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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-28604
SOUND SOURCE INTERACTIVE, INC.
(Name of Small Business Issuer in its Charter)
Delaware 95-4264046
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001
Redeemable Warrants
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 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.
[_]
State Issuer's revenues for its most recent fiscal year: $4,624,540
The aggregate market value of the common stock of the Issuer (the "Common
Stock") held by nonaffiliates as of June 30, 1999, based on the market price at
August 31, 1999, was approximately $3,494,718 As of August 31, 1999, there were
5,869,402 shares of the Common Stock outstanding and 559,928 redeemable warrants
of the Issuer outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
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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 30,1999 are incorporated by reference into Part lll of this Form 10-KSB.
INDEX
PART I
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Page No.
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ITEM 1. DESCRIPTION OF BUSINESS.................................... 3
ITEM 2. PROPERTIES................................................. 12
ITEM 3. LEGAL PROCEEDINGS.......................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 12
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS............................. 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................... 14
ITEM 7. FINANCIAL STATEMENTS....................................... 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 19
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS................................................. 20
ITEM 10. EXECUTIVE COMPENSATION.................................... 20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................. 20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 20
PART IV
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................... 20
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains statements that are based upon
certain estimates, projections and other forward-looking statements within the
meaning of the Securities Litigation Reform Act of 1995 with respect to Sound
Source Interactive, Inc. (the "Company"). Forward-looking statements give the
Company's expectations of forecast of future events. These statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They use words such as "estimate," "expect," "project," "plan,"
"believe," "anticipate" "intend," and other words and terms of similar meanings
in connection with disclosures of future operating or financial performance. In
particular, these statements relate to future actions, prospective performance
or results of current and anticipated products, sales, efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial results.
All of the forward-looking statements contained in this Annual Report on
Form 10-KSB or in other Company publications may turn out to be wrong. They can
be affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining actual or
future results. Consequently, no forward-looking statement can be guaranteed.
The Company's actual results may vary materially and there are no guarantees
about the performance of the Company's publicly traded securities.
The Company undertakes no obligation to correct or update any forward-
looking statements, whether as a result of new information, future events or
otherwise. Future disclosures on related subjects in the Company's reports to
the Securities and Exchange Commission (the "SEC") may update some of the
Company's `s disclosures (including Forms 10-QSB and 8-K filed in the future)
contained herein.
Some of the facts that could cause uncertainties are:
- New competitors and intensification of price competition from other
manufacturers of consumer software products;
- New products that make the Company's products and services obsolete;
- Inability to obtain additional capital as needed;
- Loss of customers;
- Technical problems with the Company's products and services;
- Departure of key employees, and inability to attract new employees;
- Litigation and administrative proceedings;
- Departure or retirement of key executives; and
- Contracts tied to key executives and / or change in control.
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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
interactive computer software primarily based on well recognized intellectual
content. The Company produces educational software and entertainment software.
Educational software consists primarily of children's educational and
entertainment type products including Interactive MovieBooks/TM/, Activity
Centers and Learning Adventures/TM/ for children ages three to twelve.
Entertainment software designed for the teen and above market shipped during the
fiscal year consisted primarily of interactive games. On February 17, 1999 the
Company announced its plans to exit the teen and above (non-family oriented
software) marketplace and to focus on its children's product line.
The Company's objective is to be a leading publisher of high quality,
competitively priced, consumer oriented children's software on both the personal
computer ("PC") and dedicated game console formats such as Sony Playstation/TM/
and Nintendo Game Boy/TM/. 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, television programming, home video
franchises, children's literary works and other intellectual characters or
brands, which 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 trade name recognition, (v)
leverage its licensed content to develop products intended for the dedicated
game console market and (vi) pursue strategic alliances, joint ventures and
acquisitions.
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, Universal Studios and others.
The Company's license agreements for existing products include Babe/TM/, The
Land Before Time/TM/, The Lost World: Jurassic Park/TM/, Babylon 5/TM/, Free
Willy/TM/, Star Trek/TM/, Casper/TM/, Lost In Space/TM/, An American Tail/TM/,
The Abyss/TM/, The Berenstain Bears/TM/, The King and I/TM/ and Maisy/TM/. The
Company is continuing to pursue the procurement of additional licenses. The King
and I/TM/ was licensed and developed under a joint venture agreement with the
licensor which was signed on September 9, 1998. Management believes the Company
is capable of continuing to obtain new licenses and/or other partnership
arrangements and developing new, high quality software products using content
from these intellectual properties.
The licensing contracts with the licensor studios are generally of three to
five years in duration. The licenses are usually exclusive and 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.
All of the Company's licenses allow for application to its basic compact
disk-read only memory ("CD-ROM") products. In addition, many of the licenses
allow for application to digital videodisk ("DVD") and dedicated game console
products such as the Sony Playstation and Nintendo Game Boy. Universal's The
Land Before Time/TM/ franchise is expected to be among the first titles shipped
by the Company on the Sony Playstation format, as product development is already
underway. On July 22, 1998 the Company signed a four-year publishing license
agreement with Sony Entertainment Corporation of America to publish Sony
Playstation titles, and on September 30, 1998 signed an additional agreement to
become an authorized developer for the Sony Playstation dedicated game
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console system. In addition, the Company is an authorized developer for Nintendo
Game Boy and is exploring other dedicated game console opportunities such as VM
Lab's Nuon.
