<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended December 31, 1998
-----------------
Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-28604
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SOUND SOURCE INTERACTIVE, INC.
- -----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-426046
--------- ---------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26115 MUREAU ROAD, SUITE B, CALABASAS, CALIFORNIA 91302-3126
- -------------------------------------------------------------
(Address of Principal Executive Offices)
(818) 878-0505
- --------------
(Issuer's Telephone Number, Including Area Code)
_______________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be file by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No
----- -----
The number of shares outstanding of the issuer's common stock as of
February 12, 1999 was 5,869,402
-----------
Transitional Small Business Disclosure Format (check one):
Yes No XXX
----- -----
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1998 AND 1997
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three month periods ended December 31, 1998 and 1997, 4
Six month periods ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Six month periods ended December 31, 1998 and 1997 6
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Forward Looking Statements 12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 4. Annual Meeting - Submission of Matters to a Vote
of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Financial Data Schedule 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 203,771
Accounts receivable - net 1,006,751
Inventory - net 585,610
Prepaid royalties 1,978,310
Prepaid expenses and other 192,037
------------
Total current assets 3,966,479
Property and equipment - net 330,815
------------
TOTAL ASSETS $ 4,297,294
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,274,540
Accrued royalties 1,907,331
Capital lease obligations 1,251
Deferred revenues 71,892
Line of Credit 484,462
------------
Total current liabilities 3,739,476
------------
Stockholder's Equity:
Common stock - $.001 par value, 20,000,000 shares
authorized, 5,867,729 shares issued and outstanding 5,868
Warrants 559,928
Additional paid-in capital 14,302,777
Accumulated deficit (14,310,755)
------------
Total stockholders' equity 557,818
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,297,294
============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Net revenues $1,692,483 $3,007,390
Cost of sales 734,262 1,059,474
---------- ----------
Gross profit 958,221 1,947,916
---------- ----------
Operating costs and expenses:
Marketing and sales 660,740 539,941
Compensation in connection with
common stock and common stock options
issued for services rendered 88,095
Other general and administrative 601,159 (223,546)
Research and development 416,183 253,644
---------- ----------
Total operating costs and expenses 1,678,082 658,134
Operating (loss) income (719,861) 1,289,782
Other income (expense) (38,242) (16,502)
---------- ----------
(Loss) income before provision for income taxes (758,103) 1,273,280
Provision for income taxes 2,400
---------- ----------
Net (loss) income $ (760,503) $1,273,280
========== ==========
Basic (loss) income per share $ (0.13) $ 0.29
========== ==========
Diluted (loss) income per share $ (0.13) $ 0.27
========== ==========
Weighted average number of common
shares outstanding - Basic 5,859,780 4,412,099
========== ==========
Weighted average number of common
shares outstanding - Diluted 5,859,780 4,750,456
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION> 1998 1997
------------ -----------
<S> <C> <C>
Net revenues $ 2,989,815 $4,072,969
Cost of sales 1,296,380 1,464,491
----------- ----------
Gross profit 1,693,435 2,608,478
----------- ----------
Operating costs and expenses:
Marketing and sales 1,427,701 949,885
Compensation in connection with
common stock and common stock options
issued for services rendered 176,190
Other general and administrative 947,095 204,389
Research and development 836,311 574,720
----------- ----------
Total operating costs and expenses 3,211,107 1,905,184
Operating (loss) income (1,517,672) 703,294
Other income (expense) (35,012) (14,231)
----------- ----------
(Loss) income before provision for income taxes (1,552,684) 689,063
Provision for income taxes 3,200
----------- -----------
Net (loss) income $(1,555,884) $ 689,063
=========== ==========
Basic (loss) income per share $ (0.27) $ 0.16
=========== ==========
Diluted (loss) income per share $ (0.27) $ 0.15
=========== ==========
Weighted average number of common
shares outstanding - Basic 5,766,342 4,410,974
=========== ==========
Weighted average number of common
shares outstanding - Diluted 5,766,342 4,746,660
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,555,884) $ 689,063
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Depreciation and amortization 88,817 63,647
Allowance for sales returns 410,478 341,983
Allowance for bad debt reserves (703,421)
Common stock and common stock options
issued for services rendered 176,190
Changes in operating assets and liabilities:
Accounts receivable 965,904 (1,028,283)
Inventories (168,395) (31,861)
Prepaid royalties (112,266) 58,423
Prepaid expenses and other 13,514 (22,906)
Accounts payable and accrued expenses (928,619) (44,945)
Accrued royalties 292,169 (28,195)
Deferred revenues 26,892
----------- -----------
Net cash used by operating activities (967,390) (530,305)
----------- -----------
Cash flows from investing activities-
Purchases of property and equipment (10,502) (7,080)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,123 180
Payments on capital lease obligations (1,663) (6,580)
Net borrowings under Line of Credit 484,462
----------- -----------
Net cash provided by (used in) financing activities 487,922 (6,400)
Net change in cash and cash equivalents (489,970) (543,785)
Cash and cash equivalents, beginning of period 693,741 590,459
----------- -----------
Cash and cash equivalents, end of period $ 203,771 $ 46,674
=========== ===========
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 28,441 $ 18,501
=========== ===========
Income taxes $ 3,200 $ 0
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its
wholly-owned subsidiaries (collectively referred to as the Company). The
operating results for interim periods are unaudited and are not necessarily an
indication of the results to be expected for the full fiscal year. In the
opinion of management, the results of operations as reported for the interim
period reflect all adjustments which are necessary for a fair presentation of
operating results.
