Part I, Item 1, "Description of
Business--Risk Factors--Forward-Looking Statements."
The Company derives substantially all of its revenues from sales of its
retail consumer software. The Company designs, develops, markets and supports
a broad line of consumer software products. The Company focuses primarily on
family-oriented products with educational and entertainment value, which are
easy to use and install, using popular licensed intellectual content.
Effective June 1, 1996 the Company entered into a Distribution Services
Agreement with SSIDS that expired on May 31, 1998. The Company's relationship
with SSIDS was exclusive except with regard to the rights to distribute the
Company's product in direct-to-the-customer programs including direct mail,
telemarketing and in-box coupon fulfillment, which were nonexclusive. The
Company had no net sales to or through SSIDS during the year ended June 30,
1996. During the years ended June 30, 1998 and 1997, the Company had net sales
to or through SSIDS in the amount of $5,665,347 and $2,982,285, respectively,
which accounted for approximately 63.9% and 64.9% of the Company's total net
sales.
The Company is currently negotiating with SSIDS with a view to entering into
a new agreement, whereby SSIDS would provide only distribution, warehousing,
order fulfillment and accounts collection services. It is anticipated that
such agreement, which would be nonexclusive, would require the Company to be
responsible for all other aspects of marketing its products. There can be no
assurance that the Company will enter into any such agreement with SSIDS.
Moreover, there can be no assurance that the Company can successfully
undertake the other marketing responsibilities previously assumed by SSIDS
pursuant to the expired agreement. Pending the execution of such anticipated
agreement, the Company continues to distribute its products through SSIDS on
the basis anticipated to be reflected in the agreement. See Part I, Item 1,
"Description of Business--Risk Factors--Product Distribution" and,
"Description of Business--Risk Factors--Product Returns.
Net sales consist of gross sales net of allowances for returns, credit
losses and other adjustments. The Company adjusts its allowance for returns as
it deems appropriate. The Company could be forced to accept substantial
product returns or other concessions to maintain its relationships with
retailers and distributors and its access to distributor channels. The Company
is also exposed to the risk of returns of defective, shelf-worn and damaged
products from retailers and distributors.
Costs of sales consist primarily of product cost, freight charges, royalties
to outside programmers and content providers, and an inventory provision for
damaged and obsolete products. Product costs consist of the costs to purchase
the underlying materials and print boxes and manuals, media costs and
fulfillment.
YEAR 2000 DISCLOSURE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2-
digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is currently evaluating the potential impact of year 2000
compliance upon its operations. In addition, the Company is in the process of
communicating with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 Compliance issues. However, there can
be no guarantee that the systems of other companies on
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<PAGE>
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or it
results of operations for any given year. These costs and the date on which
the Company plans to complete the Year 2000 Compliance modifications and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
RESULTS OF OPERATIONS
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1998
Net Sales. Net sales increased by 92.9 percent from $4,596,806 for the year
ended June 30, 1997 to $8,867,490 for the year ended June 30, 1998. Total
sales of the Company's software products increased by 94.9 percent from
$4,524,447 in 1997 to $8,819,529 in 1998. The significant increase in product
sales is due to increased sales of the Company's products in the North
American retail channel and to a sale in the amount of $1,957,500 to Universal
Home Video. Increased sales in the domestic retail channel are attributed to
better distribution, packaging, brand awareness and an internal dedicated
sales force. The Company has established a reserve for product returns that it
believes to be adequate based upon historical return data and its analysis of
current customer inventory levels and sell through rates.
Cost of Sales. Cost of Sales increased by 52.2 percent from $2,329,211
during 1997 to $3,5474,168 during 1998, and decreased as a percentage of net
sales from 50.7 percent to 40.3 percent during the same periods. This increase
in cost of sales is attributable to the above noted 92.9 percent increase in
net sales, partially offset by decreased unit costs based principally on
volume discounts and vendor pricing reductions. Additionally, costs for
internal warehousing and technical support, which are included in cost of
sales, remained relatively constant, and thereby reduced cost of sales per
unit.
Marketing and Sales. Marketing and sales expenses increased by 41.1 percent
from $1,449,189 during 1997 to $2,045,312 during 1998, and decreased as a
percentage of net sales from 31.5 percent to 23.1 percent, respectively. The
increase in expenses was primarily due to increased costs associated with
channel marketing, product packaging design and branding, as well as increased
personnel costs associated with the development of an internal sales team. The
decrease in marketing and sales expenses as a percentage of net sales is
primarily attributable to the above noted sale to Universal Home Video in
which the Company did not incur any marketing or sales costs. Without such
sale, marketing and sales expense as a percentage of net sales would have been
29.6 percent during 1998. The Company anticipates that for the foreseeable
future, marketing and sales expenses will continue to increase and will
increase as a percentage of net sales.
General and Administrative. General and administrative costs decreased by
7.4 percent from $1,988,213 during 1997 to $1,839,386 during 1998 and
decreased as a percentage of net sales from 43.3 percent to 20.7 percent,
respectively. During 1997, the Company recorded compensation expense in the
amount of $329,644 related to the separation of the Company's former
president. No such amounts have been incurred during 1998. Additionally, the
Company noted reductions in certain other costs, such as insurance,
telecommunications and legal expenses. Such reductions in general and
administrative expenses are partially offset by increased costs associated
with occupancy, depreciation, personnel costs and costs associated with being
a publicly held company.
Compensation In Connection With Common Stock and Common Stock Options Issued
for Services Rendered. A total of $323,351 and $333,029 of expenses for 1998
and 1997, respectively, relate to noncash charges to earnings in connection
with the vesting of stock options granted to employees in prior fiscal years,
determined as the difference between the fair market value of the stock at the
date of grant and the exercise price.
14
<PAGE>
Research and Development. Research and development expenses increased by
29.6 percent from $1,219,456 during 1997 to $1,580,413 during 1998, and
decreased as a percentage of net sales from 26.5 percent to 17.8 percent,
respectively. The increase in costs is primarily related to increases in the
number of products under development by the Company and increased personnel
costs that resulted from the acquisition of BWT Labs, Inc., partially offset
by lower development costs for certain product types and the establishment of
royalty based agreements with certain developers. The Company believes that
development costs will continue to increase as the Company develops increasing
numbers of products and as the Company develops increasingly more complex
products that contain additional features. The Company is also evaluating
other platforms for product development. Such platforms, such as the Sony(TM)
Playstation(TM), require a more expensive development process.
Other Income. Other income is principally comprised of a recovery of a bad
debt from Acclaim Entertainment, Inc., the Company's former exclusive
distributor that had been previously reserved, and other income associated
with the settlement of the lawsuit filed by the Company against Acclaim.
Tax Provision. The current period tax provision is comprised of minimum
State of California Franchise Taxes of $1,600. There is no provision for
Federal income taxes as the Company had a loss in 1997, and has sufficient net
operating loss carryforwards to offset its 1998 taxable income.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1997
Net Sales .Net sales increased by 103.0 percent from $2,264,633 for the year
ended June 30, 1996 to $4,596,806 for the year ended June 30, 1997. Total
sales of the Company's software products increased by 109.3 percent from
$2,161,351 in 1996 to $4,524,447 in 1997. Other revenues, principally
comprised of royalties and development fees, decreased by 29.9 percent from
$103,282 during 1996 to $72,359 during 1997, as a result of the Company not
entering into any new original equipment manufacturing ("OEM") agreements
during 1997. The 109.3 percent increase in product sales is principally due to
the success of two of the Company's products: the Star Wars(TM) Limited
Edition Entertainment Utility (the license for which expired on June 30, 1997)
and The Land Before Time(TM) Animated MovieBook(TM). The Company also
increased the number of storefronts carrying the Company's products. New
retailers carrying the Company's products for the first time during 1997
included Toys R Us, Dapy Stores, Spencer Gifts, Sam's Club and Office Depot.
During 1997, of the Company's net revenues of $4,596,806, a total of
$2,982,285 was generated by SSIDS, $773,905 was generated by One Stop, Ltd.,
the Company's distributor in the United Kingdom, and $279,164 was generated by
Electro Source, Inc. These three customers generated none of the Company's
sales of $2,264,633 during 1996. During 1996, net sales of $1,889,750 were
generated by Acclaim Entertainment, Inc., which previously served as the
Company's exclusive distributor.
Cost of Sales. Cost of sales increased by 68.4 percent from $1,382,999 for
1996 to $2,329,211 for 1997, representing 61.1 percent and 50.7 percent of net
sales, respectively, and 64.0 percent and 51.5 percent of products sales,
respectively. This increase in cost of sales was attributable to the above
noted 103.0 percent increase in net sales, partially offset by decreased
royalty costs and decreased replication, assembly and freight costs.
Additionally, the Company increased the average sales price of its products,
which lead to a lower cost of sales percentage.
Marketing and Sales. Marketing and sales expenses increased by 37.4 percent
from $1,054,602 for 1996 to $1,449,189 for 1997, and decreased as a percentage
of net sales from 46.6 percent to 31.5 percent, respectively. The increase in
expenses was primarily due to increased marketing activities to promote the
Company's products and brand name among retail purchasers, and increased
personnel costs.
General and Administrative. General and administrative expenses decreased by
9.4 percent from $2,193,855 for 1996 to $1,988,213 for 1997, and decreased as
a percentage of net sales from 96.9 percent to 43.3 percent, respectively.
This decrease is primarily attributable to a reduction in bad debt expense.
During fiscal
15
<PAGE>
1996, the Company recorded a bad debt expense in the amount of $663,421
related to amounts due to the Company from Acclaim, which was reversed in
1998. This reduction in general and administrative expenses in 1997 was
partially offset by costs incurred by the Company related to the Company's
initial public offering, costs associated with being a publicly held company
such as insurance, investor and stockholder relations, costs associated with
the separation of the former president of the Company, and costs associated
with the Company's lawsuit against Acclaim, which was settled in January 1998.
Compensation In Connection With Common Stock and Common Stock Options Issued
For Services Rendered. A total of $333,029 of the general and administrative
expenses for 1997 relates to a noncash charge to earnings in connection with
the vesting of stock options granted to employees, determined as the
difference between the fair market value of the common stock on the date of
grant and the exercise price. No such charge was incurred during 1996.
Development. Development expenses increased by 69.8 percent from $717,994
for 1996 to $1,219,456 for 1997, and decreased as a percentage of net sales
from 31.7 percent to 26.5 percent, respectively. The increase in expenses
during 1997 as compared to 1996, was primarily attributable to costs related
to new product development activities, some of which resulted in products that
were not scheduled to be completed and shipped until 1998 and 1999.
Tax Provision. The current period income tax provision is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision
for Federal or state income taxes as the Company had losses in 1997 and 1996,
respectively, and has a net operating loss carryforward.
Other. Other income (expense) increased from $(1,388,559) for 1996 to
$55,372 for 1997, and increased as a percentage of net sales from (61.3)
percent to 1.2 percent, respectively. This decrease was due to expenses
incurred during fiscal 1996 related to debt financing incurred by the Company,
which was repaid during July 1997. These expenses were primarily comprised of
amortization of deferred loan costs in the amount of $1,035,200 and interest
expense in the amount of $374,175.
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1996
Net Revenues. Net revenues from continuing operations increased by 5.1
percent from $2,154,926 for the year ended June 30, 1995 to $2,264,633 for the
year ended June 30, 1996. In 1996, the Company determined to concentrate its
focus on development of its educational and entertainment utility interactive
CD-ROM software and to reduce its development work for third parties.
Consequently, total retail sales of the Company's software products increased
by 72.2 percent from $1,255,230 in 1995 to $2,161,351 in 1996. However, the
Company had no development revenues during 1996 as compared with $343,250 for
1995. Revenues from OEM sales declined from $479,675 for 1995 to $70,895 for
1996, reflecting a one-time agreement with Acer that produced significant
revenues in calendar 1994 but not in calendar 1995. In addition, the Company's
royalty fees declined from $76,771 for 1995 to $32,387 for 1996. The higher
royalty revenues for the year ended June 30, 1995 resulted primarily from
product introductions incorporating content sublicensed by the Company that
were not repeated in the year ended June 30, 1996. This decline in royalty
revenues also reflected the Company's current strategy of focusing on
developing all product licenses itself rather than sublicensing them to third
parties.
During 1996, of the Company's net sales of $2,264,633 a total of $1,889,750
were generated by Acclaim. None of the Company's net sales of $2,154,926
during 1995 were generated by Acclaim. The Company terminated its exclusive
distribution agreement with Acclaim as of April 30, 1996 and entered into a
new distribution agreement with SSIDS as of June 1, 1996.
Cost of Sales. Cost of Sales increased by 28.9 percent from $1,072,691 for
1995 to $1,382,999 for 1996, representing 49.8 percent and 61.1 percent of net
sales, respectively, and 85.5 percent and 64.0 percent of product sales,
respectively. This decrease is attributable to the above noted 72.2 percent
increase in software product sales partially offset by decreased production
costs resulting from the Company's switch from floppy disk to CD-ROM
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<PAGE>
media for a majority of its products, decreased per unit costs due to larger
quantity purchases, decreased royalty costs and diminishing inventory
writedowns and writeoffs.
Marketing and Sales. Marketing and sales expenses increased by 104.0 percent
from $516,886 for 1995 to $1,054,602 for 1996, and increased as a percentage
of net sales from 24.0 percent to 46.6 percent, respectively. These increases
were primarily due to increased marketing activities to promote the Company's
products and brand name among retail purchasers, and increased personnel
costs.
General and Administrative. General and administrative expenses increased by
109.0 percent from $1,049,858 for 1995 to $2,193,855 for 1996, and increased
as a percentage of net sales from 48.7 percent to 96.9 percent, respectively.
The increase was primarily attributable to costs incurred by the Company
during fiscal 1996 related to the Company's initial public offering and two
private placements, increases in executive salaries related to the addition of
a Chief Financial Officer, and bad debt expense in the amount of $663,421
related to amounts due from Acclaim.
Compensation In Connection With Common Stock and Common Stock Options Issued
for Services Rendered. A total of $733,165 of the general and administrative
expenses for 1995 relates to a noncash charge to earnings in connection with
the vesting of stock options granted to employees determined as the difference
between the fair market value of the date of grant and the exercise price. No
such charge was incurred during 1996.
Development. Development expenses increased by 89.7 percent from $378,471
for 1995 to $717,994 for 1996, and increased as a percentage of net sales from
17.6 percent to 31.7 percent, respectively. These increases were primarily
attributable to costs related to product upgrades and new product development
activities.
Tax Provision. The income tax provision for 1995 and 1996 is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision
for Federal or state income taxes as the Company had losses in 1996 and 1995,
respectively, and has a net operating loss carryforward.
Other. Other income (expense) increased from $6,691 for 1995 to $(1,388,599)
for 1996, and increased as a percentage of net sales from .3 percent to (61.3)
percent, respectively. This increase is primarily comprised of amortization of
deferred loan costs of $1,035,200 and interest expense of $374,175, both of
which relate to private placements of the Company's debt securities.
QUARTERLY RESULTS OF OPERATIONS
The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including the size and rate of
growth of the consumer software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
products, product returns, changes in pricing policies by the Company and its
competitors, the accuracy of retailers' forecasts of consumer demand, the
timing of the receipt of orders from major customers, and account
cancellations or delays in shipment. The Company's expense levels are based,
in part, on its expectations as to future sales and, as a result, operating
results could be disproportionately affected by a reduction in sales or a
failure to meet the Company's sales expectations.
SEASONALITY
The consumer software business traditionally has been seasonal. Typically,
net sales are the highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern
is due primarily to the increased demand for consumer software during the
year-end holiday buying season. The Company expects its net sales and
operating results to continue to reflect seasonality. Nevertheless, management
believes that in the future its results may be less subject to seasonal
fluctuations because its products will be marketed in connection with the
releases of major motion pictures and home videos, which occur throughout the
year, such as the previously noted sales of CDs to Universal Home Video in
June 1998.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As shown in the Company's consolidated financial statements, although the
Company realized a net profit of $501,200 for the fiscal year ended June 30,
1998, the Company incurred net losses of $2,668,520 and $4,474,976 for the
years ended June 30, 1997 and 1996, respectively. The Company has not
historically generated sufficient cash flows to fund operations, and has had
to rely on debt and equity financings to fund operations. Management believes
the future success of the Company is largely dependent upon the Company's
ability to generate revenues sufficient to fund operations. As of the fiscal
year ended June 30, 1998, the Company had working capital of $1,684,546 and
cash of $693,741. See Part I, Item 1, "Description of Business--Risk Factors--
Possible Need for Additional Financing" and "Description of Business--Risk
Factors--Forward-Looking Statements."
The Company experienced a significant increase in growth during the last
fiscal year as compared to 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 relating to such business
opportunities in the future, the Company may require additional financing to
fund its growth.
The Company invested approximately $138,688 during fiscal 1998 and
approximately $345,395 during fiscal 1997 for capital equipment to expand into
new product lines and to address potential capacity constraints created by the
Company's growing unit sales volumes. From time to time, the Company evaluates
acquisitions of products, businesses and technologies that are complementary
to the Company's business.
Effective September 1997, the Company entered into a factoring agreement
with Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides up to $1,500,000 of the Company's qualified gross
domestic accounts receivable, as defined in the agreement, 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. As of August 31, 1998, no amounts
were drawn under this facility.
ITEM 7. FINANCIAL STATEMENTS.
The information required by Item 7 is filed herewith under the Consolidated
Financial Statements of Sound Source Interactive, Inc. and Subsidiaries
together with the report of Deloitte & Touche, LLP dated September 11, 1998 in
the financial information section, included as Appendix A of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
18
<PAGE>
PART III
Items 10, 11 and 12 of Part III of this Form 10-KSB are omitted because the
Company intends to file with the Securities and Exchange Commission, within
120 days of the close of its fiscal year ended June 30, 1998, a definitive
Proxy Statement containing information pursuant to Regulation 14A of the
Exchange Act, and that such information shall be deemed incorporated herein by
reference from the date of filing of such document.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXH.
NO. DESCRIPTION OF EXHIBITS
---- -----------------------
<C> <S>
3.1 Second Restated Certificate of Incorporation of the Registrant. [Filed as
Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2 No.
33-80827 ("Registration Statement No. 33-80827") and incorporated herein
by reference.]
3.2 Amended and Restated Bylaws of the Registrant. [Filed as Exhibit 3.1 to
the Registrant's Form 8-K Report dated May 6, 1998 (the "May 1998 Form
8-K") and incorporated herein by reference.]
4.1 Specimen Common Stock Certificate. [Filed as Exhibit 4.1 to Registration
Statement No. 33-80827 and incorporated herein by reference.]
4.2 Form of Warrant Agreement between the Registrant and Corporate Stock
Transfer, Inc., as warrant agent, and form of Redeemable Warrant. [Filed
as Exhibit 4.2 to Registration Statement No. 33-80827 and incorporated
herein by reference.]
4.3 Form of Warrant Agreement between the Registrant and The Boston Group, LP
and Joseph Stevens and Company, LP and form of Underwriters' Warrant.
[Filed as Exhibit 4.3 to Registration Statement No. 33-80827 and
incorporated herein by reference.]
4.4 Warrant dated April 30, 1996 issued to ASSI, Inc. [Filed as Exhibit 4.4
to Registration Statement No. 33-80827 and incorporated herein by
reference.]
4.5 Form of Underwriting Agreement among the Registrant, Vincent J. Bitetti,
Eric H. Winston and The Boston Group, LP and Joseph Stevens & Co., LP,
as underwriters. [Filed as Exhibit 1 to Registration Statement No. 33-
80827 and incorporated herein by reference.]
9.1 Stockholder Voting Agreement dated as of April 30, 1996, among ASSI,
Inc., Vincent J. Bitetti and Eric H. Winston. [Filed as Exhibit 9.1 to
Registration Statement No. 33-80827 and incorporated herein by
reference.]
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April 30,
1996. [Filed as Exhibit 9.2 to Registration Statement No. 33-80827 and
incorporated herein by reference.]
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30, 1996.
[Filed as Exhibit 9.3 to Registration Statement No. 33-80827 and
incorporated herein by reference.]
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April 30,
1996. [Filed as Exhibit 9.4 to Registration Statement No. 33-80827 and
incorporated herein by reference.]
9.5 Irrevocable Proxy and Voting Agreement of Martin Meyer to Vincent J.
Bitetti, dated May 4, 1994. [Filed as Exhibit 9.5 to Registration
Statement No. 33-80827 and incorporated herein by reference.]
9.6 Irrevocable Proxy and Voting Agreement of Mark Lane to Vincent J.
Bitetti, dated May 10, 1994. [Filed as Exhibit 9.6 to Registration
Statement No. 33-80827 and incorporated herein by reference.]
9.7 Consent of ASSI, Inc., dated as of April 20, 1998, pursuant to the Voting
Agreement, dated as of April 30, 1996, among ASSI, Inc., Vincent J.
Bitetti and Eric H. Winston. [Filed as Exhibit 9.1 to the May 1998 Form
8-K Report and incorporated herein by reference.]
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXH.
NO. DESCRIPTION OF EXHIBITS
---- -----------------------
<C> <S>
10.1 Second Amended and Restated Employment Agreement of Vincent J. Bitetti
dated as of April 30, 1996. [Filed as Exhibit 10.1 to Registration
Statement No. 33-80827 and incorporated herein by reference.]