The Company believes that as of August 31, 1999, its CD-ROM 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, Costco, Learningsmith, Wal-Mart, Barnes &
Noble, Sam's Club, Zainy Brainy, Hastings, Virgin Megastores, Fry's Electronics
and others including numerous e-commerce internet stores such as eToys and
Beyond.com.
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.
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 suitable for
both educational and entertainment - oriented content.
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
compact disks ("CDs") and motion picture videos. With the increasing
consumerization of the software market, prices for consumer software products
are now at impulse price levels ranging from $9.99 on CD-ROM to $39.99 on
dedicated game platforms such as Sony Playstation and Nintendo Game Boy. The
Company believes that the distribution channels for consumer software will
continue to expand to include book and music stores, toy stores, department
stores, electronic stores, appliance stores, video outlets, supermarkets,
convenience stores, TV home shopping, direct mail catalogs and internet e-
commerce stores.
The home video game software market consists both of cartridge-based and
CD-ROM-based software for use solely on dedicated hardware systems. Until 1996,
most software for dedicated platforms was sold in cartridge form. However, CD-
ROMs have become increasingly popular because they have substantially greater
data storage capacity and lower manufacturing costs than cartridges. The first
modern platform was introduced by Nintendo in 1985 using "8-bit" technology ("8-
bit" means that the central processing unit, or "chip," on which the Software
operates is capable of processing data in 8-bit units). Subsequent advances in
technology have resulted in continuous increases in the processing power of the
chips that power the platforms. As the hardware technology has advanced, the
software designed for the platforms has similarly advanced, with faster and more
complex images, more lifelike animation and sound effects and more intricate
scenarios. The larger data storage capacity of CD-ROMs enable them to provide
richer content and longer play. Currently, the nonportable platforms being
marketed are based primarily on 32-bit and 64-bit technology. In contrast,
portable platforms typically are less sophisticated technologically and do not
require television monitors.
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As consumer software has evolved into a mass-market product, the Company
believes it is increasingly important for consumer software companies to have
direct relationships with retailers to market their products to consumers
effectively. The Company believes that in order to be successful, consumer
software companies must have international distribution (with products produced
locally and translated into multiple languages), a consumer-driven focus, a
broad offering of category-leading products, close relationships with
distributors and retailers, a recognized brand name and a cost-efficient
business model. In an effort to incrementally increase its revenues, as well as
to create new revenue sources, the Company is actively searching for new ways to
market its products. Included in these nontraditional methods is network
marketing, e-commerce, internet marketing and web links, e-mail campaigns direct
to consumers, the placement of coupons in videos and in other complimentary
products, catalogs on disks, "un-lockable" discs and enhanced up-sell programs
to new and existing customers.
Core Competence
The Company believes that a high quality product with solid playability and
recognizable characters 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. Historically the Company has produced its products itself in
its Calabasas, California offices and/or under contract to outside developers
that are managed by Company personnel. The Company expects to outsource a
majority of its product development in the future to gain greater expertise
across a wider spectrum of formats and product categories, and to better control
overhead and other related expenses. As of July 1999, PC Data, Inc., ranked the
Company as the seventh largest educational software publisher in the United
States.
Products
Children's Software (Under thirteen years of age)
The Company has divided its children's software products into the following
categories:
Curriculum Series (Education). This product line contains both subject
specific and multi-subject children's learning products based on accepted
curriculum standards and practices. Titles include: The Land Before Time/TM/
Math Adventure, The Land Before Time/TM/ Kindergarten Adventure, The Casper/TM/
Early Reader, The Babe/TM/ Preschool Adventure and others. Currently, the
products are sold at suggested retail prices of up to $20 each. To date, the
Company has released seven subject specific or multi-subject educational
products and has under development one additional product that is scheduled for
release prior to December 1999. According to PC Data, Inc., curriculum-based
products currently account for approximately 37 percent of the consumer
educational software market.
Stealth Learning/TM/ Series (Edutainment). This product line contains
titles that have learning and/or entertainment activities that may not be
curriculum specific, which are intended to 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. Titles include: The Land BeforeTime
Interactive MovieBook/TM/, The American Tail Interactive MovieBook/TM/, The Babe
Interactive MovieBook/TM/, The Land Before Time/TM/ Activity Center, The
Casper/TM/ Activity Center, The King and I Thinking Adventure/TM/, The Lost in
Space/TM/ Learning Adventure and others. Currently, the products are sold at
suggested retail prices of up to $20 each. To date the Company has released 14
edutainment titles, and plans to introduce more titles in this category for both
the PC and dedicated game consoles. According to PC Data, Inc. products in the
edutainment categories account for approximately 25 percent of the consumer
educational software market. As products for children under 13 in the dedicated
game console market are relatively new, there is no clear cut historical data
available related to market share.
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Life Skills Series (Edutainment). Designed specifically for children
ages two to six, the life skills series is a new category for the Company and
the industry. The product line contains titles that emphasize early learning
activities intended to teach young children independence, confidence and other
socially responsible traits such as getting along, cleaning up and recycling.
Familiar themes such as logic, matching skills and color recognition round out
the gameplay while entertaining and captivating the players. Currently, the
products are sold at suggested retail prices of up to $20 each. On July 22,
1999 the Company released the Maisy's Playhouse CD-ROM (based on the Nickelodeon
television show) and intends to introduce four additional life skills series
titles based on its Berenstain Bears license during holiday 1999. There is
currently no relevant tracking data available from PC Data, Inc. or any other
source for this new software category.