Note B - Accounts Receivable
- ----------------------------
As of December 31, 1998, $307,708 of the accounts receivable balance is due from
Macmillan Digital Publishing (MDP). Pursuant to a new sales and distribution
agreement between the Company and MDP, MDP will provide sales, distribution,
warehousing and order fulfillment services for all of the Company's products
throughout North America. The distribution agreement between the Company and MDP
expires on January 31, 2001. Also included within the accounts receivable is
$500,000 representing the remaining balance due of a $860,000.00 non-refundable
contract guarantee from TDK Recording Media Europe against the Company's
recently signed international republishing and distribution agreement.
Note C - Cash and Cash Equivalents
- ----------------------------------
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
Note D - Determination of Earnings Per Share Computation
- --------------------------------------------------------
In fiscal 1998 the Company adopted the Financial Accounting Standards Board's
SFAS No. 128 "Earnings Per Share" (EPS). During the three-month and six month
periods ended December 31, 1998, the Company incurred a loss from operations.
Accordingly, for those periods, all potentially dilutive incremental shares are
antidilutive and are therefore excluded from the computations of EPS. As of
December 31, 1997, the Company had issued options to purchase a total of 873,773
shares of the Company's common stock. Of such amount, options to purchase
584,923 shares of common stock are included in the above diluted earnings per
share computation for the three month period ended December 31, 1997. Of the
remaining 288,850 outstanding options to purchase shares of common stock,
268,850 options were excluded from the above diluted earnings per share
computation for the three month period ended December 31, 1997 as they were not
vested as of December 31, 1997, and 20,000 options to purchase shares of common
stock were excluded as their inclusion would have been anti-dilutive.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended December 31, 1998 Compared to the Three Months Ended December
31, 1997
Net Sales. Net sales decreased by 43.7 percent from $3,007,390 for the three
months ended December 31, 1997 to $1,692,483 for the three months ended December
31, 1998. This decrease is primarily attributable to (i) The cancellation of a
new strategy game title which was to ship in the quarter and was canceled due
to delivery failure by the outside developer (ii) The failure of the PC
Adventure game, The Abyss:Incident at EuropaTM and our existing games and
Entertainment Utilities to substantively perform at retail during the holiday
season and (iii) Sales for the Company's three Babe titles did not materialize
primarily due to the lack of consumer acceptance for the Babe: Pig in the CityTM
theatrical release which translated to lower than expected children's software
revenue for the Company. Net sales for the three months ended December 31, 1998
also included revenue of $860,000 from TDK Recording Media Europe representing a
non-refundable contract guarantee against the Company's recently signed
international republishing and distribution agreement. International
distribution efforts for Western Europe were curtailed for the period with
existing distributors to allow TDK to create optimum market conditions for the
Company's new titles in the coming year. The agreement with TDK extends through
October 31, 2001 and titles will begin shipping in August 1999. Although the
Company is entitled to a royalty per product (after royalty advance/guarantee
recoupment), there can be no assurance that the Company will earn any additional
income beyond the guarantee under the agreement.
Cost of Sales. Cost of sales decreased from $1,059,474 for the three months
ended December 31, 1997 to $734,262 for the three months ended December 31,
1998. However, cost of sales as a percentage of sales increased from 35.2
percent to 43.4 percent during these respective periods. The increase in cost
of sales as a percentage of revenues is primarily due to changes in product mix
and lower priced items.