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston
dated as of April 30, 1996. [Filed as Exhibit 10.2 to Registration
Statement No. 33-80827and incorporated herein by reference.]
10.3 Amended and Restated Employment Agreement of Ulrich E. Gottschling dated
as of February 1, 1997. [Filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form SB-2 (No. 333-24271, ("Registration
Statement No. 333-24271") and incorporated herein by reference.]
10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. [Filed as Exhibit
10.4 to Registration Statement No. 33-80827and incorporated herein by
reference.]
10.5 Sound Source Interactive, Inc. and 1995 Stock Option Plan, as amended.
[Filed as Exhibit A to the Registrant's Proxy Statement on Schedule 14A
dated June 8, 1998 and incorporated herein by reference.]
10.6 Warrant Agreement, dated as of September 26, 1995, among the Registrant,
Sound Source Interactive, Inc., a California corporation (the
"Subsidiary") and Financial West Group, Inc., corporation ("FWG"), as
warrant agent. [Filed as Exhibit 10.6 to Registration Statement No. 33-
80827 and incorporated herein by reference.]
10.7 Warrant Agreement, dated as of June 30, 1995, between the Registrant and
FWG, as warrant agent. [Filed as Exhibit 10.7 to Registration Statement
No. 33-80827 and incorporated herein by reference.]
10.8 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Vincent J. Bitetti. [Filed as Exhibit 10.35 to
Registration Statement No. 33-80827 and incorporated herein by
reference.]
10.9 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Eric H. Winston. [Filed as Exhibit 10.36 to Registration
Statement No. 33-80827and incorporated herein by reference.]
10.10 Indemnification Agreement, dated as of January 1, 1996, between the
Registrant and Ulrich Gottschling. [Filed as Exhibit 10.37 to
Registration Statement No. 33-80827 and incorporated herein by
reference.]
10.11 Consulting Agreement, dated as of April 30, 1996, between the Company
and ASSI, Inc. [Filed as Exhibit 10.45 to Registration Statement No.
33-80827 and incorporated herein by reference.]
10.12 Share Purchase Agreement, dated April 3, 1995, between Eric Winston and
Vincent Bitetti. [Filed as Exhibit 10.46 to Registration Statement No.
33-80827 and incorporated herein by reference.]
10.13 Distribution Services Agreement, dated June 1, 1996, between the
Registrant and Simon & Schuster Interactive Distribution Services.
[Filed as Exhibit 10.47 to Registration Statement No. 33-80827 and
incorporated herein by reference.]
10.14 Note Purchase Agreement, dated as of May 30, 1996, between the
Registrant and ASSI, Inc. [Filed as Exhibit 10.48 to Registration
Statement No. 33-80827 and incorporated herein by reference.]
10.15 Convertible Promissory Note, dated May 30, 1996, issued by the Company
to ASSI, Inc. [Filed as Exhibit 10.49 to Registration Statement No. 33-
80827 and incorporated herein by reference.]
10.16 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Mark A. James. [Filed as Exhibit 10.44 to Amendment No.
1 to the Registrant's Annual Report on Form 10-KSB for the year ended
June 30, 1996 (the "1996 Form 10-KSB") and incorporated herein by
reference.]
10.17 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Ernest T. Klinger. [Filed as Exhibit 10.45 to Amendment
No. 1 to the 1996 Form 10-KSB and incorporated herein by reference.]
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXH.
NO. DESCRIPTION OF EXHIBITS
---- -----------------------
<C> <S>
10.18 Indemnification Agreement, dated as of October 1, 1996, between the
Registrant and Ronald W. Hart. [Filed as Exhibit 10.46 to Amendment No.
1 to the 1996 Form 10-KSB and incorporated herein by reference.]
10.19 Separation and Release Agreement, dated as of October 24, 1996, between
the Registrant and Eric. H. Winston. [Filed as Exhibit 10.47 to
Amendment No. 1 to the 1996 Form 10-KSB" and incorporated herein by
reference.]
10.20 Indemnification Agreement, dated as of February 3, 1997, between the
Registrant and Robert. S. Burke. [Filed as Exhibit 10.23 to
Registration Statement No. 333-24271 and incorporated herein by
reference.]
10.21 Office Lease, dated as of March 4, 1997, between Arden Realty Limited
Partnership and the Registrant. [Filed as Exhibit 10.24 to Registration
Statement No. 333-24271 and incorporated herein by reference.]
10.22 Factoring Agreement, dated as of September 19, 1997, between the
Registrant and Silicon Valley Financial Service, a division of Silicon
Valley Bank. [Filed as Exhibit 10.25 to the Registrant's Annual Report
on Form 10-KSB for the year ended June 30, 1997 (the "1997 Form 10-
KSB") and incorporated herein by reference.].
10.23 Collateral Assignment, Patent Mortgage and Security Agreement, dated as
of September 19, 1997, between the Registrant and Silicon Valley
Financial Service, a division of Silicon Valley Bank. [Filed as Exhibit
10.26 to the 1997 Form 10-KSB and incorporated herein by reference.]
10.24 Stock Purchase Agreement, dated as of February 13, 1988, among the
Registrant, Brett G. Durrett and Biological Weapons Testing
Laboratories, Inc. [Filed herewith.]
10.25 Settlement Agreement, dated as of April 27, 1998, among the Registrant,
ASSI, Inc., NCD, Inc., The Boston Group, LP, Vincent J. Bitetti, Ulrich
E. Gottschling, Mark A. James and Robert G. Kalik [Filed as Exhibit
10.1 to the May 1998 Form 8-K and incorporated herein by reference.]
10.26 Lock-Up Agreement, dated as of April 27, 1998, among the Registrant,
ASSI, Inc., NCD, Inc. and Louis Habash [Filed as Exhibit 10.2 to the
May 1998 Form 8-K and incorporated herein by reference.]
10.27 Third Amended and Restated Employment Agreement of Vincent J. Bitetti
dated as of April 27, 1998 [Filed as Exhibit 10.3 to the May 1998 Form
8-K and incorporated herein by reference.]
10.28 Employment Memorandum of Ulrich E. Gottschling dated as of April 27,
1998 [Filed as Exhibit 10.4 to the May 1998 Form 8-K and incorporated
herein by reference.]
10.29 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and Richard Azevedo. [Filed herewith.]
10.30 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and Samuel L. Poole. [Filed herewith.]
10.31 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and Wayne M. Rogers. [Filed herewith.]
10.32 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and John Wholihan. [Filed herewith.]
21.1 Subsidiaries of the Registrant. [Filed herewith.]
23.1 Consent of Corbin & Wertz. [Filed herewith.]
23.2 Consent of Deloitte & Touche. [Filed herewith.]
27.1 Financial Data Schedule. [Filed herewith.]
</TABLE>
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K on May 6, 1998 relating to the settlement of
litigation involving the Registrant, ASSI, Inc., NCD, Inc., The Boston Group,
LP, Vincent J. Bitetti, Ulrich E. Gottschling, Mark A. James and Robert G.
Kalik.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the issuer has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 28, 1998 SOUND SOURCE INTERACTIVE, INC.
/s/ Vincent J. Bitetti
By __________________________________
Vincent J. Bitetti,
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the issuer in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Vincent J. Bitetti Chairman of the Board and September 28, 1998
____________________________________ Chief Executive Officer
Vincent J. Bitetti (principal executive
officer)
/s/ Ulrich E. Gottschling President, Chief Operating September 28, 1998
____________________________________ Officer, Chief Financial
Ulrich E. Gottschling Officer, Treasurer and
Secretary (principal
financial and accounting
officer)
/s/ Richard Azevedo Director September 28, 1998
____________________________________
Richard Azevedo
/s/ Mark A. James Director September 28, 1998
____________________________________
Mark A. James
/s/ Samuel L. Poole Director September 28, 1998
____________________________________
Samuel L. Poole
/s/ Wayne M. Rogers Director September 28, 1998
____________________________________
Wayne M. Rogers
/s/ John Wholihan Director September 28, 1998
____________________________________
John Wholihan
</TABLE>
No annual report or proxy materials have been sent to security holders. An
annual report for the Company's fiscal year ended June 30, 1998 will be
forwarded to stockholders.
22
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................... 1
Independent Auditors' Report.......................................... 2
Consolidated Financial Statements as of June 30, 1998 and 1997 and for
each of the three years in the period ended June 30, 1998:
Balance Sheets...................................................... 3
Statements of Operations............................................ 4
Statements of Stockholders' Equity.................................. 5
Statements of Cash Flows............................................ 6-7
Notes to Consolidated Financial Statements.......................... 8-17
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sound Source Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of Sound Source
Interactive, Inc. and subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of June 30,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Los Angeles, California
September 11, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sound Source Interactive, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Sound Source Interactive, Inc. (a
Delaware corporation) and subsidiary (collectively referred to as the
"Company") for the year ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Sound Source Interactive, Inc. and subsidiary for the year ended
June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Corbin & Wertz
_____________________________________
Corbin & Wertz
Irvine, California
September 16, 1996
F-2
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 693,741 $ 590,459
Accounts receivable, net of allowance for
doubtful accounts of $22,540 and $703,421 as of
June 30, 1998 and 1997, respectively (Note 4)... 2,383,132 1,361,118
Inventories (Note 2)............................. 417,215 228,677
Prepaid royalties................................ 1,866,044 1,555,263
Prepaid expenses and other....................... 189,848 77,873
------------ ------------
Total current assets........................... 5,549,980 3,813,390
PROPERTY AND EQUIPMENT, Net (Note 3)............... 409,129 414,455
OTHER ASSETS....................................... 15,703 14,553
------------ ------------
TOTAL.............................................. $ 5,974,812 $ 4,242,398
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 4)... $ 2,203,159 $ 1,328,261
Accrued royalties................................ 1,615,162 1,610,441
Deferred revenue................................. 45,000 12,000
Current portion of capital lease obligations
(Note 4)........................................ 2,913 11,398
------------ ------------
Total current liabilities...................... 3,866,234 2,962,100
CAPITAL LEASE OBLIGATIONS (Note 4)................. 2,414
------------ ------------
Total liabilities.............................. 3,866,234 2,964,514
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (Notes 5 and 6):
Common stock, $.001 par value; 20,000,000 shares
authorized; 5,649,974 and 4,409,099 shares
issued and outstanding as of
June 30, 1998 and 1997, respectively............ 5,650 4,409
Warrants......................................... 559,928 1,104,925
Additional paid-in capital....................... 14,297,872 13,424,622
Accumulated deficit.............................. (12,754,872) (13,256,072)
------------ ------------
Total stockholders' equity..................... 2,108,578 1,277,884
------------ ------------
TOTAL.............................................. $ 5,974,812 $ 4,242,398
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Product sales.......................... $8,819,529 $ 4,524,447 $ 2,161,351
Development fees and other............. 47,961 72,359 103,282
---------- ----------- -----------
Net revenues......................... 8,867,490 4,596,806 2,264,633
COST OF SALES (Note 4)................... 3,574,168 2,329,211 1,382,999
---------- ----------- -----------
GROSS PROFIT............................. 5,293,322 2,267,595 881,634
---------- ----------- -----------
OPERATING EXPENSES:
Research and development (Note 4)...... 1,580,413 1,219,456 717,994
Sales and marketing (Note 4)........... 2,045,312 1,449,189 1,054,602
General and administrative (Notes 4 and
8).................................... 1,839,386 1,988,213 2,193,855
Compensation in connection with stock
options issued for services rendered
(Note 6).............................. 323,351 333,029
---------- ----------- -----------
Total operating expenses............. 5,788,462 4,989,887 3,966,451
---------- ----------- -----------
OPERATING LOSS........................... (495,140) (2,722,292) (3,084,817)
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................ 23,261 75,858 35,430
Interest expense....................... (24,521) (16,428) (374,175)
Amortization of deferred loan costs.... (1,035,200)
Other income (Note 4).................. 1,000,000
Other expense, net..................... (800) (4,058) (14,614)
---------- ----------- -----------
Total other income (expense)......... 997,940 55,372 (1,388,559)
---------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES................................... 502,800 (2,666,920) (4,473,376)
PROVISION FOR INCOME TAXES (Note 7)...... 1,600 1,600 1,600
---------- ----------- -----------
NET INCOME (LOSS)........................ $ 501,200 $(2,668,520) $(4,474,976)
========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE........ $ 0.11 $ (0.61) $ (2.46)
========== =========== ===========
DILUTED NET INCOME (LOSS) PER SHARE...... $ 0.10 $ (0.61) $ (2.46)
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
--------- ------ --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995... 1,859,182 $1,859 $ 5,124,525 $ (6,112,576) $ (986,192)
Issuance of warrants in
connection with
private offerings..... $ 263,350 263,350
Cancellation of shares
in connection with
settlement............ (15,120) (15) 15
Cancellation of shares
for which the Company
had not received paid
commissions........... (36,238) (36) 36
Net loss............... (4,474,976) (4,474,976)
--------- ------ --------- ----------- ------------ -----------
BALANCE, JUNE 30, 1996.. 1,807,824 1,808 263,350 5,124,576 (10,587,552) (5,197,818)
Issuance of common
stock in connection
with public offering,
net of offering costs
of $2,297,408
(Note 5).............. 2,560,000 2,560 7,964,581 7,967,141
Issuance of common
stock in connection
with exercise of
employee stock options
(Note 6).............. 41,275 41 2,436 2,477
Issuance of warrants in
connection with public
offering (Note 5)..... 337,411 337,411
Issuance of warrants in
connection with the
conversion of a note
payable and accrued
interest to related
party................. 504,164 504,164
Issuance of stock
options for services.. 333,029 333,029
Net loss............... (2,668,520) (2,668,520)
--------- ------ --------- ----------- ------------ -----------
BALANCE, JUNE 30, 1997.. 4,409,099 4,409 1,104,925 13,424,622 (13,256,072) 1,277,884
Issuance of common
stock in connection
with exercise of
employee stock options
(Note 6).............. 140,875 141 6,002 6,143
Issuance of common
stock in exchange for
warrants (Note 4)..... 1,100,000 1,100 (544,997) 543,897
Issuance of stock
options for services.. 323,351 323,351
Net income............. 501,200 501,200
--------- ------ --------- ----------- ------------ -----------
BALANCE, JUNE 30, 1998.. 5,649,974 $5,650 $ 559,928 $14,297,872 $(12,754,872) $ 2,108,578
========= ====== ========= =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 501,200 $(2,668,520) $(4,474,976)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 144,014 108,007 45,230
Stock options issued for services
rendered........................... 323,351 333,029 --
Changes in operating assets and
liabilities:
Accounts receivable............... (1,022,014) (448,214) (852,076)
Inventories....................... (188,538) 33,980 (112,337)
Prepaid royalties................. (310,781) (926,587) (147,264)
Prepaid expenses and other........ (111,975) (62,009) (15,864)
Accounts payable and accrued
expenses......................... 874,898 240,714 308,462
Accrued interest.................. -- (363,531) 367,695
Commissions payable............... -- -- (159,593)
Accrued royalties................. 4,721 1,067,637 291
Deferred revenue.................. 33,000 (72,360) 20,360
----------- ----------- -----------
Net cash provided by (used in)
operations...................... 247,876 (2,757,854) (5,020,072)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (138,688) (345,395) (90,985)
Other assets.......................... (1,150) (1,653) (9,840)
----------- ----------- -----------
Net cash used in investing
activities...................... (139,838) (347,048) (100,825)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock................................ 6,143 8,590,522 --
Proceeds from issuance of warrants.... -- 337,411 263,350
Proceeds from issuance of notes
payable.............................. -- -- 5,306,700
Repayment of notes payable............ -- (4,987,500) (319,200)
Notes payable to officers............. -- -- (13,500)
Note payable to related party......... -- -- 500,000
Deferred offerings costs.............. -- -- (620,904)
Payments on capital lease obligations. (10,899) (27,057) (27,294)
Short-term advance.................... -- (400,000) --
----------- ----------- -----------
Net cash (used in) provided by
investing activities............ (4,756) 3,513,376 5,089,152
----------- ----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................... 103,282 408,474 (31,745)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................. 590,459 181,985 213,730
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR. $ 693,741 $ 590,459 $ 181,985
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION --
Cash paid during the year for:
Interest............................ $ 24,521 $ 16,428 $ 6,480
=========== =========== ===========
Income taxes........................ $ 1,600 $ 1,600 $ 1,600
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Company issued 1,100,000 shares of common stock in exchange
for 4,816,657 common stock purchase warrants held by (see Note 4).
During 1997, the Company issued 2,016,657 redeemable warrants in exchange
for a $500,000 note payable to ASSI, Inc. plus accrued interest of $4,164.
During 1996, the Company purchased property and equipment valued at $38,471
through the issuance of capital leases (see Notes 3 and 4).
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--Sound Source Interactive, Inc. (a Delaware
Corporation), through its wholly owned subsidiaries, Sound Source Interactive
Inc. (a California Corporation) and Biological Weapon Testing Laboratories,
Inc. (collectively, the "Company"), creates, develops, produces, publishes,
distributes and otherwise exploits, worldwide, interactive educational and
entertainment software properties for personal computers. Significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
periods reported. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--The Company at times maintains cash balances
at certain financial institutions in excess of federally insured deposits.
The Company performs periodic credit evaluations of its customers and
maintains an allowance for potential credit losses. The Company estimates
credit losses based on management's evaluation of historical experience and
current industry trends. Although the Company expects to collect amounts due,
actual collections may differ from the estimated amounts.
Simon & Schuster Interactive Distribution Services ("SSIDS") accounted for
64% and 65%, respectively, of consolidated revenues for the years ended June
30, 1998 and 1997 (see Note 4). Universal Home Video accounted for 22% of
consolidated revenues for the year ended June 30, 1998. The Company's former
principal distributor accounted for 83% of consolidated revenues in 1996. The
Company's accounts receivable at June 30, 1998 are primarily due from SSIDS
and Universal Home Video. The Company's accounts receivable at June 30, 1997
are primarily due from SSIDS and the Company's European distributor, One Stop
Direct Ltd.
JVC Disc America, Co. ("JVC") accounted for approximately 67% of
consolidated purchases for the year ended June 30, 1998. Accounts payable to
JVC accounted for 65% of consolidated accounts payable as of June 30, 1998. No
one company accounted for more than 10% of consolidated purchases for the year
ended June 30, 1997. The Company purchased certain products from two
companies, which accounted for approximately 49% and 37% of consolidated
purchases for the year ended June 30, 1996.
RISK AND UNCERTAINTIES
Technological Obsolescence
The entertainment software industry is characterized by rapid technological
advancement and change. Should demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable value of such
products could be substantially less than the amount shown in the consolidated
balance sheet.
Licenses
The Company's products are based upon the licensed content of major motion
pictures and television shows and/or development agreements with major
entertainment studios. All of such license and development agreements to which
the Company currently is a party are for fixed terms that will expire over the
next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under
F-8
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
each agreement will extend its terms, provided that the Company is in
compliance with all requirements of each license, including most significantly
that the Company has satisfied the applicable minimum royalty guarantees. In
the event that any licensor fails to renew its license agreement, then the
subject license will terminate, and the Company will no longer be entitled to
sell the licensed product. The loss of one or more of the licenses could have
a material adverse effect on the Company's revenues and operating results.
There can be no assurance that the Company will satisfy its performance
obligations under any license or development agreement or that, even if such
requirements are satisfied, all material licenses will be renewed. Generally,
the terms of a license agreement state that, upon any bankruptcy or
liquidation of the Company, licensing rights revert to the licensor.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with original maturities of 90 days or less to be cash
equivalents.
INVENTORIES--Inventories, which consist primarily of software media and
related packaging materials, are stated at the lower of cost or market, with
cost determined on a first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation and amortization. Property and equipment are
depreciated using the straight-line method over the estimated useful lives of
the related assets, generally ranging from five to seven years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
life of the improvement.
LONG-LIVED ASSETS--The Company evaluates the recovery of its long-lived
assets and recognizes impairment if it is probable that the recorded amounts
are not recoverable based upon future undiscounted cash flows if there is an
event or change in circumstances which indicates that the carrying amount of
an asset may not be recoverable.
ROYALTIES--The Company enters into license agreements with movie studios,
actors, and sound developers for recognized movie and television properties
that require the Company to pay up-front minimum guarantees against future
royalties. The license agreements generally require the Company to pay a
percentage of sales of the products but no less than a specified amount (the
minimum guaranteed royalty). The Company records the minimum guaranteed
royalty as a liability and a related asset at the time the agreement is
consummated. The liability is extinguished as payments are made to the license
holders and the asset is expensed at the contractual royalty rate based on
actual net product sales. Royalty liabilities in excess of the minimum
guaranteed amount are recorded when such amounts are earned by the licensor.
The Company periodically assesses the recoverability of prepaid royalties by
determining whether the minimum guarantee will be recovered through
anticipated future sales on a product-by-product basis. Any amounts not
expected to be recovered are charged to operations in the period assessed by
management. For the years ended June 30, 1998, 1997 and 1996, $225,000,
$40,000 and $99,798, respectively, of such royalties were charged to cost of
sales in the consolidated statements of operations.