Entertainment Software (Teen and above demographic)
On February 17, 1999, the Company announced that it is discontinuing its
production of entertainment computer software for the teen and above market
(non-family oriented software), including games and utilities. The Company does
not intend to release any additional entertainment software for the teen and
above market on any platform in the foreseeable future. The last entertainment
title under license, Star Trek: Trivia Challenge, began shipping in August 1999.
The license for this product expires on December 31, 1999 with sell-off
provisions continuing through June 30, 2000. All other entertainment titles for
the teen and above demographic will be sold, liquidated and/or destroyed by the
license expiration date(s) as required under each agreement.
Product Distribution
North American Sales
Exclusive Provisions. On June 1, 1996, the Company entered into a two-year
distribution services agreement with Simon & Schuster Interactive Distribution
Services ("SSIDS"), which terminated on May 31, 1998. During the period from
June 1, 1998 to February 4, 1999, the Company obtained fulfillment services and
limited sales support from Macmillan Digital Publishing ("MDP"), a division of
Viacom, Inc. which included the SSIDS software distribution services arm. In
fiscal year 1999, Viacom, Inc. sold its MDP division, including the SSIDS
software distribution services arm, to Pearson plc.
During the transition in MDP's ownership from Viacom, Inc. to Pearson plc,
the Company sought to develop an internal sales team to serve as the primary
distribution vehicle for its products. In the wake of the Company's
disappointing sales during the 1998 holiday season, the Company discontinued its
efforts to sell its products primarily through an internal sales team and on
February 5, 1999 entered into a new Distribution Services Agreement with MDP.
This agreement, which expires on January 31, 2001, grants MDP the exclusive
right to sell, distribute and provide inventory, warehousing and fulfillment
services for the Company's licensed products, in certain defined markets and
territories. The agreement also includes a nonexclusive provision for specified
channels. The new agreement with MDP is a two-year renewable contract that is
terminable by either party with 90 days' prior written notice and contains both
exclusive and nonexclusive channels of distribution. The Company has streamlined
its internal sales department accordingly to take advantage of the enhanced
agreement with MDP and to reduce operating expenses.
Under the new agreement, MDP makes 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"
are defined as amounts actually billed by MDP to its customers for Company
products sold by it. The payments by MDP are due not later than 75 days after
each calendar month end. Under the MDP distribution agreement, the Company is
responsible for both bad debts and product returns. The Company maintains
reserves for
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bad debts and product returns based upon its prior experience and current market
conditions against which credits for actual bad debts and returns are applied.
The reserve for product returns is netted against revenues as reported by MDP.
Nonexclusive Provisions. Under the MDP agreement, the Company reserves the
right to market its products directly through certain nonexclusive channels such
as direct mail, telemarketing (such as 800 number sales), in-box coupon
fulfillment, infomercials, original equipment manufacturer sales, "soft bundles"
of the licensed products with nonsoftware products designed to generate a
secondary market for the licensed products, and nontraditional channels such as
grocery stores.
On June 10, 1999 the Company entered into a direct distribution agreement
with Major Connections, a major provider of consumer software to grocery stores
and supermarkets. Major Connections maintains shelf space at over 1,000
locations. The Company began shipping titles to this new channel in August 1999
in time for the upcoming fiscal 2000 holiday selling season. Other nonexclusive
customers include AVON, The Family Software Club and others.
International Sales
The Company utilizes several international distributors actively to promote
and sell the Company's English language products throughout most of the English
speaking countries. Additionally, on November 1, 1999, the Company entered into
a three-year republishing and distribution agreement with TDK Recording Media
Europe ("TDK") to distribute certain of its children's software titles
throughout Europe and other territories. Although new to the consumer software
market, TDK commands approximately 20 percent of the European CD-ROM market, 40
percent of the audio cassette market, 20 percent of the VHS cassette market, 38
percent VHS-C market and 21 percent of the 8mm market. Its European distribution
covers the channels including hypermarkets, supermarkets, record/video stores,
electronics stores, department stores, duty free stores, kiosks, bookstores and
others, throughout Europe. Under the agreement, TDK retained options for
additional territories and platforms including CD-ROM, DVD and the Sony
Playstation and Nintendo Game Boy dedicated game platforms. To date, the Company
has signed three addendums adding additional titles, territories and platforms
to the agreement. In addition to CD-ROM, TDK has acquired the rights for Sony
Playstation titles throughout Europe, Japan and Australia and retains options
for the DVD and Nintendo Game Boy platforms.
Previously, IONA Software, Ltd. ("IONA") of Dublin, Ireland had acquired
the republishing and distribution rights to translate certain of the Company's
products into as many as 14 different languages for sale in up to 35 countries.
IONA's republishing and distribution agreement with the Company expired on March
16, 1999 with sell-off provisions through September 1999. The Company plans to
continue its relationship with IONA for its Interactive MovieBook titles in
Japan and may in the future work with IONA to distribute select titles in
various international territories as allowed under the new agreement with TDK.
Under the terms of its international republishing and distribution
agreements, 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 the republishing partner. The success of the localization is dependent
upon the international appeal of certain of the Company's products, growth of
the interactive software market internationally, the ability of the republishing
partners successfully to localize and market 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 in available territories.