Marketing and Sales. Marketing and sales expenses increased by 22.4 percent from
$539,941 for the three months ended December 31, 1997 to $660,740 for the three
months ended December 31, 1998, and increased as a percentage of sales from 18.0
percent to 39.0 percent, respectively. The change in dollar amount is
principally related to increased marketing and sales efforts to support new
product releases during the six month period and increased salaries due to
additional sales and marketing personnel. The Company expects expenses related
to marketing and sales to decrease as a percentage of sales as the Company
transitions in February of 1999 to a new sales and distribution agreement for
North America with Macmillan Digital Publishing.
Research and Development. Research and development costs increased 64.1 percent
from $253,644 during the three months ended December 31, 1997 to $416,183 for
the three months ended December 31, 1998, and increased as a percentage of sales
from 8.4 percent to 24.6 percent, respectively. The increase in costs is
primarily associated with (i) ongoing costs associated with the development of
PC based video games (ii) increased personnel and hardware/software costs
associated with the development of these games (iii) the enhancement of its
current product lines. The Company anticipates that research and development
costs will decrease as the Company exits the non-family oriented software
marketplace - ie: PC Games. However, the Company may develop family oriented
software products for platforms other than the PC in the future, such as DVD and
CD Console based titles. In the event the Company develops products for these
additional platforms, there is no assurance that sales of these products may
offset any increased development costs.
8
<PAGE>
General and Administrative. General and Administrative expenses increased from
($223,546) during the three months ended December 31, 1997 to $601,159 for the
three months ended December 31, 1998. Included in General and Administrative
expenses for the three months ended December 31, 1997 is a one-time recovery of
$703,421 related to the collection of a bad debt which had been previously
reserved during fiscal 1996. Excluding this one-time recovery amount, General
and Administrative expenses would have reflected an increase of 25.3 percent for
the three months ended December 31, 1998 from the three month period ended
December 31, 1997. This increase of approximately $120,000 was primarily due to
December year-end employee incentive pay and executive bonuses.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $88,095
for the three months ended December 31, 1997 and relate to the vesting of common
stock options issued during fiscal 1994. No such expense was recorded in the
three months ended December 31, 1998 as all such options to purchase shares of
common stock were fully vested as of June 30, 1998.
Six Months Ended December 31, 1998 Compared to the Six Months Ended December 31,
1997
Net Sales. Net sales decreased by 26.6 percent from $4,072,969 for the six
months ended December 31, 1997 to $2,989,815 for the six months ended December
31, 1998. This decrease is primarily attributable to (i) the failure at retail
of certain of the Company's products that were linked to theatrical and/or home
video release expectations (ii) The postponement and eventual cancellation of a
new strategy game title due to lack of performance by the outside developer
(iii) The failure of our existing games and Entertainment Utilities to
substantively perform at retail during the period (iv) Sales for the Company's
three Babe titles did not materialize primarily due to the lack of consumer
acceptance for the Babe: Pig in the CityTM theatrical release which translated
to lower than expected children's software revenue for the December quarter. Net
sales for the three months ended December 31, 1998 also included revenue of
$860,000 from TDK Recording Media Europe representing a non-refundable contract
guarantee against the Company's recently signed international republishing and
distribution agreement. The agreement with TDK extends through October 31, 2001
and titles will begin shipping in August 1999.
Cost of Sales. Cost of sales decreased by 11.5 percent from $1,464,491 for the
six months ended December 31, 1997 to $1,296,380 for the six months ended
December 31, 1998. However, cost of sales as a percentage of sales increased
from 36.0 percent to 43.3 percent during these respective periods. The increase
in cost of sales as a percentage of revenues is primarily due to the transition
of distribution services from Simon & Schuster to MDP and to changes in
product mix to lower priced items.
Marketing and Sales. Marketing and sales expenses increased by 50.3 percent from
$949,885 for the six months ended December 31, 1997 to $1,427,701 for the six
months ended December 31, 1998, and increased as a percentage of sales from 23.3
percent to 47.8 percent, respectively. The change in dollar amount is
principally related to increased marketing and sales efforts to support new
product releases during the six month period and increased salaries due to
additional sales personnel. We expect expenses related to marketing and sales to
decrease as a percentage of sales as we transition in February of 1999 to our
new sales and distribution agreement for North America with MDP.
9
<PAGE>
Research and Development. Research and development costs increased 45.5 percent
from $574,720 during the six months ended December 31, 1997 to $836,311 for the
six months ended December 31, 1998, and increased as a percentage of sales from
14.1 percent to 28.0 percent, respectively. The increase in costs is primarily
associated with (i) ongoing costs associated with the development of PC based
video games (ii) increased personnel and hardware/software costs associated with
the development of the games and (iii) the enhancement of our current product
lines.
The Company anticipates that Research and development costs will decrease as the
Company exits the non-family oriented software marketplace - i.e.: PC Games.