INCOME TAXES--Deferred income taxes are provided for temporary differences
between the financial statement and income tax bases of the Company's assets
and liabilities, based on enacted tax rates. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
REVENUE RECOGNITION--Direct-to-the-customer sales are recognized when
merchandise is shipped to customers and are recorded net of discounts,
allowances, and estimated merchandise returns. While the Company has no
obligation to perform future services subsequent to shipment, the Company
provides telephone customer support as an accommodation to purchasers of its
products for a limited time. Costs associated with this effort are charged to
cost of sales as incurred in the consolidated statements of operations.
Revenue from third-party
F-9
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
distributors is recognized as reported by such distributors, net of
distribution fees and estimated returns. Reserves for returns are based on
management's evaluation of historical experience and current industry trends.
SOFTWARE DEVELOPMENT COSTS--In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Capitalized
Software to Be Sold, Leased or Otherwise Marketed," the Company examines its
software development costs after technological feasibility has been
established to determine if capitalization is required. Through June 30, 1998,
all internal software development costs have been expensed.
STOCK-BASED COMPENSATION--In fiscal 1997, the Company adopted the
disclosure-only provisions of SFAS No. 123. The Company continues to account
for its stock compensation arrangements using the intrinsic value method in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees."
NET INCOME (LOSS) PER COMMON SHARE--In fiscal 1998 the Company adopted the
Financial Accounting Standards Board's SFAS No. 128, "Earnings per Share"
("EPS"). The statement is effective for interim periods and fiscal years
ending after December 15, 1997. All prior periods have been restated.
The computations of the weighted-average common shares and potential common
shares used in the computation of basic and diluted EPS are as follows
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS--
Weighted-average common shares outstanding
during the period............................. 4,665,527 4,368,462 1,822,759
Incremental shares assumed to be outstanding
related to stock options granted.............. 343,836
--------- --------- ---------
Diluted EPS--
Weighted-average common shares and equivalents
outstanding for any of the periods presented.. 5,009,363 4,368,462 1,822,759
========= ========= =========
</TABLE>
No adjustments were made to net income (loss) for any of the periods
presented for the purposes of calculating earnings per share. Warrants to
purchase shares of the Company's common stock at $4.60-$5.80 per share were
outstanding for each of the three years ended June 30, 1998 but were not
included in the computation of diluted EPS because the warrants were
antidilutive.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1997 and
1996 consolidated financial statements to conform with the current year's
presentation.
2. INVENTORIES
Inventories consisted of the following as of June 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished goods.......................................... $147,718 $151,282
Raw materials (components).............................. 269,497 77,395
-------- --------
$417,215 $228,677
======== ========
</TABLE>
F-10
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Leasehold improvements................................. $ 7,781 $ 7,781
Computer equipment..................................... 618,499 548,462
Office furniture and equipment......................... 83,343 96,173
-------- --------
709,623 652,416
Accumulated depreciation and amortization.............. (300,494) (237,961)
-------- --------
$409,129 $414,455
======== ========
</TABLE>
As of June 30, 1998 and 1997, the Company had property and equipment with a
total cost of $21,631 and $86,723 and accumulated depreciation of $16,400 and
$48,511, respectively, of assets recorded under capital leases (see Note 4).
4. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS--The Company has entered into employment contracts with
five of its employees, including two officers, which expire on various dates
through December 2000 and provide for certain expense allowances.
Future minimum base salaries, by year and in the aggregate, consist of the
following as of June 30, 1998:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1999.......................................................... $ 741,338
2000.......................................................... 503,438
2001.......................................................... 120,000
----------
$1,364,776
==========
</TABLE>
Certain of the employment contracts provide for commissions based on net
revenues. Commissions under employment contracts for the years ended June 30,
1998, 1997 and 1996, amounted to $53,086, $41,633 and $66,067, respectively,
and are included in sales and marketing expense in the consolidated statements
of operations.
OPERATING LEASES--The Company leases its facilities and certain equipment
under noncancelable operating leases that expire at various dates through May
2002.
The facility lease expense is being recognized on a straight-line basis over
the term of the related leases. The excess of the expense recognized over the
amount paid is included in accounts payable and accrued expenses in the
consolidated balance sheets.
Future minimum lease payments as of June 30, 1998, due through May 31, 2002
under such leases, are as follows:
<TABLE>
<CAPTION>
LEASE RENT DEFERRED
OPERATING LEASES PAYMENTS EXPENSE RENT
---------------- -------- -------- --------
<S> <C> <C> <C>
1999.......................................... $144,698 $140,031 $ 4,667
2000.......................................... 144,698 140,031 4,667
2001.......................................... 144,698 140,031 4,667
2002.......................................... 132,642 136,534 3,892
-------- -------- -------
$566,736 $556,627 $17,893
======== ======== =======
</TABLE>
F-11
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense under operating lease agreements totaled $150,516, $106,474 and
$89,192 for the years ended June 30, 1998, 1997 and 1996, respectively, which
are included in general and administrative expenses in the consolidated
statements of operations.
CAPITAL LEASES--The Company leases certain equipment and computers under
capital lease obligations with interest at rates ranging from 20.00% to 27.93%
per annum.
Future minimum lease payments under capital leases for equipment and
computers, all of which are due during the year ended June 30, 1999 are
$3,151.
SIMON & SCHUSTER DISTRIBUTION AGREEMENT--Effective June 1, 1996, the Company
entered into a two-year distribution services agreement with SSIDS, which
terminated on May 31, 1998. SSIDS is the consumer software distribution unit
of Simon & Schuster, Inc., the publishing operation of Viacom, Inc. The
Company's relationship with SSIDS was exclusive except with regard to the
rights to distribute the Company's products in direct-to-the-customer
programs, including direct mail, telemarketing, and in-box coupon fulfillment,
which were nonexclusive.
Pursuant to this agreement, SSIDS made monthly payments to the Company in
the amount equal to its gross revenues, as defined, during such month from the
Company's products, less a distribution fee and reserve for returns equal to
stated percentages of the gross revenues and less certain other items,
including out-of-pocket costs associated with inventory maintenance and order
fulfillment. The payments were due not later than 75 days after the calendar
month in question.
The Company is currently negotiating a new agreement with SSIDS with a view
to entering into a new agreement, whereby SSIDS would provide only
distribution, warehousing, order fulfillment, and accounts collection
services. It is anticipated that such agreement, which would be nonexclusive,
would require the Company to be responsible for all other aspects of marketing
its products. There can be no assurance that the Company will enter into any
such agreement with SSIDS. Moreover, there can be no assurance that the
Company can successfully undertake the other marketing responsibilities
previously assumed by SSIDS pursuant to the expired agreement.
CONSULTING AGREEMENT--On October 16, 1995, the Company entered into a one-
year binding letter of intent with a consultant whereby for consulting
services the Company would pay a minimum $39,000 per year plus royalties up to
3%, as defined, on products as specified. Through June 30, 1996, the Company
paid a total of $73,340 under this agreement. During the year ended June 30,
1996, $39,581 is included in sales and marketing expenses and $33,759 is
included in cost of sales in the consolidated statements of operations.
Effective February 1997, the consultant became an employee of the Company.
Royalties paid to this consultant in 1998 and 1997 were $48,981 and $37,769,
respectively, and are included in cost of goods sold in the consolidated
statement of operations.
DEVELOPMENT CONTRACTS--Periodically, the Company enters into certain
agreements with software developers whereby for specified development services
the Company will pay a fixed fee and/or a percentage of sales of the product
developed. For the years ended June 30, 1998, 1997 and 1996, the Company paid
a total of $408,016, $403,036 and $146,416, respectively, under such
agreements that are included in research and development expenses in the
consolidated statements of operations.
LITIGATION--On December 13, 1996, the Company filed suit in Superior Court
for the County of Los Angeles, California, against its former distributor,
Acclaim Distribution, 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
F-12
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liability. The Company netted approximately $1,000,000 after payment for
legal, accounting and other costs associated with the lawsuit, which is
included in other income for the year ended June 30, 1998. All amounts due
from Acclaim related to this settlement have been received as of June 30,
1998.
On April 24, 1998, the Company entered into settlement agreement with ASSI,
Inc. NCD, Inc., a related party; 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 has settled with prejudice two legal
proceedings that 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, which related to an
attempted expansion of the Company's Board of Directors and the election of
four persons to fill expansion seats. In connection with the settlement, the
Company (a) exchanged 1,100,000 shares of its common stock for the remaining
4,816,657 common stock purchase warrants held by ASSI, Inc.; (b) amended and
restated its bylaws to provide for a seven-member Board of Directors; (c)
appointed Wayne Rogers, John Wholihan, Samuel Poole and Richard Azevedo to
fill vacancies on the Board of Directors; and (d) entered into new employment
agreements with Mr. Bitetti and Mr. Gottschling. The fair market value of the
common stock equaled the fair market value of the warrants at the transaction
date.
Pursuant to the settlement agreement, ASSI, Inc., NCD, Inc. Louis Habash and
the Company also entered into a lock-up agreement. Such agreement provides
that during the year ending May 31, 1999, ASSI, Inc., NCD, Inc. and Louis
Habash (who is the beneficial owner of all of the voting securities of ASSI,
Inc. and NCD, Inc.) may not sell shares of the Company's common stock
beneficially owned by them in an aggregate amount in excess of an amount
determined by a formula, which equates to the product of approximately 94,620
shares times the number of full months commencing with the month of May 1998
elapsed since the settlement.
Certain aspects of the settlement were submitted to the stockholders for
their approval at the annual stockholder meeting held on June 30, 1998. The
stockholders voted to approve those aspects of the settlement.
5. COMMON STOCK
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 $7,372,980, net of offering costs of
$2,208,625, related to the common stock, and $295,160 related to the
redeemable warrants. On August 14, 1996, the underwriters exercised a portion
of their "over-allotment" option, pursuant to the underwriting agreement,
which resulted in the Company's 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, related to
the common stock, and $42,251 related to the redeemable warrants.
Each redeemable warrant entitles the holder to purchase one share of common
stock at $4.40 per share, subject to adjustment as defined, expiring December
31, 2001. In the event that the redeemable warrants are called for redemption,
they will be exercisable for 30 days preceding the applicable redemption date.
Commencing on July 1, 1997, the redeemable warrants are subject to redemption
at $.25 per redeemable warrant if the average closing bid price of the common
stock equals or exceeds $5.60 per share for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice or redemption.
The Company has also, in connection with the IPO, given the underwriter a
warrant for $50, which entitles the underwriter to purchase 240,000 shares of
common stock at $5.80 per share.
F-13
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 7, 1996, in connection with the IPO, the Company repaid notes
payable issued with their 1995 private placement aggregating $4,987,500 plus
accrued interest of $373,753. The notes accrued interest at 10% per annum and
were secured by substantially all of the assets of the Company. The notes were
due upon the earlier of the Company's successful completion of an IPO or
September 1, 1996.
On July 7, 1996, in connection with the IPO, the Company issued 2,016,657
redeemable warrants in connection with the conversion of the note payable to a
related party (see Note 8) of $500,000, plus accrued interest of $4,164.
6. STOCK OPTIONS
THE 1992 STOCK OPTION PLAN--The Company adopted the 1992 Stock Option Plan
(the "1992 Plan") in May 1992, authorizing the issuance of up to 2,000,000
shares of common stock to employees, officers and directors and to employees
of the Company. Options are granted at the discretion of a member committee
(the "Committee") consisting of individuals from these potential grantees.
Any shares that are subject to an award but are not used because the terms
and conditions of the award are not met, or any shares that are used by
participants to pay all or part of the purchase price of any option, may again
be used for awards under the Plan. However, shares with respect to which a
stock appreciation right has been exercised may not again be made subject to
an award. on September 22, 1995, the Board of Directors resolved that no
additional shares shall be issued under the 1992 Plan.
For the years ended June 30, 1998 and 1997, an aggregate of $323,351 and
$333,029, respectively, was charged to operating expenses for the options
vested during those years. No related expense was recognized in fiscal 1996.
Effective, December 8, 1997, the Compensation Committee of the Board of
Directors approved the repricing of 200,000 options issued under the 1992 Plan
to an officer of the Company to the then fair market value of $1.1875 per
share.
THE 1995 STOCK OPTION PLAN--Pursuant to the Company's restated 1995 stock
option plan (the "1995 Plan"), the Company may grant up to 500,000 options for
shares of the Company's common stock. On June 30, 1998, the stockholders of
the Company voted to increase the number of options available under the 1995
stock option plan to 1,000,000 options.
Options under the 1995 Plan may be granted in the form of incentive stock
options or nonqualified stock options. The 1995 Plan terminates October 31,
2005 and is administered by a committee appointed by the Board of Directors of
the Company.
Incentive stock options under the 1995 Plan are limited to persons who are
employees of the Company and may not be granted at a price less than 100% of
the fair value of the stock as of the date of grant (110% as to any 10%
stockholder at the time of grant).
The term of each option may not exceed 10 years from the date of grant (five
years for any 10% stockholder). Vesting of the options is determined by the
committee on a case-by-case basis, and the options are not exercisable unless
the holder is currently employed with the Company. Upon termination of
employment, the holder has 30 days to exercise any options held.
F-14
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective, December 8, 1997, the Compensation Committee of the Board of
Directors approved a repricing of all outstanding employee stock options under
the 1995 stock option plan to the then fair market price of $1.1875 per share.
The following table summarizes option transactions during the three years
ended June 30, 1998 under both of the aforementioned plans:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance, July 1, 1995................................... 475,234 $0.06
Granted............................................... 300,000 $4.13
Canceled.............................................. (100,000) $5.00
--------- -----
Balance, June 30, 1996.................................. 675,234 $1.26
Granted............................................... 405,857 $4.04
Exercised............................................. (41,275) $0.06
Canceled.............................................. (20,952) $2.35
--------- -----
Balance, June 30, 1997.................................. 1,018,864 $2.32
Granted............................................... 771,099 $1.75
Exercised............................................. (140,875) $0.06
Canceled.............................................. (593,193) $3.91
--------- -----
Balance, June 30, 1998.................................. 1,055,895 $1.31
--------- -----
</TABLE>
The following summarizes pricing and term information for options
outstanding as of June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.06................... 284,299 6 $0.06 284,299 $0.06
$1.00-.$1.1875.......... 421,099 7 $1.19 310,474 $1.19
$1.31-$1.97............. 95,501 9.7 $1.37 52,167 $1.34
$2.0625-$2.75........... 194,996 9.7 $2.26 50,000 $2.75
$4.5625-$5.00........... 60,000 9.8 $4.93 55,000 $4.96
--------- --- ----- ------- -----
1,055,895 7.6 $1.31 751,940 $1.15
========= === ===== ======= =====
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The estimated fair value of options
granted during 1998, 1997 and 1996 pursuant to SFAS No. 123 was approximately
$538,027, $685,182 and $555,983, respectively. Had the Company adopted SFAS
No. 123, pro forma net loss would have been $36,827, $3,353,702 and
$5,030,959, and pro forma basic net loss per share would have been $(0.01),
$(0.77) and $(2.74) for 1998, 1997 and 1996, respectively. The fair value of
each option grant was estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions: dividend yield of zero,
volatility of 40%, a risk-free interest rate of 6.28%, and expected option
lives of four years.
F-15
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The provision for income taxes for the years ended June 30, 1998, 1997 and
1996 comprises minimum state taxes only.
A reconciliation of the provision for income taxes with the expected income
tax benefit computed by applying the federal statutory income tax rate to
income (loss) before provision for income taxes for the years ended June 30,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ------------------
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Income tax (benefit)
computed at federal
statutory tax rate..... $ 175,700 35.0 $(933,422) (35.0) $(1,520,948) (34.0)
State and local taxes... 1,600 1,600 1,600
Expenses not deductible
for income tax
purposes............... 7,603 8,817 3,774
Change in the valuation
allowance.............. (183,303) (35.0) 924,605 35.0 1,517,174 34.0
--------- ----- --------- ----- ----------- -----
$ 1,600 -- $ 1,600 -- $ 1,600 --
========= ===== ========= ===== =========== =====
</TABLE>
The components of the net deferred income tax asset recorded in the
accompanying consolidated balance sheets as of June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Reserves, principally due to allowance for sales
returns............................................. $ 111,564 $ 281,360
Accrued liabilities, principally due to accruals for
financial reporting purposes........................ 1,393,644 1,373,227
Net operating loss carryforwards..................... 3,732,875 3,936,250
Valuation allowance.................................. (5,238,083) (5,590,837)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The valuation allowance decreased $352,754 during the year ended June 30,
1998 and increased $1,286,128 during the year ended June 30, 1997.
At June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $9,206,800 and $6,329,000, respectively,
available to offset future taxable federal and state income. The federal and
state carryforwards expire in varying amounts through 2012 and 2002,
respectively.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for federal income tax reporting purposes are
subject to annual limitations. The change of ownership that occurred during
fiscal 1997, as a result of the IPO, caused the limitation of the Company's
net operating loss carryforwards.
8. RELATED-PARTY TRANSACTIONS
NOTE PAYABLE TO RELATED PARTY--On May 30, 1996, ASSI, Inc., a stockholder,
loaned the Company $500,000 (the "ASSI Convertible Loan"). The ASSI
Convertible Loan bore interest at 8% per annum, and principal and accrued
interest were due on the earlier of September 1, 1996 or the completion of the
Company's IPO. Upon the closing of the Company's IPO, ASSI, Inc. had the
option to convert all or part of the ASSI Convertible Loan plus accrued
interest into warrants to purchase common stock at a conversion price of $.25
per warrant (the "ASSI Loan Warrants").
F-16
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 7, 1996, in connection with the Company's IPO, ASSI, Inc. exercised
the conversion option to convert this note, plus accrued interest, into
warrants to purchase common stock at the conversion price of $.25 per warrant.
ASSI WARRANTS--On April 30, 1996, in consideration of certain financial and
personnel consulting service provided to the Company in 1996, including
advising the Company regarding capital raising alternatives and executive
recruiting, the Company entered into an agreement to issue to ASSI, Inc.
warrants to purchase 2,000,000 shares of common stock at an exercise price of
$4.40 per share (the "ASSI Warrants").
In connection with the 1995 bridge financing, the Company issued 1,100,000
common stock warrants to ASSI, Inc for $0.05 per warrant.
Effective April 24, 1998, as part of the previously noted settlement
agreement, the Company exchanged all outstanding stock purchase warrants of
the Company held by ASSI, Inc. into 1,100,000 shares of the Company's common
stock.
LEGAL SERVICE--A related party performed legal services on behalf of the
Company. The Company incurred approximately $250,000 and $44,576 for the years
ended June 30, 1998 and 1997, which is included in general and administrative
expenses.
9. LINE OF CREDIT
In September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides up to $1,500,000 of the Company's qualified gross
domestic accounts receivable, as defined in the agreement, 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 can be terminated by either party
upon 30 days notice. As of June 30, 1998, the Company has no amounts
outstanding under the line of credit.
F-17
<PAGE>
EXHIBIT 10.24
AMONG
SOUND SOURCE INTERACTIVE, INC.,
BRETT G. DURRETT
AND
BIOLOGICAL WEAPONS TESTING LABORATORIES, INC.
DATED AS OF
FEBRUARY 13, 1998
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is entered into as of
February 13, 1998 by and among Sound Source Interactive, Inc., a Delaware
corporation ("Buyer"), Brett G. Durrett ("Seller") and Biological Weapons
Testing Laboratories, Inc., a California corporation which is wholly-owned by
Seller (the "Company") (Seller and the Company are referred to herein together
as the "Sellers"). Each of the Buyer and the Sellers are referred to herein
individually as a "Party" and, collectively, as the "Parties."
W I T N E S S E T H:
-------------------
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, all of the issued and outstanding capital stock of the Company (the
"Stock") in consideration of the Purchase Price (as defined below) and on the
terms and conditions set forth herein (the "Acquisition"); and
WHEREAS, in connection with such Acquisition, Buyer, Seller and the Company
desire to make certain representations, warranties and covenants amongst one
another.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the warranties and covenants herein
contained, the Parties hereto agree as follows.
1. DEFINITIONS.
-----------
"Acquisition" shall have the meaning set forth above.
"Acquisition Proposal" shall mean any inquiry or proposal relating to (i)
any merger, consolidation, sale of substantially all of the assets of or similar
transaction involving the Company, or (ii) the sale of any of the outstanding
shares of capital stock of the Company (including without limitation by way of
an exchange offer) or similar transaction involving the Company.
"Affiliate" shall have the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended,
of the United States.
"Agreement" shall have the meaning set forth in the preamble above.
"Basis" shall have the meaning set forth in Section 8.1.
"Breach" and "Breaches" shall have the meanings set forth in Section 8.1.
"Business" shall mean the Company's business of developing and licensing
consumer computer software products and related services.
"Buyer" shall have the meaning set forth in the preamble above.
"Buyer's Basket" shall have the meaning set forth in Section 8.4(e).
"Buyer's Common Stock" means the common stock, par value $.001, of Buyer.
<PAGE>
"Cash" shall mean cash and cash equivalents within the meaning of GAAP.