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 with pre-teen children. The Company also
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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, children's television, literary works 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 such promotion through the sale of CDs to Universal Home
Video resulting in net sales by the Company in the amount of $1,957,500. During
fiscal 1999, the Company generated $36,000 from promotional sales of products.
The Company is actively seeking additional cross-promotion opportunities. The
Company believes that additional revenues could be generated through the
Company's involvement in cross-promotional efforts with studio partners, other
licensees 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.
On July 8, 1999, the Company entered into an agreement with Digital River,
Inc. to provide certain Internet sales and marketing services. This is in line
with the Company's strategy to promote and sell its products via the Internet
direct to consumers.
The Company provides technical support to its customers by telephone and
on-line via its web site (soundsourceinteractive.com). The Company has also
installed a telephone system and a call-handling center to facilitate its
response to customer inquiries. Customer feedback is shared among 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 licensor based
upon upcoming theatrical and/or video and book releases, television programming,
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.
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The overall product, including documentation, is designed to meet a
manufacturing specification that also will satisfy 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 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 approach, 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 sometimes partially paid by
royalties based on net sales, which lowers the Company's investment risk. The
Company's agreements with its external developers 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. The Company expects to outsource the majority of product development to
qualified outside sources for the foreseeable future.
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. 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. Future products designed for dedicated game consoles will be tested
and evaluated in a similar fashion.
The Company currently is the licensee under technology licenses with
Microsoft Corp., Apple Computer, Inc., Macromedia, 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 Microsoft Corp. developer's license, the Company
believes there are satisfactory alternative products that could be substituted
at comparable cost for each of the technologies which it now licenses. The
Microsoft developer's license and supplied tools and applications are available
to any publisher supporting Microsoft operating systems, and is updated
regularly by Microsoft.
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 and/or its designated outside contractors (developers) prepare
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. It is anticipated that the Company will continue with this
process in regards to its planned CD-ROM and DVD titles. However, dedicated game
console products are manufactured and packaged by the respective licensors (such
as Sony and Nintendo), with which the Company has no prior experience.
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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 have broadened their product lines to compete with the
Company's licensed products, and new competitors, including computer hardware
and software manufacturers, diversified media companies and toy companies have
entered the consumer software market, resulting in greater competition for the
Company.
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 Mattel, Havas, Disney, GT Interactive Software Corp.,
IBM and Microsoft Corp. to be its chief competitors. See Part I, Item 1,
"Description of Business - Risk Factors - Competition."
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 by consumers. During the fiscal years ended June 30, 1999,
1998 and 1997, the Company was unaware of any significant amount of unauthorized
copying of its products in North America although copies that originated in
Singapore were recently received by the Company from its Asian distributor for
evaluation.
The Company's products are based upon the licensed content of major motion
picture studios under license agreements. All of such license 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/or the right of first refusal and last negotiation for additional products
utilizing the same characters. The Company anticipates that in most cases the
licensor 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, 1999, the Company had 24 full-time employees, including
three employees in sales and marketing, thirteen employees in development and
customer support, five employees in administration and finance and three
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.
10
<PAGE>
Executive Officers
The executive officers of the Company, their ages and their positions with
the Company as of August 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Vincent J. Bitetti 44 Chairman of the Board, Chief Executive
Officer and Director
Jeffrey Court 47 Vice President of Finance and acting
Chief Financial Officer
Eugene Code 53 Vice President of International Business
Affairs and Corporate Secretary
</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. From 1986 to 1993, Mr. Bitetti was a
consultant to manufacturers of keyboard synthesizers and other digitally
controlled musical instruments in the musical instrument industry. Mr. Bitetti
is primarily responsible for developing the concepts for the Company's products,
and maintaining the Company's relationships and negotiating its distribution,
republishing and license agreements with the studios. Mr. Bitetti has been a
director of the Company since 1994. As described below under "Recent
Developments", the Company is currently engaged in negotiations with Mr. Bitetti
concerning his submission of resignation.
Jeffrey Court was recruited to Sound Source in August 1998 to manage the
accounting and management control systems and to support the production of
financial statements. On January 8, 1999, Mr. Court was appointed Vice
President of Finance and acting Chief Financial Officer. He came with over 18
years of experience as a senior accountant, corporate controller and chief
financial officer. Since May 1988, Mr.Court has held finance management
positions in related industries, including serving as controller of Metropolis,
a Southern California-based publisher of video game magazines, from July 1997 to
July 1998, serving as corporate controller of Klasky Csupo, Inc., a Southern
California-based animation production company, from May 1995 to June 1997; and
serving as chief financial officer of Full Moon Entertainment, a Southern
California-based motion picture production and distribution company, from May
1988 to April 1995.
Eugene Code was appointed Vice President of International Affairs and
Corporate Secretary on January 8, 1999 after having served in various capacities
within the Company since 1994. While at the Company, Mr. Code has managed
contract administration and the international product republishing program. He
successfully negotiated the Company's entry into the world market by
coordinating development of over 30 localized products. He has recently
concluded agreements with TDK for localization, republishing and distribution.
He manages the Company's efforts in support of TDK's product localization
initiative to bring the Company's products to market in as many as 20 languages
for distribution in over 60 countries. His mandate is to explore new market
areas for product adaptation and development. Mr. Code joined the Company in
1994 with over 20 years of international contract management and administration
experience. Prior to joining Sound Source Interactive, Mr. Code served in
management positions in the defense industry where he managed development of
projects associated with advanced weapons systems. Earlier positions also
included liaison with the Navy and industry for fleet weapons retrofitting and
repair.