However, the Company may develop family oriented software products for platforms
other than the PC in the future, such as DVD and CD Console based titles. In the
event the Company develops products for these additional platforms, there is no
assurance that sales of these products may offset any increased development
costs.
General and Administrative. General and administrative expenses increased from
$204,389 during the six months ended December 31, 1997 to $947,095 for the six
months ended December 31, 1998. Included in General and Administrative expenses
for the six month period ended December 31, 1997 is a one-time recovery of
$703,421 related to the collection of a bad debt which had been previously
reserved during fiscal 1996. Excluding this one-time recovery amount, General
and Administrative expenses would have increased only 4.3 percent from $907,810
for the six month period ended December 31, 1997 to $947,095 for the six month
period ending December 31, 1998.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $176,190
for the six months ended December 31, 1997 and relate to the vesting of common
stock options issued during fiscal 1994. No such expense was recorded for the
six month period ended December 31, 1998 as all such options to purchase shares
of common stock were fully vested as of June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of $227,003 in
comparison with $1,683,746 at June 30, 1998, a decrease of $1,456,743. Cash and
cash equivalents decreased $489,970 directly as a result of the Company's
significantly reducing its outstanding accounts payable and due to the loss
incurred during the six month period ended December 31, 1998. Accounts
receivable decreased $1,376,381 due to decreased sales of products to the
Company's North American distributor, it's international distributors and other
direct sales and is also due to recording of appropriate allowances for sales
returns.
During the six months ended December 31, 1998, current liabilities decreased 3.2
percent by $126,758 from $3,866,234, at June 30, 1998 to $3,739,476 at December
31, 1998.
During September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides the Company with borrowing availability of up to
85% of the Company's qualified gross domestic accounts receivable, not to exceed
$1,500,000 in the aggregate, at a rate of 1.75% per month of the average gross
daily factoring account balance. The credit agreement, which renewed in
September 1998 to mature one year from the date of renewal, is secured by all
the assets of the Company. As of December 31, 1998, the Company had outstanding
borrowings under the agreement aggregating $475,000 plus $9,462 of accrued
interest, and a remaining availability under the agreement of $1,025,000.
10
<PAGE>
The Company has experienced a significant decrease in sales during the last six
month period, as compared to the same period of time in the prior fiscal year.
This decrease is principally related to the failure of non-family oriented
software products such as PC games and Entertainment Utilities to perform at
retail. The Company is in the process of revising its business plan to address
its ability to achieve success in the non-family oriented software products
marketplace. Although sales of children's educational titles are within
expectations, sales of games and utility-based entertainment titles are far
below expectations. As a result, the Company has discontinued all development,
marketing and sales of non-family oriented software products such as PC strategy
games, adventure games and Entertainment Utilities.
In addition, the Company has entered into two new sales, marketing and
distribution agreements for its family oriented software products. In North
America, the Company will be represented by Macmillan Digital Publishing (MDP,
as previously defined), and in Western Europe the Company will be represented by
TDK Recording Media Corporation. The Company has reduced monthly expenses
related to (i) non-family oriented software product development and (ii)
internal sales and marketing functions. Additionally, on February 2nd, 1999, the
Company engaged the services of investment bank Wedbush Morgan to explore
strategic alternatives for the Company including, but not limited to, the
possible sale of the Company by way of merger or sale of all or a portion of the
stock assets of the Company. The Company continues to search for new
opportunities to obtain family oriented software licenses, develop and sell
products, and to purchase products that are at or near completion of
development. Additionally, the Company is seeking new and innovative ways to
deliver its products to consumers, some of which may require large up-front cash
resources. If the Company enters into agreements in such business opportunities
in the future, the Company will require additional financing to fund its growth.
YEAR 2000 DISCLOSURE
The ability of computers, software and other equipment microprocessors to
recognize and properly process data fields containing a 2-digit year 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 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 its
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 upon 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.
11
<PAGE>
FORWARD LOOKING STATEMENTS
The preceding paragraphs of this Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's expectations, hopes, intentions or
strategies regarding the future. Forward-looking statements include, but are not
limited to: statements regarding the Company's sales and future revenues,
statements regarding future research and development costs and products, and
statements regarding the future flexibility of the Company's cash reserves. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed below. Please consult the risk
factors listed from time to time in the Company's reports on Form 10-QSB and 10-
KSB and Annual Reports to Stockholders.
The Company does not provide forecasts of potential future financial
performance. While management of the Company is optimistic about the Company's
long-term prospects, the following issues and uncertainties among others, should
be considered in evaluating its growth outlook.