"Chemical Substance" means any chemical substance, including but not
limited to any: (i) pollutant, contaminant, irritant, chemical, raw material,
intermediate, product, by-product, slag, construction debris; (ii) industrial,
solid, liquid or gaseous toxic or hazardous substance, material or waste, (iii)
petroleum or any fraction thereof; (iv) asbestos or asbestos-containing
material; (v) polychlorinated biphenyls; (vi) chlorofluorocarbons; and (vii) any
other substance, material or waste, which is identified or regulated under any
Environmental Law or Safety Law, as now in effect, or other comparable laws.
"Closing" shall have the meaning set forth in Section 2.4.
"Closing Date" shall have the meaning set forth in Section 2.4.
"Code" shall mean the Internal Revenue Code of 1986, as amended, of the
United States.
"Company" shall mean Biological Weapons Testing Laboratories, Inc.
"Company Assets" shall have the meaning set forth in Section 2.1.
"Company Agents" shall mean officers, employees and consultants of the
Company.
"Company Employee Plan" shall refer to any Company plan, scheme, program,
policy, practice, contract, commitment, agreement or other arrangement providing
for pension, death benefit, gratuities, superannuation, performance awards,
stock or stock-related awards, share option, share participation, share
incentive, profit sharing, bonus, incentive, fringe benefits, medical, dental or
other employee benefits of any kind, whether formal or informal, funded or
unfunded and whether or not legally binding, including without limitation, each
"employee benefit plan" within the meaning of Section 3(3) of ERISA, each
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA each
"employee welfare benefit plan" within the meaning of Section 3(1) of ERISA and
each "multiemployer plan" within the meaning of Section 3(37) of ERISA, in each
case which is or has been maintained, contributed to or required to be
contributed to, by the Company for the benefit of any Company Agent and pursuant
to which the Company has or may have any material liability, contingent or
otherwise.
"Contract" shall have the meaning set forth in Section 3.16.
"Disclosed Liabilities" shall have the meaning set forth in Section 7.5.
"Disclosure Letter" shall mean the Disclosure Letter of Seller dated as of
the date of this Agreement as delivered to Buyer concurrently with the execution
of this Agreement, which contains exceptions to Seller's representations and
warranties as set forth in Section 3. Such Disclosure Letter may only be
amended prior to Closing with the express written consent of Buyer.
"Environment" shall mean real property and any improvements thereon, and
also includes, but is not limited to, air (including that within man-made
structures above or below ground), surface water, drinking water, groundwater,
land surface, subsurface strata and water body sediments.
"Environmental Authorizations" shall have the meaning set forth in Section
3.23(a).
-2-
<PAGE>
"Environmental Law" shall mean any statute, statutory instrument, common
law, treaty, regulation or legal requirement relating to pollution, or
protection or cleanup of the Environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Resource Conservation and Recovery Act, as amended, the Clean Air
Act, as amended, and the Clean Water Act, as amended, relating to: (a) the
Release, containment, removal, remediation, response, cleanup or abatement of
any sort of any Chemical Substance; (b) the manufacture, generation,
formulation, processing, labeling, distribution, introduction into commerce,
use, treatment, handling, storage, recycling, disposal or transportation of any
Chemical Substance; or (c) exposure of persons, including Company Agents to any
Chemical Substance.
"Environmental Permit" shall mean any Permit or authorization from any
governmental authority required under, issued pursuant to, or authorized by, any
Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Extended Buyer Claim" shall have the meaning set forth in Section 8.1.
"Extended Seller Claim" shall have the meaning set forth in Section 8.1.
"Extremely Hazardous Substance" shall have the meaning set forth in Section
302 of the Emergency Planning and Community Right-to-Know Act of 1986, as
amended.
"Fair Market Value" shall mean, with respect to the value of a share of
Buyer's Common Stock on any day: (i) if the principal market for Buyer's Common
Stock is a national securities exchange or if Buyer's Common Stock is quoted on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the closing sales price of Buyer's Common Stock on such day as
reported by such exchange or NASDAQ, or on a consolidated tape reflecting
transactions on such exchange or NASDAQ; or (ii) if the principal market for the
Common Stock is not a national securities exchange and Buyer's Common Stock is
not quoted on NASDAQ, the mean between the highest bid and lowest asked prices
for Buyer's Common Stock on such day as reported by the National Quotation
Bureau, Inc.; provided that if clauses (i) and (ii) of this paragraph are all
inapplicable, or if no trades have been made or no quotes are available for such
day, the Fair Market Value of Buyer's Common Stock shall be determined by
Buyer's Board of Directors or the Compensation Committee thereof, as the case
may be, which determination shall be conclusive as to the Fair Market Value of
Buyer's Common Stock.
"Fiduciary" shall have the meaning set forth in ERISA Section 3(21).
"Financial Statements" shall have the meaning set forth in Section 3.7.
"Indebtedness" shall have the meaning set forth in Section 3.8.
"Intellectual Property" shall mean (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all Patents, (b) all trademarks, service marks, trade dress, logos,
trade names and corporate names, together with all translations, adaptations,
derivations and combinations thereof and including all goodwill associated
therewith, and all applications, registrations and renewals in connection
therewith, (c) all copyrightable works, all copyrights, design rights and all
applications, registrations, and renewals in connection therewith, (d) all mask-
works and all
-3-
<PAGE>
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights and (h) all copies and tangible
embodiments thereof (in whatever form or medium).
"IRS" shall mean the Internal Revenue Service.
"Knowledge" shall mean the actual knowledge of the executive officers of
the applicable Party.
"Liability" shall have the meaning set forth in Section 8.1.
"Lien" shall mean any mortgage, pledge, lien, security interest, charge,
claim, equity, encumbrance, conditional sale or other title retention device or
arrangement for the purpose of subjection to the payment of any Indebtedness, or
restriction on the creation of any of the foregoing, whether relating to any
property or right or the income or profits therefrom; provided, however, that
the term "Lien" shall not include (i) statutory liens for Taxes to the extent
that the payment thereof is not in arrears or otherwise due, (ii) encumbrances
in the nature of zoning restrictions, easements, rights or restrictions of
record on the uses of real property if the same do not materially detract from
the value of the property encumbered thereby or materially impair the use of
such property in the businesses of the Sellers as currently conducted, (iii)
statutory or common law liens to secure landlords, lessors or renters under
leases or rental agreements confirmed to the premises rented to the extent that
no payment or performance under any such lease or rental agreement is in arrears
or is otherwise due, (iv) deposits or pledges made in connection with, or to
secure payment of, worker's compensation, unemployment insurance, old age
pension programs mandated under applicable laws or other social security
regulations, and (v) statutory or common law liens in favor of carriers,
warehousemen, mechanics and materials, statutory or common law liens to secure
claims for labor, materials or supplies and other like liens, which secure
obligations to the extent that payment thereof is not in arrears or otherwise
due.
"Loss" and "Losses" shall have the meanings set forth in Section 8.1.
"Most Recent Balance Sheet" shall have the meaning set forth in Section
3.7.
"Most Recent Financial Statements" shall have the meaning set forth in
Section 3.7.
"Officer's Indemnification Certificate" shall have the meaning set forth in
Section 8.1.
"Ordinary Course of Business" shall mean the ordinary course of a Party's
business consistent with such Party's past custom and practice including with
respect to quantity and frequency.
"Party" and "Parties" shall have the respective meanings set forth in the
preamble above.
"Patent" shall mean any: (i) patent, patent application, patent disclosure
or other patent right in any jurisdiction of the world; (ii) any division,
continuation, continuation-in-part, reissuance, reexamination or extension of a
Patent; or (iii) any other patent right that is based upon an item described in
clause (i) or (ii) of this sentence.
-4-
<PAGE>
"Person" shall mean an individual, a partnership, a corporation, an
association, a joint stock company, a trust, an unincorporated organization or a
governmental entity (or any department, agency, or political subdivision
thereof).
"Premises" shall mean the real properties that are leased by the Company
under the Real Property Leases listed in Schedule 3.13(b) hereto.
----------------
"Proceedings" shall have the meaning set forth in Section 7.3.
"Prohibited Transaction" shall have the meaning set forth in ERISA Section
406 and Code Section 4975.
"Purchase Price" shall have the meaning set forth in Section 2.2.
"Real Property Leases" shall have the meaning set forth in Section 3.13(b).
"Release" shall mean any actual spilling, leaking, pumping, pouring,
emitting, dispersing, emptying, discharging, injecting, escaping, leaching,
dumping, or disposing of any Chemical Substance into the Environment that may
cause Liability under Environmental Laws (including the abandonment or
discarding of barrels, containers, tanks or other receptacles containing or
previously containing any Chemical Substance).
"Reportable Event" shall have the meaning set forth in ERISA Section 4043.
"Returns" shall have the meaning set forth in Section 3.12(a).
"Safety Laws" shall mean any statute, statutory instrument, common law,
regulation, directive, code of practice or guidance notes, or legal requirement
relating to health or safety, including but not limited to the Occupational
Safety and Health Act, as amended, relating to: (a) exposure of employees of the
Company to any Chemical Substance, (b) the physical structure, use or condition
of a building, facility, fixture or other structure or manufacturing processes,
or (c) otherwise concerning the health and safety of persons who work for the
Company, whether as employees, consultants or otherwise, or persons who visit
the Premises or are in any way affected by the activities of the Company or by
persons who work for the Company.
"Schedules" shall mean the Schedules of Seller delivered to Buyer
concurrently with the execution of this Agreement which Schedules set forth the
specific information referenced in various sections of this Agreement. The
Schedules and the information contained therein shall not be deemed exceptions
to any of the representations or warranties contained herein, except that they
qualify Sections 3.13(b), 3.14(c)(iv), 3.21(a), 3.21(d) and 3.21(e) to the
extent set forth therein. Such Schedules may only be amended prior to Closing
with the express written consent of all parties hereto. The Schedules are
arranged to supplement various sections of this Agreement by corresponding or
cross-referencing specific lettered and numbered Sections contained herein.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
-5-
<PAGE>
"Seller" and "Sellers" shall have the respective meanings set forth in the
preamble above.
"Seller's Basket" shall have the meaning set forth in Section 8.3(e).
"Stock" shall have the meaning set forth in Section 3.5(a).
"Survival Period" shall have the meaning set forth in Section 8.1.
"Tax," "Taxation" or "Taxes" means any and all United States and other
foreign taxes, whether governmental, local or municipal, assessments and other
governmental or local or municipal charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, property transfer,
franchise, withholding, stamp, payroll, recapture, employment, national
insurance, social security, excise duties and rates together with all interest,
penalties and additions imposed with respect to such amounts.
"Tax Return" shall mean any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Trademarks" shall mean any trademarks, service marks, trade dress, logos,
trade names and corporate names, together with all goodwill associated
therewith.
2. PURCHASE AND SALE TRANSACTION.
-----------------------------
2.1 Purchase and Sale of Stock. On the terms and subject to the
--------------------------
conditions set forth in this Agreement, at the Closing, Seller will sell,
convey, transfer, assign and deliver to Buyer, and Buyer will purchase and
acquire from Seller, all of the Stock (and as a result thereof, all right,
title, and interest to any and all assets of the Company included in the assets
listed on the Most Recent Balance Sheet of the Company, except (i) those assets
disposed of or consumed in the Ordinary Course of Business since the date of the
Most Recent Balance Sheet, and (ii) those assets whose disposition prior to the
Closing is described in the Disclosure Letter (the "Company Assets")), in
exchange for the Purchase Price.
2.2 Purchase Price. Buyer agrees to pay to Seller on the Closing Date an
--------------
aggregate of U.S. $10.00 in cash, by check payable to the order of Seller (the
"Purchase Price"). In addition, Buyer agrees to pay or cause to be paid certain
liabilities of the Company as more fully provided in Section 7.5.
2.3 Transfer Tax. Buyer shall bear and pay any transfer Taxes (other than
------------
any sales or use tax), documentation charges, recording fees or similar charges,
fees or expenses that may become payable in connection with the sale of the
Stock and the Acquisition.
2.4 The Closing. Subject to the terms and conditions of this Agreement,
-----------
the closing of the sale of the Stock by Seller to Buyer and the other
transactions contemplated by this Agreement (the "Closing") shall take place
immediately after the satisfaction and/or waiver of all conditions listed in
Section 6 hereof. Subject to compliance with the foregoing, the Closing shall
take place effective immediately after the close of business, Pacific Time, on
February 13, 1998 or at such other time and date as agreed to by Buyer and
Seller (the "Closing Date"). The Closing shall take place at the offices of the
Company (or at such other location as agreed to by Buyer and Seller).
-6-
<PAGE>
2.5 Deliveries at the Closing. At the Closing, the following shall occur:
-------------------------
(i) Seller will deliver to Buyer the stock certificate(s)
representing the Stock;
(ii) Seller will deliver to Buyer the various certificates,
instruments and documents referred to in Section 6.1 below;
(iii) Seller will execute, acknowledge (if appropriate), and deliver
to the Buyer such other instruments of sale, transfer, conveyance and
assignment of the Stock as Buyer and its counsel may reasonably request;
(iv) Buyer will deliver the Purchase Price to Seller as specified in
Section 2.2 above;
(v) Buyer will deliver to Seller the various certificates,
instruments and documents referred to in Section 6.2 below; and
(vi) Buyer and Seller shall deliver or cause to be delivered to one
another such other instruments and documents as are reasonably necessary
or appropriate to evidence the due execution, delivery and performance of
this Agreement.
At any time, and from time to time after the Closing, at the reasonable request
of Buyer and without further consideration, Seller, at Buyer's sole cost and
expense, will execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation and take such lawful action as Buyer may
reasonably determine is necessary to transfer, convey and assign to the Buyer,
and to confirm Buyer's title to or interest in the Stock, to put the Buyer in
actual possession and operating control of the Business and to assist the Buyer
in exercising all rights with respect thereto.
3. REPRESENTATIONS AND WARRANTIES OF SELLER.
----------------------------------------
Seller represents and warrants to Buyer that the statements contained in
this Section 3 are true and correct as of the date of this Agreement and, if the
Closing Date is different than the date of this Agreement, will be true and
correct as of the Closing Date (as though made as of the Closing Date and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 3), except (i) for changes pursuant to the conduct of
the business of the Company occurring prior to the Closing in conformity with
this Agreement (including the Exhibits attached hereto) or (ii) as specifically
set forth in the Disclosure Letter.
3.1 Organization of the Company. The Company is duly organized, validly
---------------------------
existing, and in good standing under the laws of the State of California. The
Company is, or at or prior to the Closing Date will be, duly qualified to
transact business as a foreign corporation in good standing under the laws of
each jurisdiction where such qualification is required and in which the
Company's failure to be so qualified would have a material adverse effect on the
Company's Business, financial condition or results of operations. The Company
has full power and authority, and all licenses, permits and authorizations
necessary, to carry on the Business and to own and use the Company Assets and
properties owned and used by it. The Company is not in default under or in
violation of any provision of its articles of incorporation or bylaws.
-7-
<PAGE>
3.2 Authorization of Transaction. The Company has full corporate power
----------------------------
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally binding
obligation of Seller and the Company, enforceable against Seller and the Company
in accordance with its terms and conditions, subject to the effect of bankruptcy
or similar insolvency laws affecting the rights of creditors generally and the
availability of specific enforcement, injunctive relief and other equitable
remedies.
3.3 Noncontravention. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any government,
governmental agency, or court to which either of the Sellers is subject or any
provision of any charter documents or bylaws of the Company or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which the Company is a party or by which the
Company is bound or to which any of the Company's assets is subject (or result
in the imposition of any Lien upon any of the Company's assets). Neither of the
Sellers is required by any law to give any notice to, make any filing with or
obtain any authorization, consent or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated by
this Agreement.
3.4 Brokers' Fees. Neither of the Sellers has any Liability or obligation
-------------
to pay any fees or commissions to any broker, finder or agent with respect to
the transactions contemplated by this Agreement.
3.5 Capitalization; Title to Stock.
------------------------------
(a) The authorized capital stock of the Company consists 10,000,000
shares of common stock, of which 782,320 shares, and no more, are issued
and outstanding (such 782,320 issued and outstanding shares herein
collectively the "Stock"). All such shares of Stock are duly authorized,
validly issued, fully-paid and nonassessable. Seller is the sole holder of
outstanding capital stock of the Company as of the date hereof. As of the
Closing Date, there will be outstanding no option, warrant right,
conversion privilege or other commitment entitling any Person to acquire
any capital stock or other equity securities of the Company.
(b) Seller has good and marketable title to the Stock; such shares of
Stock are free and clear of any Liens (as defined herein) and free from any
restriction on sale or transfer (other than restrictions imposed by
applicable securities laws), preemptive right, option, warrant or any other
claim of any kind or nature whatsoever by any person other than the
registered owner thereof. The delivery of the Shares to Buyer pursuant to
this Agreement upon Closing will transfer to Buyer legal and valid title to
the Shares being acquired, free and clear of all Liens or other claims of
any kind or nature whatsoever.
3.6 Subsidiaries. The Company does not control, directly or indirectly,
------------
or have any direct or indirect equity participation in, any other corporation,
partnership, trust or other business association.
3.7 Financial Statements. Schedule 3.7 sets forth the following unaudited
-------------------- ------------
financial statements of the Company (collectively, the "Financial Statements"):
(i) an unaudited balance sheet at December 31,
-8-
<PAGE>
1997 and statements of income and cash flows for the fiscal year ended December
31, 1997; and (ii) an unaudited balance sheet of the Company as of January 31,
1998 (the "Most Recent Balance Sheet") and statements of income and cash flows
for the one-month period ended January 31, 1998 (the Most Recent Balance Sheet
and such one-month unaudited pro forma adjusted statements of income and cash
flows being hereinafter referred to as the "Most Recent Financial Statements").
The Financial Statements, specifically including the Most Recent Financial
Statements, have been adjusted in accordance with the assumptions,
qualifications and adjustments expressly set forth in the Financial Statements.
Subject to the assumptions and qualifications set forth therein, the Financial
Statements present fairly the financial condition and the results of operations
of the Company as of the date or dates of such Financial Statements and for the
periods covered thereby and, subject to the assumptions and qualifications set
forth therein, are consistent with the books and records of the Company that
pertain to the Business of the Company except for normal year-end adjustments
which will not be material.
3.8 Indebtedness; Guarantees.
------------------------
(a) Except as set forth on the Most Recent Financial Statements, the
Company does not have any indebtedness for money borrowed or for the
deferred purchase price of property or services, or capital lease
obligations, or conditional sale or other title retention agreements
relating to the Business ("Indebtedness"), and is not a guarantor or
otherwise liable for any Liability or obligation of any other Person for
any matter which relates to or affects or will affect the Business.
(b) Schedule 3.8(b) identifies all funded indebtedness of the Company
---------------
of which Seller is a guarantor.
3.9 Absence of Changes. Since the Most Recent Balance Sheet date and
------------------
except as set forth in Section 3.9 of the Disclosure Letter, there has not been
any material adverse change in the Business, financial condition, operations or
results of operations of the Company. Without limiting the generality of the
foregoing, since such date, except as set forth in the Disclosure Letter:
(a) the Company has not sold, leased, transferred or assigned any of
its assets, tangible or intangible, other than in the Ordinary Course of
Business;
(b) the Company has not entered into any agreement, contract, lease or
license (or series of related agreements, contracts, leases, and licenses)
relating to the Business other than in the Ordinary Course of Business;
(c) no party (including the Company) has accelerated, terminated,
modified or canceled any agreement, contract, lease or license (or series
of related agreements, contracts, leases and licenses) involving
individually more than $5,000 to which the Company is a party or by which
the Company is bound;
(d) the Company has not imposed, or agreed to, or suffered the
imposition of any Lien in excess of $5,000 upon any of its assets, tangible
or intangible;
(e) the Company has not made any capital expenditure (or series of
related capital expenditures) (or series of related capital expenditures)
involving more than $5,000.
-9-
<PAGE>
(f) the Company has not made any capital investment in, any loan to or
any acquisition of the securities or assets of, any other Person (or series
of related capital investments, loans and acquisitions) involving
individually more than $5,000 other than pursuant to agreements with
suppliers that were entered into in the Ordinary Course of Business;
(g) the Company has not issued any note, bond or other debt security
or created, incurred, assumed or guaranteed any indebtedness for borrowed
money or capitalized lease obligation either involving more than $1,000
individually or $5,000 in the aggregate;
(h) the Company has not canceled, compromised, waived or released any
right or claim (or series of related rights and claims) involving more than
$5,000;
(i) the Company has not granted any license or sublicense of any
rights under or with respect to any Intellectual Property other than
"shrink wrap" or site licenses to end-users;
(j) there has been no change made or authorized in the articles of
incorporation or bylaws of the Company;
(k) the Company has not issued, sold or otherwise disposed of any of
its capital stock, or granted any options, warrants or other rights to
purchase or obtain (including upon conversion, exchange or exercise) any of
its capital stock;
(l) the Company has not declared, set aside or paid any dividend or
made any distribution with respect to its capital stock (whether in cash or
in kind) or redeemed, purchased or otherwise acquired any of its capital
stock;
(m) the Company has not experienced any damage, destruction or loss
(whether or not covered by insurance) to its property in excess of $5,000;
(n) the Company has not made any loan to any of its directors,
officers or employees, or entered into any other compensation transaction
with any of its directors, officers and employees;
(o) the Company has not entered into any employment or severance
agreement or arrangement (other than pursuant to the Company's standard
services agreement terms and conditions in the Ordinary Course of
Business), written or oral, or modified the terms of any existing such
contract or agreement;
(p) the Company has not granted any increase in the base compensation
of any of its directors, officers and employees;
(q) the Company has not adopted, amended, modified or terminated any
Seller Employee Plan for the benefit of any of its directors, officers and
employees;
(r) the Company has not made any other change in employment terms for
any of its directors, officers and employees or entered into any collective
bargaining agreement;
-10-
<PAGE>
(s) the Company has not made or pledged to make any charitable or
other capital contribution outside the Ordinary Course of Business; and
(t) the Company has not committed to any of the foregoing.