11
<PAGE>
Recent Developments
The Company is currently engaged in negotiations with Vincent J. Bitetti
with a view to Mr. Bitetti's resigning as Chairman of the Board and Chief
Executive Officer of the Company. The Company would like Mr. Bitetti to remain
as Chairman of the Company until December 31, 2000 when his contract expires.
Depending on the outcome of such negotiations, it is contemplated that Mr.
Bitetti will enter into a Separation Agreement which will terminate or modify
his existing employment agreement to restructure his duties which may include
maintaining strategic relationships, new business development and overall
strategic planning and implementation.
The Company also expects to enter into an Employment Agreement with John
Warwick, pursuant to which he will be employed as the Company's Chief Executive
Officer for a six-month period while the Company searches for a new, permanent
Chief Executive Officer.
No assurance can be given that the Company will enter into the Separation
Agreement with Mr. Bitetti or the Employment Agreement with Mr. Warwick, or that
it will be able to locate and engage a new, permanent Chief Executive Officer as
described above.
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. The Company currently expects that these
facilities will be sufficient for its needs at least through the term of the
lease. 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 in the past 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.
No matters were submitted to a vote of security holders in the fourth
fiscal quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Redeemable Warrants were traded on the
NASDAQ SmallCap Market under the symbols "SSII" and "SSIIW," respectively, for
the period from since July 2, 1996 to September 3, 1999, and were not traded on
any market or exchange prior to July 2, 1996, and therefore no information is
available as to the range of sales prices for these securities for any period
prior to such date. On September 3, 1999, the company's securities were
delisted from the Nasdaq SmallCap Market, and on that date the Common Stock
commenced trading on the OTC Bulletin Board. The Redeemable Warrants, however,
do not presently trade on any market other than the "pink
12
<PAGE>
sheets". 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
--------
Common Stock SSII High Low
---- ----
<S> <C> <C>
1998
First Calendar Quarter 2.38 1.00
Second Calendar Quarter 2.50 0.97
Third Calendar Quarter 1.44 0.63
Fourth Calendar Quarter 1.25 0.59
1999
First Calendar Quarter 2.25 0.56
Second Calendar Quarter 1.25 0.31
Third Calendar Quarter (thru 8/31/99) 0.44 0.25
Redeemable Warrants SSIIW High Low
---- ----
1998
First Calendar Quarter 0.31 0.03
Second Calendar Quarter 0.31 0.09
Third Calendar 0.16 0.06
Fourth Calendar Quarter 0.16 0.03
1999
First Calendar Quarter 0.22 0.03
Second Calendar Quarter 0.13 0.03
Third Calendar Quarter (thru 8/31/99) 0.09 0.02
</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.
During fiscal 1995, the Company did not sell any equity securities that
were not registered under the Securities Act of 1933.
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.
13
<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, 1999,
1998 and 1997, and certain factors that are expected to affect the Company's
prospective financial condition. See "Special Note Regarding 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.
On February 5, 1999, the Company entered into a Distribution Services
Agreement with Macmillan Digital Publishing ("MDP," as previously defined). The
agreement, which expires on January 31, 2001, grants MDP the exclusive right to
sell, distribute and provide inventory, warehousing and fulfillment services for
the Company's licensed products, in certain defined markets and territories. The
agreement also includes a non-exclusive provision for specified channels. The
new agreement with MDP is a two-year renewable contract that is terminable by
either party with 90 days' prior written notice and contains both exclusive and
non exclusive channels of distribution. See Part I, Item 1, "Description of
Business - Product Distribution - North American Sales - Exclusive Provisions."
Under the agreement, MDP makes 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"
are defined as amounts actually billed by MDP to its customers for Company
products sold by it. The payments by MDP are due not later than 75 days after
each calendar month end. Under the MDP distribution agreement, the Company is
responsible for both bad debts and product returns. The Company maintains
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
are applied. The reserve for product returns is netted against revenues as
reported by MDP. During the years ended June 30, 1999, 1998 and 1997, the
Company had net sales to or through MDP/SSIDS in the amount of $2,389,103,
$5,665,347 and $2,982,285, respectively, which accounted for approximately
51.7%, 63.9% and 64.9%, of the Company's total net sales.
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 developers, 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.
14
<PAGE>
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.
Readiness for Year 2000 - 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.
The company plans to use both internal and external resources to identify,
correct, upgrade or replace and test its information technology systems (IT
Systems). The company estimates that its IT Systems will be compliant prior to
December 31, 1999. However, there can be no guarantee that the Company's system,
or the systems of other companies on which the Company 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.
Costs - The total cost to the Company of these Year 2000 Compliance
activities (less than $10,000 being incurred through September 30, 1999) 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 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.
Risks - The Company expects to implement the changes necessary to address
the year 2000 issue for IT Systems. The company presently believes that, with
modifications to existing software, conversions to new software, and appropriate
remediation of embedded chip equipment, the year 2000 issue with respect to the
Company's IT Systems is not reasonably likely to pose significant operational
problems for the Company. However, if unforeseen difficulties arise or such
modifications, conversions and replacements are not completed timely, or if the
company's vendors' or suppliers' systems are not modified to become year 2000
compliant, the year 2000 issue may have a material impact on the results of
operations and financial condition of the Company.