1. Common Stock Compliance. On January 29, 1999, the Company received a letter
from Nasdaq regarding the failure of its common stock to satisfy the minimum
closing price requirement necessary for continued listing of the company's
securities on the Nasdaq Small Cap Market (See Item 5 in Part II). There can be
no assurance that the Company will be in compliance or that delisting will be
stayed. The delisting of the Company's common stock will most likely have an
adverse effect on their stock price.
2. Accounts Receivables and Liquidity. The lower than anticipated revenues for
the six months ending December 31, 1998 had reduced the Company's accounts
receivables and collateral to borrow utilizing its Line of Credit. Subsequently,
the Company's working capital had also been significantly reduced. (See
Liquidity and Capital Resources under Item 2). There can be no assurance that
increased participation by its new North America distributor, MDP, and the
Company's continued commitment in obtaining a larger percentage of sales in the
marketplace through new family oriented software products will translate into
larger revenues and higher working capital within the first two quarters of
1999.
3. Technological Developments. The personal computer software industry is
characterized by rapid technological advancement and the uncertainty of new
breakthroughs and developments in emerging areas such as the Internet.
4. Distribution Channels. Traditional retail distribution channels have been
experiencing a major restructuring and are fostering the development of
alternative distribution outlets.
12
<PAGE>
(FORWARD LOOKING STATEMENTS CONTINUED)
5. Licensed Properties. There is a risk factor inherent in any venture
involving licensed properties. Not every licensed product is guaranteed success;
only the software consumer can ultimately determine the outcome. Additionally,
there is no guarantee that the Company can obtain future licenses of either the
quality or the quantity necessary for the Company to reach its goals.
6. Product Ship Schedules. Delays in product ship schedules can cause problems
with product fulfillment, revenue recognition and retailer orders.
7. Research and Development. Research and development costs can very
significantly depending on the products currently in development and potential
products the Company may choose to develop.
8. Consumer Preferences. Consumers ultimately determine the success of software
products. Not every product will be a hit and residual inventory may exist
depending on actual sell through.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors have been, and in the future 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 December 11, 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:
FOR ABSTAIN
--------- -------
Richard Azevedo 5,464,913 102,819
Vincent J. Bitetti 5,473,147 94,585
Ulrich E. Gottschling 5,473,147 94,585
Mark A. James 5,471,613 96,119
Samuel L. Poole 5,466,513 101,219
Wayne M. Rogers 5,472,013 93,750
John T. Wholihan 5,473,613 94,119
2. A proposal to authorize the Board of Directors, in their discretion, to offer
holders of the Company's outstanding redeemable warrants the opportunity to
exercise such redeemable warrants at a reduced exercised price and on a cashless
basis, received 3,178,684 votes FOR and 182,726 votes AGAINST with 24,572
abstentions.
3. A proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for 1999, received 5,497,729 votes FOR and 54,830
votes AGAINST with 15,340 abstentions.
ITEM 5. OTHER INFORMATION
On January 29, 1999 the Company received a letter from Nasdaq stating that its
common stock had not maintained a closing bid price greater than or equal to
$1.00 over 30 consecutive trade dates. To regain compliance with the minimum bid
price requirement, the company stock must have a closing bid price of $1.00 for
ten consecutive trading days within 90 days by April 29, 1999. If the stock does
not demonstrate this compliance prior to April 29, 1999, the Company's common
stock and redeemable warrants will be subject to delisting. The Company may
request a hearing to stay the delisting. It is anticipated that the Company will
request such a hearing in the event it has not come into compliance by April 29,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti Date February 12,1999
----------------------- ----------------
Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jeff Court Date: February 12, 1999
-------------- -----------------
Jeff Court
Vice President, Finance
Acting Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Sound Source
Interactive, Inc. and subsidiary for the period July 1, 1998 through December
31, 1998 and is qualified in its entirety by reference to such condensed
consolidated fnancial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 203,771
<SECURITIES> 0
<RECEIVABLES> 1,029,261
<ALLOWANCES> (22,510)
<INVENTORY> 585,610
<CURRENT-ASSETS> 3,966,479
<PP&E> 720,126
<DEPRECIATION> (389,310)
<TOTAL-ASSETS> 4,297,294
<CURRENT-LIABILITIES> 3,739,476
<BONDS> 0
0
0
<COMMON> 5,868
<OTHER-SE> 551,950
<TOTAL-LIABILITY-AND-EQUITY> 557,818
<SALES> 1,692,483
<TOTAL-REVENUES> 1,692,483
<CGS> 734,262
<TOTAL-COSTS> 1,680,482
<OTHER-EXPENSES> 339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,903
<INCOME-PRETAX> (758,103)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (760,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (760,503)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