3.10 Absence of Undisclosed Liabilities. The Company has no debts or
----------------------------------
liabilities (and to the Sellers' Knowledge there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against the Company giving rise to any such Liability) except
for (i) debts and liabilities as are reflected in the Most Recent Financial
Statements and (ii) debts and liabilities arising in the Ordinary Course of
Business after the Most Recent Balance Sheet date.
3.11 Legal and Other Compliance. The Company has complied in all material
--------------------------
respects with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings and charges thereunder) of the
United States federal, state, local and other foreign governments (and all
agencies thereof) and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
the Company alleging any failure so to comply.
3.12 Taxes.
-----
(a) The Company has accurately prepared and duly filed all tax returns
and given or delivered all material information, accounts, notices,
computations, statements and reports required to be filed, given or
delivered by the Company under any applicable legislation or regulations
relating to Taxation (whether of the United States or elsewhere in the
world) ("Returns") and relating to any and all Taxes attributable to the
Company or its operations, or for which the Company is liable or has become
liable, such Returns are true and correct in all material respects and show
all amounts paid or required to be paid, and have been completed in
accordance with applicable law in all material respects. All taxes payable
on the Returns have been paid in full on a timely basis. The Company has
duly and punctually withheld or paid, all income tax, social security and
other Taxes the Company is required to withhold or pay with respect to its
employees, independent contractors or other third parties.
(b) The provisions or reserves for the Company's Taxes reflected in
the Most Recent Balance Sheet are sufficient to discharge the Taxes for all
periods (or the portion of any period) ending on or prior to the date of
such Most Recent Balance Sheet, whensoever payable.
(c) No material Tax liability has been incurred by the Company since
the date of the Most Recent Balance Sheet other than in the Ordinary Course
of Business and adequate provision has been or will be made for all Tax
Liabilities incurred since that date through the Closing Date.
(d) The Company does not have, or prior to the Closing will not have,
any Tax, nor is there any Tax deficiency outstanding, proposed or assessed,
for which adequate provision has not been made in the Most Recent Balance
Sheet, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax. No dispute, audit or other examination or investigation of the Tax
affairs of the Company is presently in progress. Except to the extent
reflected on the Most Recent Balance Sheet, the Company does not have any
Liability for unpaid Taxes, whether asserted or unasserted, known or
unknown, contingent or otherwise, and there is no basis for the assertion
of any such Liability
-11-
<PAGE>
attributable to the Company, its assets or operations except for any
Liability for Taxes incurred in the Ordinary Course of Business since the
date of the Most Recent Balance Sheet that are not yet due and payable to
the applicable taxing authority. There are (or immediately following the
Closing, there will be) no Liens on the assets of the Company relating to
or attributable to Taxes.
3.13 Property, Plant and Equipment.
-----------------------------
(a) The Company does not own any real property.
(b) Schedule 3.13(b) lists and describes all real property leased or
----------------
subleased to the Company. The Company has delivered to Buyer correct and
complete copies of the leases and subleases listed on Schedule 3.13(b) (the
----------------
"Real Property Leases"). Except as set forth on Schedule 3.13(b), with
----------------
respect to each of the Real Property Leases listed on Schedule 3.13(b):
----------------
(i) the lease or sublease is legal, valid, binding, enforceable
against the Company and, to the Seller's Knowledge, against the other
party thereto, subject to the effect of bankruptcy or similar insolvency
laws affecting the rights of creditors generally and the potential
unavailability of specific enforcement, injunctive relief and other
equitable remedies, and is in full force and effect;
(ii) upon obtaining any required consents of the landlord to
assignment or transfer of such lease or sublease necessitated by the
transactions contemplated by this Agreement, the lease or sublease will
continue to be legal, valid, binding, enforceable against the Company and,
to the Seller's Knowledge, against the other party thereto, subject to the
effect of bankruptcy or similar insolvency laws affecting the rights of
creditors generally and the potential unavailability of specific
enforcement, injunctive relief and other equitable remedies, and in full
force and effect on identical terms following the consummation of the
Acquisition contemplated hereby;
(iii) neither the Company nor, to the Knowledge of the Sellers,
the other party to the lease or sublease, is in breach or default thereof;
(iv) to the Knowledge of the Sellers, no party to such lease or
sublease has overtly repudiated any provision thereof;
(v) The Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
subleasehold;
(vi) all facilities leased or subleased under the Real Property
Leases have received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation thereof as
conducted by the Company and have been operated and maintained in
accordance with applicable laws, rules and regulations in all material
respects; and
(vii) all facilities leased or subleased under the Real Property
Leases are supplied with utilities and other services reasonably necessary
for the operation of said facilities.
-12-
<PAGE>
(c) The Company does not own, use or occupy any premises other than
the Premises.
(d) The Company is in physical possession and actual occupation of the
whole of the Premises on an exclusive basis and no right of occupation or
enjoyment has been acquired by any third party or has been granted or
agreed to be granted to any third party.
(e) All monies due to each lessor or sublessor under each of the Real
Property Leases (whether or not reserved as rent) to which the Company is a
party or by which the Company is bound have been paid and none have been
commuted, waived or paid in advance of the due date for payment.
(f) The Premises are not subject to the payment of any outgoings other
than uniform business rates and water rates (and (in the case of
leaseholds) rent (inclusive of payments of taxes, insurances and operating
costs), insurance premiums, service charges and leasehold and subleasehold
expenses), and all outgoings have been paid when due and none are disputed
under the leases.
(g) All covenants, restrictions, stipulations and other encumbrances
affecting the Premises, to the extent they have been affirmatively agreed
to by the Company, have been observed and performed in all material
respects.
(h) There are no current or existing facts or circumstances which
(with or without the taking of other action) would entitle any third party
to exercise a right of entry or forfeiture or to take possession or which
would in any other way affect or restrict the continued possession,
enjoyment or use of any of the Premises for its present purpose for the
duration of the term of the applicable lease or sublease.
(i) All buildings and structures comprised in the Premises are in a
good state of repair and condition, reasonable wear and tear excepted.
3.14 Intellectual Property.
---------------------
(a) The Company owns or has the right to use pursuant to license,
sublicense, agreement or permission all Intellectual Property reasonably
necessary for the operation of the Business as such is currently conducted.
Each item of Intellectual Property owned or used by the Company immediately
prior to the Closing hereunder will, immediately after the Closing, be
owned or available for use by the Buyer and the Company on identical terms
and conditions as owned or available for use by the Company prior to the
Closing subject to obtaining any required consents disclosed in Section
3.29 of the Disclosure Letter. The Company has taken all commercially
reasonable actions to maintain and protect each item of Intellectual
Property that the Company owns or uses.
(b) The Company does not infringe upon, misappropriate or use without
a required license, any Intellectual Property rights of third parties, nor
has the Company received any written charge, complaint, claim, demand or
notice alleging that the operation of the Business gives rise to any such
infringement, misappropriation, or misuse that has not previously been
finally resolved (including any claim that the Company must license or
refrain from using any Intellectual Property
-13-
<PAGE>
rights of any third party). To the Knowledge of Sellers, no third party has
infringed upon, misappropriated or otherwise misused any Intellectual
Property rights of the Company.
(c) Schedule 3.14(c) identifies each issued patent, and each
----------------
registered copyright, trademark, trade name, mask work, service mark or
other registration which has been issued to the Company by any governmental
entity with respect to any of its Intellectual Property, identifies each
pending patent application or application for other registration which the
Company has made with respect to any of its Intellectual Property, and
identifies each license, agreement or other permission currently in effect
pursuant to which the Company has granted to any third party rights with
respect to any of the Company's Intellectual Property (together with any
exceptions) other than shrink wrap licenses to end users. The Sellers have
delivered to Buyer correct and complete copies of all such issued patents,
and registered copyrights, trademarks, trade names, mask works,
servicemarks, registrations, applications, licenses, agreements and
permissions (as amended to date) and have made available to the Buyer
correct and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. With respect
to each item of Intellectual Property required to be identified on Schedule
--------
3.14(c), except as set forth in Section 3.14(c) of the Disclosure Letter:
-------
(i) the Company possesses all right, title, and interest in and
to the item, or has the valid right to use the item, free and clear of any
Lien or license;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand has been filed or, to the Knowledge of
the Sellers is threatened which challenges the legality, validity,
enforceability, use or ownership of the item; and
(iv) except for indemnification provided in connection with
agreements set forth on Schedule 3.14(c) and Schedule 3.16, the Company has
---------------- -------------
not agreed to indemnify any Person for or against any interference,
infringement, misappropriation or other conflict with respect to the item.
(d) Schedule 3.14(d) lists the items of Intellectual Property that any
----------------
third party owns and that the Company uses pursuant to license, sublicense,
agreement or permission other than pursuant to shrinkwrap software licenses
or site licenses. The Company has delivered to Buyer correct and complete
copies of all such licenses, sublicenses, agreements and permissions (as
amended to date). Except as described in Section 3.14(d) of the Disclosure
---------------
Letter, with respect to each item of Intellectual Property required to be
identified on Schedule 3.14(d):
----------------
(i) the license, sublicense, agreement or permission covering the
item is legal, valid, binding, enforceable against the Company and, to the
Knowledge of the Sellers, against the other party thereto, and in full
force and effect, subject to the effect of bankruptcy or similar insolvency
laws affecting the rights of creditors generally and the potential
unavailability of specific enforcement, injunctive relief and other
equitable remedies;
-14-
<PAGE>
(ii) the license, sublicense, agreement or permission will
continue to be legal, valid, binding, enforceable and in full force and
effect on identical terms immediately following the consummation of the
transactions contemplated hereby;
(iii) neither the Company, nor to the Knowledge of Sellers, any
other party to the license, sublicense, agreement or permission, is in
breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination,
modification or acceleration thereunder;
(iv) to the Knowledge of Sellers, no party to the license,
sublicense, agreement or permission has overtly repudiated any provision
thereof;
(v) with respect to each such sublicense, the representations
and warranties set forth in subsections (i) through (iv) above are true and
correct with respect to the underlying license;
(vi) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree, ruling or charge;
(vii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand has been filed against either of the Sellers or,
to the Knowledge of the Sellers, any owner of such Intellectual Property
or, to the Knowledge of the Sellers, is threatened which challenges the
legality, validity or enforceability of the underlying item of Intellectual
Property;
(viii) the Company has not granted any sublicense or similar right
with respect to the license, sublicense, agreement or permission other than
pursuant to shrink wrap licenses or site licenses to end users; and
(ix) the item of Intellectual Property does not infringe upon,
misappropriate or otherwise misuse any Intellectual Property rights of
third parties as a result of the continued operation of the Business.
3.15 Inventories. The Company has no material amount of inventory held
-----------
for sale to third parties.
3.16 Contracts. Schedule 3.16 lists the following currently effective
----------
contracts and other agreements (the "Contracts") to which the Company is a
party other than those that are required to be listed in any Schedule called for
by Section 3.13 or Section 3.14 of this Agreement:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $5,000 per annum;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products or other personal
property or for the furnishing or receipt of services, the performance of
which will extend over a period of more than one year or
-15-
<PAGE>
result in a loss in excess of $5,000 on completion of performance or
involve consideration in excess of $5,000;
(c) any agreement concerning the participation of the Company in a
partnership or joint venture;
(d) any agreement (or group of related agreements) under which the
Company has created, incurred, assumed or guaranteed any indebtedness for
borrowed money or any capitalized lease obligation, in excess of $5,000 or
under which it has imposed a Lien on any of its assets, tangible or
intangible (other than liens given in the Ordinary Course of Business
relating to the sale of goods and provision of services);
(e) any agreement concerning a commitment of confidentiality or
noncompetition by the Company;
(f) any currently effective profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance or other
plan or arrangement for the benefit of the Company's current or former
directors, officers and employees (other than plans or arrangements of
Seller as to which the Company and Buyer do not have and shall not incur
any Liability);
(g) any collective bargaining agreement binding on the Company;
(h) any currently effective written agreement for the employment by
the Company of any individual on a full-time, part-time, consulting or
other basis;
(i) any agreement under which the Company has advanced or loaned any
amount in excess of $1,000 (excluding normal advances or loans associated
with travel and meal expenses advanced in the Ordinary Course of Business)
to any of its directors, officers, and employees;
(j) any agreement pursuant to which the Company has an obligation to
pay royalties or make other payments in connection with the sale of
products or services by the Company in the Ordinary Course of Business;
(k) any other agreement (or group of related agreements) the
performance of which involves payment by the Company of consideration in
excess of $1,000; and
(l) any agreement, written or oral, between Seller and the Company.
The Company has delivered to the Buyer a correct and complete copy of each
written agreement listed on Schedule 3.16 and a written summary setting forth
-------------
the terms and conditions of each oral agreement referred to in this Section
3.16. With respect to each such agreement: (A) the agreement is legal, valid,
binding, enforceable and in full force and effect with respect to the Company,
subject to the effect of bankruptcy or similar insolvency laws affecting the
rights of creditors generally and the potential unavailability of specific
enforcement, injunctive relief and other equitable remedies and, to the
Knowledge of the Sellers is a legal, valid, binding and enforceable agreement of
the other party(ies) thereto, subject to the effect of bankruptcy or similar
insolvency laws affecting the rights of creditors generally and the
-16-
<PAGE>
potential unavailability of specific enforcement, injunctive relief and other
equitable remedies; (B) the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect after consummation of the Acquisition
(subject only to the receipt of applicable consents set forth in Section 3.29 of
the Disclosure Letter and, subject to the effect of bankruptcy or similar
insolvency laws affecting the rights of creditors generally and the potential
unavailability of specific enforcement, injunctive relief and other equitable
remedies) on identical terms immediately following the consummation of the
transactions contemplated hereby and, to the Knowledge of Sellers, will be a
legal, valid, binding and enforceable agreement of the other party(ies) thereto,
subject to the effect of bankruptcy or similar insolvency laws affecting the
rights of creditors generally and the potential unavailability of specific
enforcement, injunctive relief and other equitable remedies; (C) the Company is
not in breach or default under, and to the Knowledge of the Sellers no other
party is in breach or default under, and no event has occurred which with notice
or lapse of time would constitute a breach or default or permit termination,
modification or acceleration under, the agreement; and (D) to the Knowledge of
Sellers, no party has overtly repudiated any provision of the agreement.
3.17 Notes and Accounts Receivable. All notes and accounts receivable of
-----------------------------
the Company shown on the Most Recent Balance Sheet are reflected properly on the
Company's books and records, are valid receivables subject to no valid setoffs
or counterclaims, are current and collectible, subject only to bankruptcy
proceedings and the reserve for bad debts reflected in the Most Recent Balance
Sheet as adjusted for the passage of time through the Closing Date in accordance
with the past custom and practice of the Company.
3.18 Powers of Attorney. There are no outstanding powers of attorney
------------------
executed on behalf of the Company.
3.19 Litigation. Section 3.19 of the Disclosure Letter sets forth each
----------
instance in which the Company (i) is subject to any outstanding injunction,
judgment, order, decree, ruling or charge or (ii) is a party, or to the
Knowledge of Sellers is threatened to be made a party to any action, suit,
proceeding, hearing or investigation of, in or before any court or quasi-
judicial or administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator.
3.20 Product Warranties; Defects; Liability. Each product manufactured,
--------------------------------------
sold, leased or delivered by the Company has been in substantial conformity with
all applicable contractual commitments and all express warranties made by the
Company, and the Company has no Liability (and there is no Basis for any present
or future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against any of them giving rise to any Liability) for
replacement or repair thereof or other damages in connection therewith, subject
only to the reserve for product warranty claims reflected in the Most Recent
Balance Sheet as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the Company and labor costs
associated with warranty repairs which are immaterial. No product manufactured,
sold, leased or delivered by the Company is subject to any guaranty, warranty or
other indemnity beyond the Company's applicable standard terms and conditions of
sale or lease or beyond that implied or imposed by applicable law.
-17-
<PAGE>
3.21 Company Agents.
--------------
(a) The Company has no employees. Except as set forth in Section
3.21(a) of the Disclosure Letter, no Company Agent or former Company Agent
has any rights (including but not limited to the right to receive royalties
or other payments from any of the Sellers in exchange for licenses or other
grants of rights to any Intellectual Property) to any of the Company's
Intellectual Property.
(b) The Company is not a party to or bound by any collective
bargaining agreement, nor has the Company experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Company has not committed any unfair labor practice. Neither
of Sellers has any Knowledge of any organizational effort presently being
made or threatened by or on behalf of any labor union with respect to
employees of the Company.
(c) There is not now outstanding any contract of service or for
services between the Company and any Company Agent or former Company Agent.
(d) Except for Company Employee Plans identified in Schedule 3.22(a),
----------------
there are no loans or other benefits enjoyed by any Company Agent or former
Company Agent in consideration of such person's employment with, or
providing service to, the Company.
(e) Except as set forth in Section 3.21(d) of the Disclosure Letter,
and except to the extent (if any) to which provision or allowance therefor
has been made in the Financial Statements, no Liability has been incurred
by the Company to make any redundancy payments or any protective awards or
to pay damages or compensation for wrongful or unfair dismissal or for
failure to comply with any order for the reinstatement or re-engagement of
any employee or former employee and no gratuitous payment has been made or
promised by the Company in connection with the actual or proposed
termination or suspension of employment or variation of any contract of
employment of any present or former director or employee.
(f) There are no claims filed, or to the Knowledge of the Sellers
threatened, against the Company (and neither of the Sellers is aware of any
circumstance which could reasonably be expected to give rise to the making
of any such claim) by any employee or former employee or workman or third
party in respect of an accident or injury which is not fully covered by
insurance or by any employee, former employee, director or former director
in relation to the terms and conditions of employment or appointment.
3.22 Employee Benefits.
-----------------
(a) Plans. Schedule 3.22(a) contains an accurate and complete list of
----- ----------------
each Company Employee Plan. The Company has made no commitment to establish
any new Company Employee Plan.
(b) Documents. Sellers have provided to Buyer (i) correct and
---------
complete copies of all documents embodying or relating to each Company
Employee Plan including all amendments thereto and written interpretations
thereof; (ii) if the Company Employee Plan is funded, the most recent
annual and periodic accounting of Company Employee Plan assets; (iii) all
taxing or other
-18-
<PAGE>
governmental authority determination letters and rulings relating to
Company Employee Plans; and (iv) all communications material to any
employee relating to any Company Employee Plan, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events
which would result in any material Liability to either of Sellers.
(c) Company Employee Plan Compliance. (i) The Company has performed,
--------------------------------
in all material respects, all obligations required to be performed by the
Company under the Company Employee Plans and each Company Employee Plan has
been established and maintained in all material respects in accordance with
its terms and in compliance with all applicable laws, statutes, orders,
rules and regulations; (ii) there are no actions, suits or claims which
have been filed, or, to the Knowledge of Sellers, threatened or anticipated
(other than routine claims for benefits) against any Company Employee Plan
or against the assets of any Company Employee Plan; (iii) each Company
Employee Plan can be amended, terminated or otherwise discontinued after
the Closing in accordance with its terms, without liability to the Company,
Buyer or their respective Affiliates (other than ordinary administration
expenses typically incurred in a termination event); and (iv) there are no
inquiries or proceedings which have been filed, or, to the Knowledge of the
Sellers, threatened by any governmental authority with respect to any
Company Employee Plan.
(d) Certain Plans. Other than the plans listed on Schedule 3.22(a),
------------- ----------------
the Company does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any Company Employee Plan
which is subject to ERISA or Section 412 of the Code.
3.23 Environment, Health and Safety.
------------------------------
(a) In addition to the definitions set forth in Section 1, for
purposes of this Section 3.23: "Environmental Authorizations" means any
permits, licenses, consents or other authorizations required under any
Environmental Laws for the operation of the Business or the occupation or
use of the Premises.
(b) All Environmental Authorizations are in full force and effect and
no work or other investment is necessary to maintain any such
authorizations and there are no facts or circumstances currently in
existence which may lead to revocation, suspension, variation or non-
renewal of such authorizations.
(c) There are no processes being carried on or which have been carried
on at any time at the Premises by the Company which would require any
Environmental Authorization under any Environmental Law.
(d) The Company has never been required to hold, nor has the Company
held or applied for, a waste disposal license or waste management license
under any Environmental Laws.
(e) Except for retail cleaning solvents and normal office supplies, no
poisonous, noxious, polluting, unauthorized, dangerous or environmentally
harmful substances or articles, whether or not the same would be designated
as "controlled waste" or "special waste" under any Environmental Laws, have
been produced, treated, kept at or deposited on the Premises by the
-19-
<PAGE>
Company or have been released or discharged by the Company from the
Premises including (for the avoidance of doubt but not further or
otherwise) into any public sewer or into any drain or sewer communicating
with a public sewer from the Premises.