Contingency Plans - The Company presently believes that's its most
reasonably likely worst-case year 2000 scenarios would relate to the possible
failure of third party systems over which the Company has no control and for
which the Company has no ready substitute, such as, but not limited to, power
and communications services. As a starting point for developing specific year
2000 contingency plans, the emphasis of identifying and locating alternate
sources of supply, method of distribution and ways of processing information has
already begun taking place within the Company. Prior to December 31, 1999, the
Company intends to make necessary preparations to be ready to execute the
contingency plans, if needed. However, there can be no assurance that the
Company will be able to complete its contingency preparations on that schedule.
15
<PAGE>
Results of Operations
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1999
Net Sales. Net sales decreased by 47.9 percent from $8,867,490 for the year
ended June 30, 1998 to $4,624,540 for the year ended June 30, 1999. Total sales
of the Company's software products decreased by 48.3 percent from $8,819,529 in
1998 to $4,556,442 in 1999. The decrease in sales is attributed (i) the failure
of our existing children's software, games and entertainment utilities to
substantively perform at retail during the period, (ii) the postponement and
eventual cancellation of a new strategy game title due to lack of performance by
the outside developer and (iii) the failure at retail of certain of the
Company's products that were linked to theatrical release expectations. The lack
of consumer acceptance for the Babe: Pig in the City (TM) and The King & I
theatrical releases translated into lower than expected children's software
revenue. Net sales for the 12 months ended June 30, 1999 also included revenue
of $760,000 from TDK Recording Media Europe ("TDK", as previously defined),
representing a non-refundable contract guarantee against the Company's
international republishing and distribution agreement. The agreement with TDK
extends through October 31, 2001 and the Company expects TDK to begin shipping
titles by October 1999. 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 decreased by 11.2 percent from $3,574,168
during 1998 to $3,175,637 during 1999, and increased as a percentage of net
sales from 40.3 percent to 68.7 percent during the same periods. This decrease
in cost of sales is attributable to the above noted 47.9 percent decrease in net
sales. The increase in cost of sales as a percentage of revenues is primarily
due to the transition of distribution services from SSIDS to MDP and to changes
in product mix to lower priced items. The increase in cost of sales is also
attributable to the writeoff of obsolete inventory product and prepaid royalties
determined not to be recoverable in future periods in the amounts of $120,968
and $372,476, respectively.
Marketing and Sales. Marketing and sales expenses increased by 6.4 percent
from $2,045,312 during 1998 to $2,177,248 during 1999, and increased as a
percentage of net sales from 23.1 percent to 47.1 percent, respectively. The
increase in expenses was primarily due to increased costs associated with
channel marketing, new product packaging design and branding, as well as
increased personnel costs associated with the development of an internal sales
and marketing team that was continued in the beginning months of the fiscal
year. The increase in marketing and sales expenses as a percentage of net sales
is primarily attributable to a 47.9 percent decrease in net sales. Internal
sales efforts were cut back with the signing of the master distribution
agreement with MDP. The Company anticipates that for the foreseeable future,
marketing and sales expenses may decrease as a percentage of net sales as the
Company distributes products for North America through master distributors such
as MDP.
General and Administrative. General and administrative costs decreased by
0.6 percent from $1,839,386 during 1998 to $1,828,381 during 1999 and increased
as a percentage of net sales from 20.7 percent to 39.5 percent, respectively.
This decrease of $11,005 is primarily attributable to an decrease of $155,193
relating to legal and consulting expenses of $312,884 in the fiscal year ended
June 30, 1998 to $157,691 in the year ended June 30, 1999, which were offset by
increased expenses within the areas of asset depreciation and salaries.
Compensation In Connection With Common Stock and Common Stock Options Issued
for Services Rendered. In 1998, the Company incurred noncash charges to
earnings of $323,351 in connection with the vesting of stock options granted to
employees in prior fiscal years. No such charges were incurred in 1999. The
amount of the charge for 1998 was determined as the difference between the fair
market value of the stock at the date of grant and the exercise price.
Research and Development. Research and development expenses decreased by 14.1
16
<PAGE>
percent from $1,580,413 during 1998 to $1,356,867 during 1999, and increased as
a percentage of net sales from 17.8 percent to 29.3 percent, respectively. The
decrease in costs is primarily related to the Company's decision to exit the
teen and above (non-family oriented software) game marketplace and to decrease
the number of products under development by the Company. The increase in
research and development expenses as a percentage of net sales is primarily
attributable to a 47.9 percent decrease in net sales. The Company believes that
development costs will increase as the Company develops additional children's
products and as the Company develops increasingly more complex products that
contain additional features. The Company is currently developing products for
the Sony Playstation, which require a more expensive development process.
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 1999 and sufficient net
operating loss carryforwards from 1997 to offset its 1998 taxable income.
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 53.5 percent from $2,329,211
during 1997 to $3,574,168 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 and
marketing 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
7.5 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
were 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.
17
<PAGE>
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.
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.
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.
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 the licenses upon which they are based 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.
Liquidity and Capital Resources
The Company incurred a net loss of $3,977,630 for the fiscal year ended
June 30, 1999, the Company realized a net profit of $501,200 and a net loss of
$2,668,520 for the years ended June 30, 1998 and 1997, 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, 1999, the Company
18
<PAGE>
had negative working capital of $823,364 and cash of $857,143.
The Company experienced a significant decrease 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 and develop and sell products.