(f) There are no deficiencies in the waste disposal arrangements now
or at any time carried on by the Company at or in respect of the Business
or Premises which cause the Company to fail to comply with any existing or
proposed Environmental Laws.
(g) All information provided by and on behalf of Sellers to any
statutory authority and all records and data required to be maintained by
the Company under the provisions of any Environmental Laws regarding the
operation of the Business or any processes carried on at or emissions,
discharges or waste disposal from the Premises is complete and accurate.
(h) There have been no uncured complaints or disputes regarding the
use of the Premises, noise generated by the Company on the Premises, the
release of any substances from the Premises and, to the Knowledge of
Seller, there are no existing facts or circumstances which are likely to
lead to any such complaint or dispute.
(i) There is no actual or contingent liability to make good, repair,
reinstate or clean up the Premises or any land or buildings formerly owned
or occupied by the Company and no act, omission or circumstance has given
or prior to the Closing is likely to give rise in the future to any such
claim, investigation or other proceedings or any such liability under any
Environmental Laws.
(j) The Company has complied with all Environmental Laws and Safety
Laws and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed, served on and commenced
against the Company alleging any failure so to comply.
(k) The Company has not received any written prohibition or
improvement notices from any enforcement body, including and the relevant
local authority, with regard to breaches of Safety Laws.
(l) There have been no claims, investigations or proceedings against
or, to the Knowledge of Sellers, overtly threatened against the Company or
any of its directors, officers or employees in respect of accidents,
injuries, illness, disease or any other harm to the health and safety of
employees, contractors or any other persons caused by breaches of or
otherwise and there are no facts or circumstances which may lead to any
such claims, investigations or proceedings.
(m) The Company has reasonably adequate employer's liability and
public liability insurance covering the Business. Schedule 3.23(m) lists
----------------
and describes such insurance policies. No claims in respect of health and
safety have been made or are contemplated under such insurance policies.
3.24 Affiliated Transactions. No Affiliate of the Company owns any asset,
-----------------------
tangible or intangible, which is used in the Business.
3.25 Government Contracts. The Company is not, and has not directly been,
--------------------
a party to any contract or arrangement with any government agency relating to
the Business.
-20-
<PAGE>
3.26 Distributors, Products, and Suppliers. Schedule 3.26 sets forth a
------------------------------------- -------------
complete and accurate list of (a) the twenty largest distributors and resellers
for the Company's products (by dollar volume) for calendar year ended December
31, 1997 indicating the written contractual arrangements, if any, with each such
distributor or reseller and the dollar volume of products distributed during
such year, and (b) all suppliers of material product development services to the
Company that are material to the Company's Business.
3.27 No Illegal Payments, Etc. Neither the Company nor, to the Seller's
------------------------
knowledge, any of the Company's officers, employees, agents or Affiliates, has:
(a) directly or indirectly given or agreed to give any illegal gift,
contribution, payment or similar benefit to any supplier, customer, governmental
official or employee or other person who was or is in a position to help or
hinder the Business (or assist in connection with any actual transaction) or
made or agreed to make any illegal contribution, or reimbursed any illegal
political gift or contribution made by any other person, to any candidate for
federal, state, local or foreign public office (i) which may subject the Company
to any damage or penalty in any civil, criminal or governmental litigation or
proceeding under United States law or (ii) the noncontinuation of which has had
or might have, individually or in the aggregate, a material adverse effect on
the Company.
3.28 Books and Records. The books and all corporate (including minute
-----------------
books and stock record books) and financial records of the Company that are
related to the Business are complete and correct.
3.29 Consents. No consents are required to consummate the Acquisition and
--------
the various transactions contemplated hereby, except as described in Section
3.29 of the Disclosure Letter which sets forth a true and correct list of the
identities of any Person whose consent or approval is so required and the
matter, agreement or contract to which such consent relates.
3.30 No Liquidation, Insolvency or Winding-Up.
----------------------------------------
(a) No order has been made, or petition presented, or resolution
passed for the winding-up of the Company and there is not outstanding:
(i) any petition or order for the winding-up of the Company;
(ii) any appointment of a receiver over the whole or part of the
undertaking of assets of the Company;
(iii) any petition or order for administration of the Company;
(iv) any voluntary arrangement between the Company and any of its
creditors;
(v) any distress or execution or other process levied in respect
of the Company which remains undischarged; or
(vi) any unfulfilled or unsatisfied judgment or court order
against the Company.
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(b) To Sellers' knowledge, there are no circumstances which would
entitle any Person to present a petition for the winding-up or
administration of either the Company or Seller or to appoint a receiver
over the whole or any part of the undertaking or assets of the Company.
3.31 Disclosure. None of the representations and warranties contained in
----------
Section 3 of this Agreement and the Schedules (both as qualified by the
Disclosure Letter), or any certificate furnished by Sellers to Buyer pursuant to
this Agreement and the Schedules hereto, contain any untrue statement of a
material fact or omit to state a material fact which would have a material
adverse effect on either the Business or the Company Assets.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
---------------------------------------
Buyer represents and warrants to Seller that the statements contained in
this Section 4 are true, correct and complete as of the date of this Agreement
and, if different than the date of this Agreement, will be true, correct and
complete as of the Closing Date as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4.
4.1 Organization of Buyer. Buyer is duly organized, validly existing and
---------------------
in good standing under the laws of the State of Delaware. Buyer is qualified to
transact business as a foreign corporation in the State of California and is a
foreign corporation in good standing under the laws of the State of California.
4.2 Authorization for Transaction. Buyer has full corporate power and
-----------------------------
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of Buyer, enforceable against Buyer in accordance with its terms and conditions,
subject to the effect of bankruptcy or similar insolvency laws affecting rights
of creditors generally and the availability of specific enforcement, injunctive
relief and other equitable remedies.
4.3 Noncontravention. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any government,
governmental agency or court to which Buyer is subject, or (ii) violate any
provision of any charter documents or bylaws of Buyer, or (iii) violate any
contract of Buyer required to be filed with the Securities and Exchange
Commission pursuant to the Securities Act or Securities Exchange Act. Buyer is
not required by any law to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order for the Parties to consummate the transactions contemplated by this
Agreement.
4.4 Brokers' Fees. Buyer does not have any Liability or obligation to pay
-------------
any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
4.5 No Liquidation, Insolvency or Winding-Up.
----------------------------------------
(a) No order has been made, or petition presented, or resolution
passed for the winding-up of Buyer and there is not outstanding:
-22-
<PAGE>
(i) any petition or order for the winding-up of Buyer;
(ii) any appointment of a receiver over the whole or part of
the undertaking of assets of Buyer;
(iii) any petition or order for administration of Buyer;
(iv) any voluntary arrangement between Buyer and any of its
creditors;
(v) any distress or execution or other process levied in
respect of Buyer which remains undischarged; or
(vi) to the Knowledge of Buyer, any unfulfilled or unsatisfied
judgment or court order against Buyer.
(b) To the Knowledge of Buyer, there are no circumstances which would
entitle any Person to present a petition for the winding-up or
administration of Buyer or to appoint a receiver over the whole or any part
of the undertaking or assets of Buyer.
(c) To the Knowledge of Buyer, no petition has been filed, either
voluntarily or involuntarily, instituting bankruptcy proceedings under
United States federal or state bankruptcy laws with respect to Buyer.
4.6 Absence of Litigation. There is no claim, suit, action, arbitration,
---------------------
proceeding or investigation pending, or, to the knowledge of Buyer, threatened,
against Buyer or any Affiliate of Buyer or any of their respective assets or
properties that (i) would adversely affect Buyer's ability to perform any of its
obligations under this Agreement, (ii) seeks to enjoin, prevent or delay the
consummation of any of the transactions contemplated by this Agreement, or (iii)
might result in a material adverse effect on Buyer's financial condition or
solvency.
4.7 Investment Representations.
--------------------------
(a) Buyer is acquiring the Stock in the Acquisition for investment
purposes for Buyer's own account only and not with a view to, or for resale
in connection with, any unlawful "distribution" thereof within the meaning
of the Securities Act. No one other than Buyer will acquire any beneficial
interest in the Stock at the Closing.
(b) Buyer is an "accredited investor" within the meaning of Regulation
D promulgated under the Securities Act. Buyer has sufficient knowledge and
experience in financial and business matters necessary to evaluate and make
an informed investment decision regarding the purchase of the Stock of the
Company pursuant hereto and has the capacity to protect Buyer's own
interests in connection with the Acquisition.
(c) Buyer acknowledges that Sellers have made available to Buyer the
opportunity to examine such additional documents, and to ask questions of,
and receive answers from Sellers concerning the Company, its business,
financial condition, management, activities and any other
-23-
<PAGE>
information which Buyer considers relevant, important or material in making
the decision to participate in the Acquisition and to purchase the Stock.
(d) Buyer understands the tax consequences of investing in the Stock
and has not relied on Seller or Seller's counsel or auditors for any advice
regarding the tax consequences of the purchase of the Stock.
(e) Buyer understands that the Stock to be sold to Buyer in the
Acquisition has not been registered under the Securities Act and
constitutes "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act ("Rule 144"). Buyer is familiar with
the provisions of Rule 144.
(f) Buyer also understands and agrees that there will be placed on the
certificates evidencing the ownership of the Stock, the following (or a
substantially similar) legend (in addition to any legends required by
applicable state laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"). THESE SECURITIES MAY NOT BE OFFERED, SOLD,
PLEDGED, OR TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT (AND CURRENT PROSPECTUS) IS IN EFFECT AS TO THE
SECURITIES, OR (2) AN EXEMPTION THEREFROM IS AVAILABLE. THE ISSUER OF
THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
5. PRE-CLOSING COVENANTS.
---------------------
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
5.1 General. Each of the Parties will use its best efforts to take all
-------
action and to do all things necessary, proper or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any Party hereto
necessary in connection with any legal requirements imposed upon any of them or
their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement, and will take all reasonable
actions necessary to obtain (and will cooperate with the other Parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any federal, state, local or foreign
governmental entity or other public or private third party required to be
obtained or made in connection with the Acquisition, or taking of any action
contemplated by this Agreement.
5.2 Notices and Consents. Sellers will use their best efforts to obtain
--------------------
any material third party consents that are required to transfer the Business to
the Buyer, including, without limitation, the consents listed on Schedule 3.29.
-------------
Sellers shall give any notices to, make any filings with and use their best
efforts to obtain any authorizations, consents and approvals of governments and
governmental agencies required in connection with consummation of the
transactions contemplated by this Agreement.
-24-
<PAGE>
5.3 Operation of Business. Except as specifically contemplated hereby,
---------------------
and except for any actions taken to fulfill conditions to the Closing of the
Acquisition or that are contemplated by this Agreement, the Company will not
engage in any practice, take any action or enter into any transaction outside
the Ordinary Course of Business. Without limiting the generality of the
foregoing and except as required by this Agreement, the Company will not: (i)
declare, set aside or pay any dividend or make any distribution with respect to
its capital stock or redeem, purchase or otherwise acquire any of its capital
stock; or (ii) pay any amount to any third party with respect to any Liability
or obligation (including any costs and expenses the Company has incurred or may
incur in connection with this Agreement and the transactions contemplated
hereby, other than to the Company's accountants and legal counsel) except in the
Ordinary Course of Business, except for (A) payments of fees and similar amounts
to any governmental authority in connection with the transactions contemplated
by this Agreement and (B) any amounts paid to any person for any purpose that,
directly or indirectly, is related to compliance with or fulfillment of any
covenant, representation, warranty or condition to Closing set forth in this
Agreement. Each of Sellers shall: (i) use its commercially reasonable efforts
to keep available to Buyer the services of the Company's present Company Agents
and independent contractors, and (ii) preserve for the benefit of Buyer the
goodwill of the Company's customers, suppliers, landlords and others having
business relations with it. The Company will not engage in any practice, take
any action, or enter into any transaction of the sort and for the amounts
described in Section 3.9 above.
5.4 Preservation of Business. Each of the Sellers will use their best
------------------------
efforts to keep the Company's business and properties intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensors, suppliers and customers.
5.5 Full Access. Each of Sellers will permit representatives of Buyer to
-----------
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations of Sellers, to all premises, properties,
appropriate personnel, books, records (including Tax records), contracts, and
documents of or pertaining to the Company.
5.6 Notice of Developments. Each Party will give prompt written notice to
----------------------
the other Party of any material adverse development causing a breach of any of
its own representations and warranties in Section 3 and Section 4, as the case
may be. No disclosure by Sellers pursuant to this Section 5.6, however, shall be
deemed to amend or supplement the Schedules or to prevent or cure any
misrepresentations breach of representation or warranty, or breach of covenant
unless expressly consented to in writing by Buyer.
5.7 No Solicitation. From and after the date of this Agreement until the
---------------
earlier of the Closing or termination of this Agreement pursuant to its terms,
Sellers will not, and will cause their respective directors, officers,
employees, representatives, investment bankers, agents and Affiliates not to,
directly or indirectly, (i) solicit or encourage submission of any inquiries,
proposals or offers by any Person, entity or group (other than Buyer and its
Affiliates, agents and representatives) in connection with any Acquisition
Proposal, or (ii) participate in any discussions or negotiations with, entertain
any propositions from, or disclose any information concerning the Company to, or
afford any access to the properties, books or records of the Company to, or
otherwise assist, facilitate or encourage, or enter into any agreement or
understanding with, any Person, entity or group (other than Buyer and its
Affiliates, agents and representatives), in connection with any Acquisition
Proposal. In addition, subject to the other provisions of this Section 5.7,
from and after the date of this Agreement until the earlier of the Closing or
termination of this Agreement pursuant to its terms, Sellers will not, and will
cause their respective directors, officers,
-25-
<PAGE>
employees, representatives, investment bankers, agents and Affiliates not to,
directly or indirectly, make or authorize any statement, recommendation or
solicitation in support of any Acquisition Proposal made by any Person, entity
or group (other than Buyer). Sellers will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing.
5.8 Best Efforts and Further Assurances. Each of the Parties shall use
-----------------------------------
its best efforts to effectuate the transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to Closing under this Agreement
(including resolution of any litigation prompted hereby). Each Party hereto, at
the reasonable request of another Party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
6. CONDITIONS TO OBLIGATION TO CLOSE.
---------------------------------
6.1 Conditions Precedent to Obligations of Buyer. The obligation of Buyer
--------------------------------------------
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(a) Representation and Warranties. The representations and warranties
-----------------------------
set forth in Section 3 above and the Schedules (both, as qualified by the
Disclosure Letter) and all permitted updates thereto, shall be true and
correct in all material respects when made and shall be deemed to have been
made again at and as of the Closing Date and shall then be true and correct
in all material respects except for changes due to the conduct of the
Business prior to Closing in the Ordinary Course of Business or in
conformity with this Agreement;
(b) Performance by Sellers. Sellers shall have performed and complied
----------------------
with all of their covenants, obligations and conditions of this Agreement
required to be performed and complied with by them as of the Closing,
including each of the specific covenants contained in Section 5;
(c) Consents. Sellers shall have procured all of the consents,
--------
approvals or authorizations of the third parties listed on Schedule 3.29;
-------------
(d) Absence of Litigation. No action, suit or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local or foreign jurisdiction which has a
likelihood of resulting in an unfavorable injunction, judgment, order,
decree, ruling or charge that would (i) prevent consummation of any of the
material transactions contemplated by this Agreement, (ii) cause any of the
material transactions contemplated by this Agreement to be rescinded
following consummation or (iii) affect adversely the right of Buyer to own
the Stock or to operate the Business or to use any of the Company Assets
(and no such injunction, judgment, order, decree, ruling or charge shall be
in effect);
(e) Absence of Material Adverse Change. Since the date of this
----------------------------------
Agreement, there shall not have occurred any material adverse change in the
condition, financial or otherwise, business, properties, assets or
prospects of the Company Assets, Business or the results of operation of
the Company, except as is contemplated by the terms of this Agreement;
-26-
<PAGE>
(f) Absence of Disasters. The Business and the Company Assets shall
--------------------
not have been materially adversely affected in any way as a result of fire,
explosion, disaster, accident, labor dispute, any action by any government
or governmental authority, domestic or foreign, flood, civil disturbance,
or act of nature;
(g) Certificates. Seller shall have delivered to Buyer a certificate
------------
to the effect that each of the conditions specified above in 6.1(a) through
(f) are satisfied in all respects;
(h) Employment Agreement. Seller shall have executed an employment
--------------------
agreement in the form of Exhibit 6.1(h) providing for the employment of
--------------
Seller on the terms set forth therein; and
(i) All Necessary Actions. All actions to be taken by either of
---------------------
Sellers in connection with the consummation of the transactions
contemplated hereby and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to Buyer.
Buyer may waive any condition specified in this Section 6.1 if it executes
a written waiver thereof, specifically referenced as such therein, at or prior
to the Closing.
6.2 Conditions Precedent to Obligations of the Sellers. The obligation of
--------------------------------------------------
each of Sellers to consummate the transactions to be performed by them in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Buyer set forth in Section 4 above shall be true and correct
when made and shall be deemed to have been made again at and as of the
Closing Date and shall then be true and correct;
(b) Performance by Buyer. Buyer shall have performed and complied
--------------------
with all of its covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Closing,
including each of the specific covenants contained in Sections 5;
(c) Absence of Litigation. No action, suit, or proceeding shall be
---------------------
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local or foreign jurisdiction which has a
likelihood of resulting in an unfavorable injunction, judgment, order,
decree, ruling, or charge that would (A) prevent consummation of any of the
material transactions contemplated by this Agreement or (B) cause any of
the material transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
(d) Certificates. Buyer shall have delivered to Seller a certificate
------------
to the effect that each of the conditions specified above in Section 6.2(a)
through (e) are satisfied in all material respects;
(e) Employment Agreement. Buyer shall have executed an employment
--------------------
agreement in the form of Exhibit 6.1(h) providing for the employment of
--------------
Seller on the terms set forth therein; and
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<PAGE>
(f) All Necessary Actions. All actions to be taken by Buyer in
---------------------
connection with the consummation of the transactions contemplated hereby
and all certificates, opinions, instruments and other documents required to
effect the transactions contemplated hereby will be reasonably satisfactory
in form and substance to Seller.
Sellers may waive any condition specified in this Section 6.2 if they
execute a written waiver thereof, specifically referenced as such therein, at or
prior to the Closing.
7. ADDITIONAL AGREEMENTS.
---------------------
Buyer and Sellers hereby covenant and agree with respect to certain matters
as follows:
7.1 Returns; Indemnification; Liability for Taxes. Buyer shall prepare
---------------------------------------------
and file (or cause to be prepared and filed) on a timely basis all Tax Returns
of the Company relating to periods ending prior to, on or after the Closing Date
and shall pay, and shall indemnify and hold Seller harmless against and from,
the following: (i) all Taxes of the Company for any taxable year or period,
whether commencing prior to or after the Closing Date; and (ii) and transfer
Taxes payable by Buyer pursuant to Section 2.3 of this Agreement.
7.2 Refunds and Credits.
-------------------
(a) All refunds or credits of Taxes for or attributable to any taxable
years or periods of the Company shall be for the account of Buyer.
Following the Closing, Seller shall forward (or cause to be forwarded) to
Buyer any refunds due to Buyer pursuant to this section after receipt or
realization thereof by Seller, in accordance with the provisions of
subsection (b) below.
(b) Any payments of refunds (including refunds attributable to
credits) for Taxes required to be paid under this Agreement shall be made
within ten business days of the receipt of any refund, as the case may be.
Any payments not made within such time period, shall be subject to an
interest charge of ten percent per annum.
7.3 Conduct of Audits and Other Procedural Matters. Buyer shall, at its
----------------------------------------------
own expense, control any audit or examination by any Tax Authority, and have the
right to initiate any claim for refund or amended return, and contest, resolve
and defend against any assessment, notice of deficiency or other adjustment or
proposed adjustment of Taxes ("Proceedings") for which Buyer is charged with
payment or indemnification responsibility under this Agreement. Seller shall
promptly forward to Buyer in accordance with Section 10.7 all written
notifications and other written communications, including if available the
original envelope showing any postmark, from any Tax Authority received by
Seller or its Affiliates relating to any liability for Taxes for any taxable
period for which Buyer or any of its Affiliates is charged with payment or
indemnification responsibility under this Agreement. Buyer shall promptly
notify, and consult with, Seller as to any action it proposes to take with
respect to any liability for Taxes for which it is required to indemnify Seller
and shall not enter into any closing agreement or final settlement with any Tax
Authority with respect to any such liability without the written consent of
Seller, which consent shall not be unreasonably withheld. Seller shall, at the
expense of Buyer, execute or cause to be executed any powers of attorney or
other documents reasonably requested by Buyer to enable it to take any and all
actions that Buyer reasonably requests with respect to any Proceedings which
Buyer controls. The failure by Seller to provide timely notice under this
subsection shall relieve the Buyer from its indemnification
-28-
<PAGE>
obligations under Section 7.2 with respect to the subject matter of any
notification not timely forwarded, to the extent Buyer has suffered a loss or
other economic detriment because of such failure to provide notification in a
timely fashion.