Additionally, the Company is expanding from the Personal Computer Platform to
embrace Dedicated Game Console Platforms such as Sony Playstation and is seeking
new distributors and innovative ways to deliver its products to consumers, most
of which will require large up-front cash resources. If the Company enters into
agreements relating to such business opportunities in the future, the Company
will require additional financing to fund its growth.
The Company invested $20,341 during fiscal 1999 and $138,688 during fiscal
1998 for capital equipment to expand into new product lines and meet its
production capacity. In addition, the Company had incurred expenditures of
$342,651 during fiscal 1999 and $408,016 in 1998 for development of newly
released and upcoming product titles. From time to time, the Company evaluates
acquisitions of products, businesses and technologies that are complementary to
the Company's business.
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 is secured by all the
assets of the Company. As of June 30, 1999, the Company had outstanding
borrowings under the agreement aggregating $322,500 plus $8,543 of accrued
interest with a remaining availability under the agreement of $1,177,500.
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 10, 1999 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.
19
<PAGE>
PART III
Items 9, 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, 1999, 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.
Exh.
No. Description of Exhibits
------ -----------------------
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.]
20
<PAGE>
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.]
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 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.]
10.3 Sound Source Interactive, Inc. 1992 Stock Option Plan. [Filed as
Exhibit 10.4 to Registration Statement No. 33-80827and incorporated
herein by reference.]
10.4 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.]
10.5 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.]
10.6 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.]
10.7 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.]
10.8 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.]
10.9 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.]
10.10 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.]
10.11 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.]
10.12 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.]
10.13 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.]
10.14 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.]
10.15 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.]
21
<PAGE>
10.16 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.]
10.17 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and Richard Azevedo. [Filed as Exhibit 10.29 to the
Registrant's Annual Report on Form 10-KSB for the year ended June
30, 1998 (the "1998 Form 10-KSB") and incorporated herein by
reference.]
10.18 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and Samuel L. Poole. [Filed as Exhibit 10.30 to the 1998
Form 10-KSB and incorporated herein by reference.
10.19 Indemnification Agreement, dated as of April 27, 1998, between the
Registrant and John Wholihan. [Filed as Exhibit 10.32 to the 1998
Form 10-KSB and incorporated herein by reference.]
10.20 Distribution and Republishing Agreement, dated as of June 8, 1998,
between the Registrant and Iona Software LTD. [Filed herewith.]
10.21 Distribution and Republishing Agreement, dated as of November 1,
1998, between the Registrant and TDK Recording Media Europe [Filed
herewith.]
10.22 Addendum to Distribution and Republishing Agreement, dated as of
March 1, 1999, between the Registrant and TDK Recording Media
Europe [Filed herewith.]
10.23 Electronic Software Distribution Agreement, dated as of July 1,
1998, between the Registrant and Digital River, Inc. [Filed
herewith.]
10.24 Joint Venture Agreement, dated as of July 31, 1998, between the
Registrant and Morgan Creek Productions [Filed herewith.]
10.25 Distribution and Fulfillment Services Agreement, dated as of
February 5, 1999, between the Registrant and Macmillan Digital
Publishing [Filed herewith.]
21.1 Subsidiaries of the Registrant. [Filed herewith.]
23.2 Consent of Deloitte & Touche, LLP. [Filed herewith.]
27.1 Financial Data Schedule. [Filed herewith.]
(b) Reports on Form 8-K.
None.
22
<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: October 11, 1999 SOUND SOURCE INTERACTIVE, INC.
By /s/ Vincent J. Bitetti
---------------------------------------------
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 October 11, 1999
________________________________ Chief Executive Officer (principal
Vincent J. Bitetti executive officer)
/s/ Jeffrey Court Vice President of Finance and, October 11, 1999
________________________________ Acting Chief Financial Officer
Jeffrey Court
/s/ Richard Azevedo Director October 11, 1999
________________________________
Richard Azevedo
/s/ Mark A. James Director October 11, 1999
________________________________
Mark A. James
/s/ Samuel L. Poole Director October 11, 1999
________________________________
Samuel L. Poole
/s/ John Wholihan Director October 11, 1999
________________________________
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, 1999 will be
forwarded to stockholders.