7.4 Access to Records Following the Closing. Until the expiration of the
---------------------------------------
applicable statutes of limitations for Tax matters, Buyer and Seller agree that
so long as any books, records and files of the Company retained by Seller or the
books records and files delivered to the control of Buyer pursuant to this
Agreement, to the extent they relate to the operations of the Company prior to
the Closing Date, remain in existence and available, each Party (at its expense)
shall have the right upon prior notice to make reasonable inspection and copies
of the same at any time during business hours for any proper purpose. Buyer and
Seller shall use reasonable efforts not to destroy or allow the destruction of
any such books, records and files without first offering in writing to deliver
them to the other.
7.5 Payment of Company Liabilities, etc.
------------------------------------
(a) Buyer hereby covenants and agrees with Seller that, at all times
on and after the Closing, Buyer will cause the Company to promptly pay (or
will itself promptly pay) or perform when due any and all Disclosed
Liabilities (as defined below). As used herein, the term "Disclosed
Liabilities" means all Liabilities of the Company to any vendors, lessors
and/or any other creditors that (i) existed at, or were incurred or arose
on or prior to, the time and date of the Closing; and (ii) either (A) are
reflected in the Most Recent Balance Sheet, (B) arise in the Ordinary
Course of Business of the Company after the date of the Most Recent Balance
Sheet or (C) arise under the terms of any agreement, contract or other
commitment of the Company that is disclosed in either the Disclosure Letter
or the Schedules. By way of illustration, but not limitation, the Disclosed
Liabilities include, but are not limited to, any obligations for the
payment of rent under leases and obligations for the payment of royalties
or other payments due under licenses. Notwithstanding the foregoing,
"Disclosed Liabilities" will not include Liabilities for which Seller is
obligated to indemnify Buyer under the provisions of Section 8 of this
Agreement.
(b) As of or immediately following the Closing, (i) Buyer will offer
to guaranty all funded indebtedness of the Company reflected on the Most
Recent Balance Sheet of which Seller is a guarantor, and (ii) Buyer will
make best efforts to obtain the agreement of the payees of all such funded
indebtedness to release Seller as a guarantor thereof. In the event that
Buyer is unable to remove Seller from any guarantee within six (6) weeks
after the Closing Date, Buyer agrees to promptly pay the full amount of
outstanding indebtedness under such guarantee and close the account so
guaranteed at that time.
7.6 Non-Solicitation of Company Employees. For a period of one year
-------------------------------------
beginning on the Closing Date, neither Seller nor any of Seller's directors,
officers, employees or Affiliates who are acting in such capacity on behalf of
Seller or any of his Affiliates, shall, without Buyer's prior written consent,
solicit, encourage or otherwise take any action intended to induce any
individual who is then an employee of the Company to terminate his or her
employment with the Company; provided however, that nothing herein will prevent
Seller or any of its Affiliates from hiring any employee of the Company who,
without any solicitation, encouragement or inducement by Seller or any of its
directors, officers, employees or Affiliates, independently applies for
employment with Seller or any of its Affiliates.
-29-
<PAGE>
7.7 Employment of Former Company Agents.
-----------------------------------
(a) Promptly following the Closing, Buyer will offer, or will cause
the Company to offer, employment to the former Company Agents identified on
Schedule 7.7(a). Such offer will be made to such former Company Agents at
---------------
the annual salary levels set forth opposite their respective names on such
Schedule 7.7(a). The other terms and conditions of employment offered to
---------------
such persons shall be substantially the same as the terms and conditions of
employment applicable to Buyer's employees generally.
(b) Following the Closing, Buyer will undertake to make available to
the persons hired in response to the offer of employment required to be
made pursuant to Schedule 7.7(a) options to purchase up to 100,000 shares
---------------
of Buyer's Common Stock pursuant to Buyer's 1995 Stock Option Plan or
another plan or plans as may be adopted by Buyer. Of such options, 71,000
shall be granted to Seller and the balance shall be allocated as determined
by Seller among the other persons identified on Schedule 7.7(a) who accept
---------------
offers of employment from Buyer. The 71,000 options granted to Seller
shall vest one quarter on the date of grant, and one quarter on each of the
first three anniversaries of their date of grant; the exercise price for
the options vesting on their date of grant and the first anniversary of
their date of grant will be equal to the Fair Market Value of Buyer's
Common Stock on the date of grant; the exercise price for the options
vesting on the second anniversary of their date of grant will be equal to
150% of the Fair Market Value of Buyer's Common Stock on the date of grant;
and the exercise price for the options vesting on the third anniversary of
their date of grant will be equal to 200% of the Fair Market Value of
Buyer's Common Stock on the date of grant. The other options granted as
provided above shall vest one-third on each of the first three
anniversaries of their date(s) of grant; the exercise price for the options
vesting on the first anniversary of their date of grant will be equal to
the Fair Market Value of Buyer's Common Stock on the date of grant; the
exercise price for the options vesting on the second anniversary of their
date of grant will be equal to 150% of the Fair Market Value of Buyer's
Common Stock on the date of grant; and the exercise price for the options
vesting on the third anniversary of their date of grant will be equal to
200% of the Fair Market Value of Buyer's Common Stock on the date of grant.
8. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION.
-----------------------------------------------------------
8.1 Certain Defined Terms. For purposes of this Agreement, the following
---------------------
terms shall have the meanings set forth below:
"Basis" shall mean any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act or transaction that forms or could reasonably form the
basis for any specified consequence.
"Breach" and "Breaches" mean:
(i) with respect to a "Breach" by Seller, (a) the failure of any
representation or warranty of Seller contained in Section 3 of this
Agreement, as qualified by the Disclosure Letter, to be true or correct on
and as of the Closing Date, (b) any breach by Seller of any this Agreement,
excluding a breach of the covenants contained in Sections 5.1 (General),
5.2 (Notices and Consents), 5.4 (Preservation of Business),
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<PAGE>
5.5 (Full Access), 5.7 (No Solicitation), 5.8 (Best Efforts and
Further Assurances), or 7.6 (Non-Solicitation of Company Employees),
(c) any breach by the Company of any of the Company's covenants in
this Agreement if such covenant was to be performed by the Company
prior to the Closing except the covenants contained in Sections 5.1
(General), 5.2 (Notices and Consents), 5.4 (Preservation of Business),
5.5 (Full Access), 5.7 (No Solicitation) or 5.8 (Best Efforts and
Further Assurances) or (d) the failure by Seller (except to the extent
permitted under this Agreement or as may be waived in writing by
Buyer) to assume control of and pay both its and Buyer's reasonable
costs of the defense and settlement of any actual or overtly
threatened action, suit, claim or proceeding brought by a third party
based on any allegation or allegations which, if true, would
constitute a failure or breach described in subclause (a), (b) or (c)
of this subparagraph (i); and
(ii) with respect to a "Breach" by Buyer: (a) the failure of
any representation or warranty of Buyer contained in Section 4 of this
Agreement to be true or correct on and as of the Closing Date; (b) any
breach by Buyer of any of Buyer's covenants in this Agreement,
excluding a breach of the covenants contained in Sections 5.1
(General), 5.6 (Notice of Developments) or 5.8 (Best Efforts and
Further Assurances); (c) any breach by the Company of any of the
Company's covenants in this Agreement if such covenant is to be
performed by the Company after the Closing; or (d) the failure by
Buyer or (following the Closing) the Company (except to the extent
permitted under this Agreement or as may be waived in writing by
Seller) to assume control of and pay both their and Seller's
reasonable costs of the defense and settlement of any actual or
overtly threatened action, suit, claim or proceeding brought by a
third party based on any allegation or allegations which, if true,
would constitute a failure or breach described in subclause (a), (b)
or (c) of this subparagraph (ii).
"Disclosed Liabilities" shall have the meaning set forth in Section 7.5
above.
"Extended Buyer Claim" shall mean any claim by Buyer for indemnification
from Seller in accordance with the provisions of this Section 8 that is based
upon a Breach of: (A) representations and warranties under Section 3.12 (Taxes)
or Section 3.23 (Environment, Health and Safety); or (B) any of Seller's
covenants under Section 7.2 (Refunds and Credits) or Section 7.3 (Conduct of
Audits and Other Procedural Matters).
"Extended Seller Claim" shall mean any claim by Seller for indemnification
from Buyer in accordance with the provisions of this Section 8 that is based
upon a Breach: (i) any of Buyer's representations under Section 4.7 (Investment
Representations); or (ii) a Breach of any one or more of Buyer's covenants under
Section 7.1 (Returns; Indemnification; Liability for Taxes), Section 7.2
(Refunds and Credits), Section 7.3 (Conduct of Audits and Other Procedural
Matters) or Section 7.5 (payment of Company Liabilities).
"Liability" shall mean any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due), including any liability for Taxes.
"Loss" and "Losses" shall mean Liabilities, obligations, judgments,
damages, deficiencies, assessments, Taxes, losses, fines, penalties, expenses,
fees, costs, amounts paid (including reasonable
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attorneys' and expert witness fees and disbursements in connection with
investigating, defending or settling any action or threatened action); provided,
however, that the amount of any Loss shall be reduced by the amount of any
insurance proceeds actually received by the Person entitled to receive
indemnification under this Agreement in respect of such Loss.
"Officer's Indemnification Certificate" shall mean a duly authorized and
executed certificate of Seller or Buyer, as applicable, which (i) states that
such Party (or the Company) has paid or has made a reasonable, good faith
determination that it will have to pay Loss(es), (ii) specifies in reasonable
detail the individual items of Loss(es) included in the amount so stated, (iii)
states the date each such item was paid or reasonably determined to be paid and
the basis for such determination, and (iv) states the representation, warranty
or covenant to which such alleged item of Loss is related and the factual basis
on which such Party asserts that it is entitled to indemnification for such
asserted Loss(es) under this Agreement.
"Survival Period" shall mean the period of time beginning on the Closing
Date and ending at 11:00 p.m. Pacific Time on the date eighteen months after the
Closing Date.
8.2 Survival of Representations and Warranties. All of the
------------------------------------------
representations, warranties and covenants of the Seller and Buyer contained
herein or in any document certificate or other instrument required to be
delivered hereunder shall survive the Closing Date and continue in full force
and effect until the expiration of the Survival Period, on which date all such
warranties, representations and covenants shall expire; provided, however, that
notwithstanding the foregoing, all warranties, representations and covenants
relating to the Extended Buyer Claims and the Extended Seller Claims shall
survive until the expiration of the applicable legal statute of limitations
underlying such claim; and provided further, however, that the Extended Buyer
Claims relating to indemnification for a Breach by Buyer of Section 7.5 (Payment
of Company Liabilities) shall survive indefinitely.
8.3 Indemnity by Seller.
-------------------
(a) Subject to the terms and conditions of this Agreement, Seller
hereby agrees to indemnify, defend and hold harmless Buyer and Buyer's
directors, officers and Affiliates (which includes the Company and its
officers, directors and Affiliates after the Closing) against and in
respect of all Loss(es) incurred or reasonably determined in good faith by
Buyer to be incurred by Buyer, or its directors, officers and Affiliates,
or asserted against them to the extent that such Loss(es) arises from a
Breach by Seller as provided in Section 8.1; provided, however, that Buyer
delivers to Seller an Officer's Indemnification Certificate of Buyer
asserting Buyer's claim for indemnification for such actual or reasonably
expected Loss(es) on or before the applicable deadline for asserting such
claim for indemnification under Section 8.3(c) below.
(b) In the event of a pending or threatened action that includes
asserted claims which, if assumed to be true, would entitle Buyer or any of
its directors, officers or Affiliates to indemnification under Section
8.3(a), Buyer shall give prompt written notice of such action or actions to
Seller, and Seller shall be entitled to control the defense and
negotiation, if any, regarding settlement of such action or actions, at
Seller's expense (including the cost of any such settlement itself), and
Buyer shall cooperate with Seller, at Seller's expense, in the compromise
or defense of any such action or actions, provided that, in such event, (i)
neither Buyer nor any director, officer or Affiliate of Buyer shall agree
to or enter into any settlement of such action or actions without Seller's
prior written consent, which consent shall not be unreasonably withheld,
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and/or (ii) Seller shall not agree to or enter into any settlement that
requires cessation of Buyer's use or other similar restrictions on use of,
any of the Company Assets without the written consent of Buyer.
(c) In order for Buyer, Buyer's directors, officers or Affiliates to
be indemnified in accordance with Section 8.3(a) above, any claim for
indemnification made by Buyer or any of Buyer's directors, officers and
Affiliates under this Agreement must be set forth in an Officer's
Indemnification Certificate of Buyer that is delivered to Seller. (The
Parties agree that there is no limit on the dollar amount of
indemnification to which Buyer may become entitled to pursuant to this
Section 8.3.). No claim for indemnification; (i) that is not an Extended
Buyer Claim may be made, raised or asserted in any manner by Buyer or any
director, officer or Affiliate of Buyer, or any of their permitted
successors or assigns unless such claim for indemnification hereunder is
set forth in an Officer's Indemnification Certificate of Buyer that is
delivered to Seller prior to the expiration of the Survival Period; or (ii)
that is an Extended Buyer Claim may be made, raised or asserted in any
manner by Buyer or any director, officer or Affiliate of Buyer, or any of
their permitted successors or assigns, unless such claim for
indemnification hereunder is set forth in an Officer's Indemnification
Certificate of Buyer that is delivered to Seller prior to the expiration of
the applicable legal statute of limitations regarding such Extended Buyer
Claim.
(d) Except for any rights of specific performance under applicable
law, the rights of indemnification afforded to Buyer and its directors,
officers and Affiliates under the foregoing provisions of this Section 8.3
shall constitute the sole and exclusive right and remedy of Buyer and its
directors, officers and Affiliates with respect to any Breach by Seller.
(e) Notwithstanding anything herein to the contrary, neither Buyer nor
any of its directors, officers or Affiliates shall be entitled to any
indemnification of any claim from Seller under this Agreement unless and
until the aggregate amount of Loss(es) for which indemnification would
otherwise be available from Seller under this Section 8.3 exceeds an
aggregate of $20,000 (the "Seller's Basket"), after which time Buyer and
its directors, officers and Affiliates will be entitled, subject to the
terms and conditions of this Section 8, to recover any and all Loss with
respect to which Buyer is entitled to indemnification pursuant to Section
8.3(a) above; provided, however, that claims for indemnification that are
Extended Buyer Claims shall not be subject to the above provisions of this
subsection (e) regarding Seller's Basket.
8.4 Indemnity by Buyer.
------------------
(a) Subject to the terms and conditions of this Agreement, Buyer
hereby agrees to indemnify, defend and hold harmless Seller, Seller's
Affiliates and those persons who were the directors and officers of the
Company immediately prior to the Closing (the "Company Directors and
Officers") against and in respect of all Loss(es) incurred by or asserted
against them to the extent that such Loss(es) arises from a Breach by Buyer
as provided in Section 8.1; provided, however, that Seller delivers to
Buyer an Officer's Indemnification Certificate of Seller asserting Seller's
claim for indemnification for such actual or reasonably expected Loss(es)
on or before the applicable deadline for asserting such claim for
indemnification under Section 8.4(c) below.
(b) In the event of a pending or threatened action that includes
asserted claims which, if assumed to be true, would entitle Seller or any
of its Affiliates or any of the Company Directors
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and Officers to indemnification under Section 8.4(a), Seller shall give
prompt written notice of such action or actions to Buyer, and Buyer shall
be entitled to control the defense and negotiation, if any, regarding
settlement of such action or actions, at Buyer's expense (including the
cost of any such settlement itself), and Seller shall cooperate with Buyer,
at Buyer's expense, in the compromise or defense of any such action or
actions, provided that, in such event, neither Seller nor any director,
officer or Affiliate of Seller shall agree to or enter into any settlement
of such action or actions without Buyer's prior written consent, which
consent shall not be unreasonably withheld.
(c) In order for Seller, Seller's directors, officers or Affiliates or
the Company Directors and Officers to be indemnified in accordance with
Section 8.4(a) above, any claim for indemnification made by Seller, any of
Seller's Affiliates or any of the Company Directors or Officers under this
Agreement must be set forth in an Officer's Indemnification Certificate of
Seller that is delivered to Buyer. No claim for indemnification: (i) that
is not an Extended Seller Claim may be made, raised or asserted in any
manner by Seller, any Affiliate of Seller, any of the Company Directors or
Officers or any of their permitted successors or assigns, unless such claim
for indemnification is set forth in an Officer's Indemnification
Certificate that is delivered to Buyer prior to termination of the Survival
Period; or (ii) that is an Extended Seller Claim (except as set forth in
the following item (iii)) may be made, raised or asserted in any manner by
Seller, any Affiliate of Seller, any of the Company Directors or Officers
or any of their permitted successors or assigns, unless such claim for
indemnification hereunder is set forth in an Officer's Indemnification
Certificate of Seller that is delivered to Buyer prior to the expiration of
the applicable legal statute of limitations regarding such Extended Seller
Claim; except that (iii) a claim for indemnification that is an Extended
Seller Claim related to Section 7.5 (Payment of Company Liabilities) may be
brought at any time.
(d) Except for any rights of specific performance under applicable
law, the rights of indemnification afforded to Seller, Seller's directors,
officers and Affiliates or any of the Company Directors and Officers under
the foregoing provisions of this Section 8.4 shall constitute the sole and
exclusive right and remedy of Seller and its Affiliates and the Company
Directors and Officers with respect to any Breach by Buyer.
(e) Notwithstanding anything herein to the contrary, neither Seller
nor any of its Affiliates nor any of the Company Directors or Officers
shall be entitled to any indemnification of any claim from Buyer under this
Agreement unless and until the aggregate amount of Loss(es) for which
indemnification would otherwise be available from Buyer under this Section
8.4 exceeds an aggregate of $5,000 (the "Buyer's Basket"), whereupon Seller
and its directors, officers and Affiliates and the Company Directors and
Officers will be entitled to recover any and all Loss(es) with respect to
which Seller is entitled to indemnification pursuant to Section 8.4(a)
above; provided, however, that claims for indemnification that are Extended
Seller Claims shall not be subject to the above provisions of this
subsection (e) regarding Buyer's Basket.
8.5 Resolution of Conflicts; Arbitration.
------------------------------------
(a) In case Seller or Buyer shall object in writing to any claim or
claims made by Buyer or Seller, as the case may be, in any Officer's
Indemnification Certificate, Seller and Buyer shall attempt in good faith
to agree upon the rights of the respective parties with respect to each
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of such claims. If Seller and Buyer should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties.
(b) If no such agreement of Buyer and Seller can be reached after good
faith negotiation, either Buyer or Seller may demand arbitration of the
matter in accordance with this Agreement unless the amount of the Loss is
at issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration, whichever is earlier; and in either such
event the matter shall be settled by arbitration conducted by a single
arbitrator acceptable to both Buyer and Seller in accordance with the
commercial arbitration rules of the American Arbitration Association as
modified by this Agreement. The arbitrator shall set a limited time period
and establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole judgement
of the arbitrator, to discover relevant information from the opposing
Parties about the subject matter of the dispute. The arbitrator shall rule
upon motions to compel or limit discovery and shall have the authority to
impose sanctions, including attorneys' fees and costs, to the same extent
as a court of competent law or equity, should the arbitrators determine
that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification.
The decision of the arbitrator as to the validity and amount of any claim
in such Officer's Certificate shall be binding and conclusive upon the
Parties to this Agreement. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set forth
the award, judgment, decree or order awarded by the arbitrator.
(c) Judgment upon any award rendered by the arbitrator may be entered
in any court having jurisdiction. Any such arbitration shall be held in
Los Angeles County, California under the Rules of the American Arbitration
Association. The arbitrator shall determine how all expenses relating to
the arbitration shall be paid, including without limitation, the respective
expenses of each Party.
(d) The foregoing arbitration provisions shall apply to any dispute
arising under or relating to this Agreement.
9. TERMINATION.
-----------
9.1 Termination of Agreement. Certain of the Parties may terminate this
------------------------
Agreement prior to the Closing as provided below.
(a) The Parties may terminate this Agreement by mutual written consent
at any time prior to the Closing.
(b) Any Party hereto may terminate this Agreement by written notice to
the other Parties at any time prior to the Closing if the Closing has not
occurred by February 13, 1998; provided, that the right to terminate this
Agreement under this Section 9.1(b) shall not be available to either Party
hereto if the failure to have effected the Closing on or prior to such date
results primarily from such Party's (or its Affiliates') breaching any
representation, warranty or covenant contained in this Agreement.
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(c) Buyer may terminate this Agreement by giving written notice to
Seller at any time prior to the Closing in the event Seller has breached
any representation, warranty or covenant contained in this Agreement in any
material respect, Buyer has notified Seller of the breach, and the breach
has continued without cure for a period of twenty days after the notice of
breach or by reason of the failure of any condition precedent under Section
6.1 hereof to have been satisfied by February 13, 1998 (unless the failure
results primarily from Buyer itself breaching any representation, warranty
or covenant contained in this Agreement).
(d) Seller may terminate this Agreement by giving written notice to
Buyer at any time prior to the Closing in the event Buyer has breached any
representation, warranty or covenant contained in this Agreement in any
material respect, Seller has notified Buyer of the breach, and the breach
has continued without cure for a period of twenty days after the notice of
breach or by reason of the failure of any condition precedent under Section
6.2 hereof (unless the failure results primarily from the Seller itself
breaching any representation, warranty or covenant contained in this
Agreement).
(e) Buyer may terminate this Agreement on or prior to the Closing Date
if there shall be any action taken, or any statute, rule, regulation or
order enacted, promulgated, issued or deemed applicable to the Acquisition
by any governmental entity, which would: (i) prohibit the Buyer's ownership
or operation of all or a material portion of the Business or the Company
Assets, or (ii) compel the Buyer to dispose of all or a material portion of
the Business or the Company Assets as a result of the Acquisition.
9.2 Effect of Termination. Any termination of this Agreement in
---------------------
accordance with Section 9.1(a) above will be effective immediately and any
termination of this Agreement in accordance with Section 9.1(b), (c), (d) or (e)
will be effective immediately upon the delivery of written notice by the
terminating Party to the other Parties hereto. In the event of the termination
of this Agreement as provided in Section 9.1, this Agreement shall be of no
further force or effect, except (i) as set forth in this Section 9.2, Section
9.3 and Article 10 (Miscellaneous), each of which shall survive the termination
of this Agreement.
9.3 Fees and Expenses. Each of Buyer and Sellers will bear its respective
-----------------
own costs and expenses (including legal and accounting fees and expenses)
incurred in connection with this Agreement, the Acquisition and the transactions
contemplated hereby and thereby; provided, however, that Buyer shall pay the
reasonable legal fees and expenses incurred (up to a maximum of $5,000) by
Seller in connection with the transaction contemplated hereby. Payment shall be
made by check at the Closing.
10. MISCELLANEOUS.
-------------
10.1 Press Releases and Public Announcements. No Party shall issue any
---------------------------------------
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of the
other Party; provided, however, that the Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will advise the other Party prior to making the disclosure).
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10.2 No Third Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
10.3 Entire Agreement. This Agreement, the Exhibits, the Disclosure
----------------
Letter and the Schedules to be delivered contemporaneously herewith and any of
the documents set forth in Sections 6.1 and 6.2 constitute the entire agreement
among the Parties and supersedes any prior understandings, agreements, or
representations by or among the Parties, written or oral, to the extent they
related in any way to the subject matter hereof.
10.4 Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written consent of
the other Parties; provided, however, that after the Closing Buyer may assign
any or all of its rights and interests (but not its obligations) hereunder to
one or more of its Affiliates provided no such assignment shall affect or defeat
any rights of Seller hereunder or relieve Buyer of any obligation it has to
Seller hereunder.
10.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
10.6 Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) upon
confirmation of facsimile, (ii) when sent by overnight delivery and (iii) when
mailed by registered or certified mail return receipt requested and postage
prepaid at the following address:
If to the Sellers: Biological Weapons Testing Laboratories, Inc.
1912 Bonita Avenue
Berkeley, California 94704-1014
Tel: (510) 204-8950
Fax: (510) 204-8951
Attn: President
If to the Buyer: Sound Source Interactive, Inc.
26115 Mureau Road
Suite B
Calabasas, California 91302-3126
Tel: (818) 878-0505
Fax: (818) 878-0007
Attn: President
Any Party may send any notice, request, demand, claim or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail or electronic mail), but no such notice,
request, demand, claim or other communication shall be deemed to have been duly
given unless and until
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it actually is received by the intended recipient or confirmation of delivery is
obtained by the sender. Any party hereto may change the address to which
notices, requests, demands, claims and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set forth.
10.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without giving effect to any
choice or conflict of law provision or rule of any other jurisdiction whatsoever
that would cause the application of the laws of any jurisdiction other than the
State of California.
10.9 Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by Buyer
and Sellers. No waiver by any Party of any default, misrepresentation or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
10.10 Severability. Any term or provision of this Agreement that is
------------
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
10.11 Construction. The Parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder prior to the Closing, unless the context
requires otherwise. The word "including" shall mean including without
limitation. Nothing in the Schedules hereto shall be deemed adequate to
disclose an exception to a representation or warranty made herein unless the
Schedule identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. The Parties intend that each
representation or warranty and covenant contained herein shall have independent
significance. If any Party has breached any representation, warranty or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
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IN WITNESS WHEREOF, the Parties hereto have executed this Stock Purchase
Agreement on the date first above written.
"BUYER"
SOUND SOURCE INTERACTIVE, INC.
By:/s/ Vincent J. Bitetti
-----------------------------------------------
Vincent J. Bitetti
Chairman of the Board &
Chief Executive Officer
"SELLER"
BRETT G. DURRETT
/s/ Brett G. Durrett
-----------------------------------------------
Brett G. Durrett
"COMPANY"
BIOLOGICAL WEAPONS TESTING
LABORATORIES, INC.
By: /s/ Brett G. Durrett
-------------------------------------------
Brett G. Durrett
President
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEFINITIONS............................................................ 1
2. PURCHASE AND SALE TRANSACTION.......................................... 6
2.1 Purchase and Sale of Stock....................................... 6
2.2 Purchase Price................................................... 6
2.3 Transfer Tax..................................................... 6
2.4 The Closing...................................................... 6
2.5 Deliveries at the Closing........................................ 7
3. REPRESENTATIONS AND WARRANTIES OF SELLER............................... 7
3.1 Organization of the Company...................................... 7
3.2 Authorization of Transaction..................................... 8
3.3 Noncontravention................................................. 8
3.4 Brokers' Fees.................................................... 8
3.5 Capitalization; Title to Stock................................... 8
3.6 Subsidiaries..................................................... 8
3.7 Financial Statements............................................. 8
3.8 Indebtedness; Guarantees......................................... 9
3.9 Absence of Changes............................................... 9
3.10 Absence of Undisclosed Liabilities............................... 11
3.11 Legal and Other Compliance....................................... 11
3.12 Taxes............................................................ 11
3.13 Property, Plant and Equipment.................................... 12
3.14 Intellectual Property............................................ 13
3.15 Inventories...................................................... 15
3.16 Contracts........................................................ 15
3.17 Notes and Accounts Receivable.................................... 17
3.18 Powers of Attorney............................................... 17
3.19 Litigation....................................................... 17
3.20 Product Warranties; Defects; Liability........................... 17
3.21 Company Agents................................................... 17
3.22 Employee Benefits................................................ 18
3.24 Affiliated Transactions.......................................... 20
3.25 Government Contracts............................................. 20
3.26 Distributors, Products, and Suppliers............................ 20
3.27 No Illegal Payments, Etc......................................... 21
3.28 Books and Records................................................ 21
3.29 Consents......................................................... 21
3.30 No Liquidation, Insolvency or Winding-Up......................... 21
3.31 Disclosure....................................................... 21
4. REPRESENTATIONS AND WARRANTIES OF BUYER................................ 22
</TABLE>
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<TABLE>
<S> <C>
4.1 Organization of Buyer............................................ 22
4.2 Authorization for Transaction.................................... 22
4.3 Noncontravention................................................. 22
4.4 Brokers' Fees.................................................... 22
4.5 No Liquidation, Insolvency or Winding-Up......................... 22
4.6 Absence of Litigation............................................ 23
4.7 Investment Representations....................................... 23
5. PRE-CLOSING COVENANTS.................................................. 24
5.1 General.......................................................... 24
5.2 Notices and Consents............................................. 24
5.3 Operation of Business............................................ 24
5.4 Preservation of Business......................................... 25
5.5 Full Access...................................................... 25
5.6 Notice of Developments........................................... 25
5.7 No Solicitation.................................................. 25
5.8 Best Efforts and Further Assurances.............................. 25
6. CONDITIONS TO OBLIGATION TO CLOSE...................................... 26
6.1 Conditions Precedent to Obligations of Buyer..................... 26
6.2 Conditions Precedent to Obligations of the Sellers............... 27
7. ADDITIONAL AGREEMENTS.................................................. 28
7.1 Returns; Indemnification; Liability for Taxes.................... 28
7.2 Refunds and Credits.............................................. 28
7.3 Conduct of Audits and Other Procedural Matters................... 28
7.4 Access to Records Following the Closing.......................... 28
7.5 Payment of Company Liabilities, etc.............................. 29
7.6 Non-Solicitation of Company Employees............................ 29
7.7 Employment of Former Company Agents.............................. 29
8. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION............ 30
8.1 Certain Defined Terms............................................ 30
8.2 Survival of Representations and Warranties....................... 32
8.3 Indemnity by Seller.............................................. 32
8.4 Indemnity by Buyer............................................... 33
8.5 Resolution of Conflicts; Arbitration............................. 34
9. TERMINATION............................................................ 35
9.1 Termination of Agreement......................................... 35
9.2 Effect of Termination............................................ 36
9.3 Fees and Expenses................................................ 36
10. MISCELLANEOUS.......................................................... 36
10.1 Press Releases and Public Announcements......................... 36
10.2 No Third Party Beneficiaries.................................... 36
10.3 Entire Agreement................................................ 36
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
10.4 Succession and Assignment.................................... 36
10.5 Counterparts................................................. 37
10.6 Headings..................................................... 37
10.7 Notices...................................................... 37
10.8 Governing Law................................................ 37
10.9 Amendments and Waivers....................................... 37
10.10 Severability................................................ 38
10.11 Construction................................................ 38
</TABLE>
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<PAGE>
EXHIBIT 10.29
SOUND SOURCE INTERACTIVE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of April 27,
1998, by and between Sound Source Interactive, Inc., a Delaware corporation (the
"Company"), and Richard Azevedo ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the ser vices of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee
<PAGE>
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including an appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is; approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter ("Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligation of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion in any case in which the Independent Legal
Counsel referred to in section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party shall have determined that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a
2
<PAGE>
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expense Advance shall be unsecured
and no interest shall be charged thereon. If there has not been a Change in
Control (as defined in Section 10(c) hereof), the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(c) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, (as defined in Section 10(d) hereof) shall be
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section 1(a)
3
<PAGE>
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedures.
------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by Judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has not any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company, of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may
4
<PAGE>
cover such claim, the Company shall give prompt notice of the commencement of
such Claim to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such action, suit, proceeding, inquiry or
investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's counsel in any such Claim at
Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has
been previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the reasonable fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
5
<PAGE>
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred by him in connection with any Claim, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation pro hibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability. The Company shall, from time to time,
------------------------------
make the good faith determination whether or not it is practicable for the
Company to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing
6
<PAGE>
the officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so as
to provide an insufficient benefit, or Indemnitee is covered by a similar
insurance maintained by a subsidiary or parent of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of intent
jurisdiction determines that each of the material
7
<PAGE>
assertions made by the Indemnitee in such proceeding was not made in good faith
or was frivolous;
(d) Insured Claims. To indemnify indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, Judgments,
fines ERISA excise taxes or Penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or any
parent or subsidiary of the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitation. No legal action shall be brought and no cause
--------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
8
<PAGE>
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary hold ing securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination or election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company
9
<PAGE>
of (in one transaction or a series of transactions) all of substantially all of
the Company's assets.
(d) For purposes of this Agreement, "Independent Legal
Counsel" shall mean an attorney or firm of attorneys, selected in accordance
with the provisions of Section 1(c) hereof, who shall not have otherwise
performed services for the Company or Indemnitee within the last three years
(other than with respect to matters concerning the rights of Indemnitee under
this Agreement, or of other indemnitee under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement
--------------------------------------
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the company, spouses, heirs
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall
10
<PAGE>
be entitled to be paid all Expenses incurred by Indemnitee with respect to such
action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to the advancement of Expenses with respect to
such action, unless as a part of such action a court of competent jurisdiction
over such action determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action including costs and expenses incurred with respect to
Indemnitee's counterclaims and crossclaim made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless as a
part of such action a court having jurisdiction over such action determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. Notice. All, notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise
11
<PAGE>
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that say be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction As Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti
----------------------------
Title: Chairman & CEO
-------------------------
Address:
--------------------------------------
--------------------------------------
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Richard Azevedo
- ---------------------------
- ---------------------------
- ---------------------------
(address)
13
7027411.2
<PAGE>
EXHIBIT 10.30
SOUND SOURCE INTERACTIVE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of April 27,
1998, by and between Sound Source Interactive, Inc., a Delaware corporation (the
"Company"), and Samuel L. Poole ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the ser vices of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee
<PAGE>
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including an appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is; approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter ("Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligation of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion in any case in which the Independent Legal
Counsel referred to in section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party shall have determined that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a
2
<PAGE>
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expense Advance shall be unsecured
and no interest shall be charged thereon. If there has not been a Change in
Control (as defined in Section 10(c) hereof), the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(c) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, (as defined in Section 10(d) hereof) shall be
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section 1(a)
3
<PAGE>
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedures.
------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
---- --------------------------------
Agreement, the termination of any Claim by Judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has not any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company, of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may
4
<PAGE>
cover such claim, the Company shall give prompt notice of the commencement of
such Claim to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such action, suit, proceeding, inquiry or
investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's counsel in any such Claim at
Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has
been previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the reasonable fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
5
<PAGE>
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred by him in connection with any Claim, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability. The Company shall, from time to time,
------------------------------
make the good faith determination whether or not it is practicable for the
Company to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing
6
<PAGE>
the officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so as
to provide an insufficient benefit, or Indemnitee is covered by a similar
insurance maintained by a subsidiary or parent of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of intent
jurisdiction determines that each of the material
7
<PAGE>
assertions made by the Indemnitee in such proceeding was not made in good faith
or was frivolous;
(d) Insured Claims. To indemnify indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, Judgments,
fines ERISA excise taxes or Penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or any
parent or subsidiary of the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitation. No legal action shall be brought and no cause
--------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
8
<PAGE>
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination or election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company
9
<PAGE>
of (in one transaction or a series of transactions) all of substantially all of
the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitee under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement
--------------------------------------
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the company, spouses, heirs
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall
10
<PAGE>
be entitled to be paid all Expenses incurred by Indemnitee with respect to such
action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to the advancement of Expenses with respect to
such action, unless as a part of such action a court of competent jurisdiction
over such action determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action including costs and expenses incurred with respect to
Indemnitee's counterclaims and crossclaim made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless as a
part of such action a court having jurisdiction over such action determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. Notice. All, notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise
11
<PAGE>
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that say be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction As Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti
----------------------------
Title: Chairman & CEO
-------------------------
Address:
-----------------------------------
-----------------------------------
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Samuel L. Poole
- ---------------------------
___________________________
___________________________
(address)
13
<PAGE>
EXHIBIT 10.31
SOUND SOURCE INTERACTIVE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of April 27,
1998, by and between Sound Source Interactive, Inc., a Delaware corporation (the
"Company"), and Wayne M. Rogers ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the ser vices of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee
<PAGE>
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including an appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is; approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter ("Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligation of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion in any case in which the Independent Legal
Counsel referred to in section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party shall have determined that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a
2
<PAGE>
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expense Advance shall be unsecured
and no interest shall be charged thereon. If there has not been a Change in
Control (as defined in Section 10(c) hereof), the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(c) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, (as defined in Section 10(d) hereof) shall be
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section 1(a)
3
<PAGE>
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedures.
------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by Judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has not any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company, of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may
4
<PAGE>
cover such claim, the Company shall give prompt notice of the commencement of
such Claim to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such action, suit, proceeding, inquiry or
investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's counsel in any such Claim at
Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has
been previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the reasonable fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
5
<PAGE>
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred by him in connection with any Claim, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability. The Company shall, from time to time,
------------------------------
make the good faith determination whether or not it is practicable for the
Company to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing
6
<PAGE>
the officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so as
to provide an insufficient benefit, or Indemnitee is covered by a similar
insurance maintained by a subsidiary or parent of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of intent
jurisdiction determines that each of the material
7
<PAGE>
assertions made by the Indemnitee in such proceeding was not made in good faith
or was frivolous;
(d) Insured Claims. To indemnify indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, Judgments,
fines ERISA excise taxes or Penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or any
parent or subsidiary of the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitation. No legal action shall be brought and no cause
--------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
8
<PAGE>
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary hold ing securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination or election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company
9
<PAGE>
of (in one transaction or a series of transactions) all of substantially all of
the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitee under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the company, spouses, heirs
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall
10
<PAGE>
be entitled to be paid all Expenses incurred by Indemnitee with respect to such
action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to the advancement of Expenses with respect to
such action, unless as a part of such action a court of competent jurisdiction
over such action determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action including costs and expenses incurred with respect to
Indemnitee's counterclaims and crossclaim made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless as a
part of such action a court having jurisdiction over such action determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. Notice. All, notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise
11
<PAGE>
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that say be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction As Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti
----------------------------
Title: Chairman & CEO
-------------------------
Address: 2985 E. Hillcrest Drive, Suite A
Westlake Village, California, 91362
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Wayne M. Rogers
- ---------------------------
___________________________
___________________________
(address)
13
<PAGE>
EXHIBIT 10.32
SOUND SOURCE INTERACTIVE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of April 27,
1998, by and between Sound Source Interactive, Inc., a Delaware corporation (the
"Company"), and John Wholihan ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the ser vices of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee
<PAGE>
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including an appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is; approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter ("Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligation of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion in any case in which the Independent Legal
Counsel referred to in section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party shall have determined that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a
2
<PAGE>
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expense Advance shall be unsecured
and no interest shall be charged thereon. If there has not been a Change in
Control (as defined in Section 10(c) hereof), the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(c) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, (as defined in Section 10(d) hereof) shall be
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section 1(a)
3
<PAGE>
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedures.
------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by Judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has not any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company, of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may
4
<PAGE>
cover such claim, the Company shall give prompt notice of the commencement of
such Claim to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such action, suit, proceeding, inquiry or
investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be liable
to Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee
shall have the right to employ Indemnitee's counsel in any such Claim at
Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has
been previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the reasonable fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
5
<PAGE>
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred by him in connection with any Claim, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation pro hibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability. The Company shall, from time to time,
------------------------------
make the good faith determination whether or not it is practicable for the
Company to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing
6
<PAGE>
the officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so as
to provide an insufficient benefit, or Indemnitee is covered by a similar
insurance maintained by a subsidiary or parent of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of intent
jurisdiction determines that each of the material
7
<PAGE>
assertions made by the Indemnitee in such proceeding was not made in good faith
or was frivolous;
(d) Insured Claims. To indemnify indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, Judgments,
fines ERISA excise taxes or Penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or any
parent or subsidiary of the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitation. No legal action shall be brought and no cause
--------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, that if any shorter period of
limitations is otherwise applicable to any such cause of action, such shorter
period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
8
<PAGE>
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary hold ing securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination or election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company
9
<PAGE>
of (in one transaction or a series of transactions) all of substantially all of
the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitee under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement
--------------------------------------
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the company, spouses, heirs
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall
10
<PAGE>
be entitled to be paid all Expenses incurred by Indemnitee with respect to such
action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to the advancement of Expenses with respect to
such action, unless as a part of such action a court of competent jurisdiction
over such action determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action including costs and expenses incurred with respect to
Indemnitee's counterclaims and crossclaim made in such action), and shall be
entitled to the advancement of Expenses with respect to such action, unless as a
part of such action a court having jurisdiction over such action determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. Notice. All, notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise
11
<PAGE>
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that say be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction As Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti
----------------------------
Title: Chairman & CEO
-------------------------
Address:
--------------------------------------
--------------------------------------
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ John Wholihan
- ---------------------------
- ---------------------------
- ---------------------------
(address)
13
7027411.5
<PAGE>
EXHIBIT 21.1
SOUND SOURCE INTERACTIVE INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
JUNE 30, 1998
Sound Source Interactive, Inc. (a California Corporation)
Biological Weapons Testing Laboratories, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
Sound Source Interactive, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-11481, 333-11483, and 333-63567) and on Form S-3
(333-24271) of our report dated September 16, 1996 appearing in your Annual
Report on Form 10-KSB of Sound Source Interactive, Inc. for the year ended June
30, 1998.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
September 24, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-11481 and No. 333-11483 of Sound Source Interactive, Inc. on Form S-8 of
our report dated September 11, 1998, appearing in this Annual Report on Form
10-KSB of Sound Source Interactive, Inc. for the year ended June 30, 1998.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Los Angeles, California
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains consolidated financial information extracted from Sound
Source Interactive, Inc and subsidiary for the period July 1, 1997 through June
30, 1998 and is qualified in its entirety by reference to such consolidated
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 693,741
<SECURITIES> 0
<RECEIVABLES> 2,405,672
<ALLOWANCES> (22,540)
<INVENTORY> 417,215
<CURRENT-ASSETS> 5,549,980
<PP&E> 709,623
<DEPRECIATION> (300,494)
<TOTAL-ASSETS> 5,974,812
<CURRENT-LIABILITIES> 3,866,234
<BONDS> 0
0
0
<COMMON> 5,560
<OTHER-SE> 2,102,928
<TOTAL-LIABILITY-AND-EQUITY> 5,974,812
<SALES> 8,819,529
<TOTAL-REVENUES> 8,867,490
<CGS> 3,574,168
<TOTAL-COSTS> 5,788,464
<OTHER-EXPENSES> 1,022,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,521
<INCOME-PRETAX> 502,800
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 501,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501,200
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.10
</TABLE>