23
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' (Deficit) Equity 4
Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-17
</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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' (deficit)
equity, and cash flows for each of the three years in the period ended June 30,
1999. 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 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 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, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements for the year ended June 30, 1999 have been
prepared assuming that the Company will continue as a going concern. As
described in Note 1 to the consolidated financial statements, the Company's
recurring losses from operations, negative working capital, and stockholders'
deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE, LLP
DELOITTE & TOUCHE, LLP
Los Angeles, California
September 10, 1999
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 10) 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 857,143 $ 693,741
Accounts receivable, net of allowance for doubtful accounts of $15,872
and $22,540 as of June 30, 1999 and 1998, respectively (Note 2) 575,521 2,383,132
Inventories (Note 3) 329,368 417,215
Prepaid royalties 1,243,889 1,866,044
Prepaid expenses and other 262,287 189,848
------------ ------------
Total current assets 3,268,208 5,549,980
PROPERTY AND EQUIPMENT, Net (Note 4) 245,274 409,129
OTHER ASSETS 16,762 15,703
------------ ------------
TOTAL $ 3,530,244 $ 5,974,812
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Notes 2 and 5) $ 1,998,512 $ 2,203,159
Accrued royalties 1,750,601 1,615,162
Deferred revenue 11,416 45,000
Short-term borrowings (Note 10) 331,043 -
Current portion of capital lease obligations (Note 5) - 2,913
------------ ------------
Total current liabilities 4,091,572 3,866,234
LONG TERM DEFERRED REVENUE 1,302,500 -
------------ ------------
Total liabilities 5,394,072 3,866,234
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' (DEFICIT) EQUITY (Notes 6 and 7):
Common stock, $.001 par value; 20,000,000 shares authorized;
5,869,402 and 5,649,974 shares issued and outstanding as of
June 30, 1999 and 1998, respectively 5,869 5,650
Warrants 559,928 559,928
Additional paid-in capital 14,302,877 14,297,872
Accumulated deficit (16,732,502) (12,754,872)
------------ ------------
Total stockholders' (deficit) equity (1,863,828) 2,108,578
------------ ------------
TOTAL $ 3,530,244 $ 5,974,812
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Product sales $ 4,556,442 $ 8,819,529 $ 4,524,447
Development fees and other 68,098 47,961 72,359
------------- ------------- -------------
Net revenues 4,624,540 8,867,490 4,596,806
COST OF SALES (Notes 2 and 5) 3,175,637 3,574,168 2,329,211
------------- ------------- -------------
GROSS PROFIT 1,448,903 5,293,322 2,267,595
------------- ------------- -------------
OPERATING EXPENSES:
Research and development (Note 5) 1,356,867 1,580,413 1,219,456
Sales and marketing (Note 5) 2,177,248 2,045,312 1,449,189
General and administrative (Notes 5 and 9) 1,828,381 1,839,386 1,988,213
Compensation in connection with stock options issued for
services rendered (Note 7) - 323,351 333,029
------------- ------------- -------------
Total operating expenses 5,362,496 5,788,462 4,989,887
------------- ------------- -------------
OPERATING LOSS (3,913,593) (495,140) (2,722,292)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 6,107 23,261 75,858
Interest expense (70,194) (24,521) (16,428)
Other income (Note 5) 3,250 1,000,000
Other expense (1,600) (800) (4,058)
------------- ------------- -------------
Total other income (expense) (62,437) 997,940 55,372
------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (3,976,030) 502,800 (2,666,920)
PROVISION FOR INCOME TAXES (Note 8) 1,600 1,600 1,600
------------- ------------- -------------
NET INCOME (LOSS) $ (3,977,630) $ 501,200 $ (2,668,520)
============= ============= =============
BASIC NET INCOME (LOSS) PER SHARE (Note 2) $ (0.68) $ 0.11 $ (0.61)
============= ============= =============
DILUTED NET INCOME (LOSS) PER SHARE (Note 2) $ (0.68) $ 0.10 $ (0.61)
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------------- Paid-in Accumulated
Shares Amount Warrants Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 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 6) 2,560,000 2,560 7,964,581 7,967,141
Issuance of common stock in connection with
exercise of employee stock options (Note 7) 41,275 41 2,436 2,477
Issuance of warrants in connection with public
offering (Note 6) 337,411 337,411
Issuance of warrants in connection with the
conversion of a note payable and accrued
interest to related party (Note 5) 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 7) 140,875 141 6,002 6,143
Issuance of common stock in exchange for
warrants (Note 5) 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
Issuance of common stock in connection with
exercise of employee stock options (Note 7) 219,428 219 5,005 5,224
Net loss (3,977,630) (3,977,630)
--------- ------ ---------- ----------- ------------ -----------
BALANCE, JUNE 30, 1999 5,869,402 $5,869 $ 559,928 $14,302,877 $(16,732,502) $(1,863,828)
========= ====== ========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,977,630) $ 501,200 $(2,668,520)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 182,446 144,014 108,007
Gain on sale of property and equipment (3,250)
Stock options issued for services rendered 323,351 333,029
Changes in operating assets and liabilities:
Accounts receivable 1,807,611 (1,022,014) (448,214)
Inventories 87,847 (188,538) 33,980
Prepaid royalties 622,155 (310,781) (926,587)
Prepaid expenses and other (72,439) (111,975) (62,009)
Accounts payable and accrued expenses (204,647) 874,898 240,714
Accrued interest (363,531)
Accrued royalties 135,439 4,721 1,067,637
Deferred revenue 1,268,916 33,000 (72,360)
----------- ----------- -----------
Net cash (used in) provided by operations (153,552) 247,876 (2,757,854)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (20,341) (138,688) (345,395)
Proceeds from sale of property and equipment 5,000
Other assets (1,059) (1,150) (1,653)
----------- ----------- -----------
Net cash used in investing activities (16,400) (139,838) (347,048)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 5,224 6,143 8,590,522
Proceeds from issuance of warrants 337,411
Repayment of notes payable (4,987,500)
Payments on capital lease obligations (2,913) (10,899) (27,057)
Short-term borrowing 331,043 (400,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 333,354 (4,756) 3,513,376
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 163,402 103,282 408,474
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 693,741 590,459 181,985
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 857,143 $ 693,741 $ 590,459
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
-5-
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the year for:
Interest $ 61,650 $ 24,521 $ 16,428
======== ======== ========
Income taxes $ 1,600 $ 1,600 $ 1,600
======== ======== ========
</TABLE>
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 ASSI, Inc.(see Note 5).
During 1997, the Company issued 2,016,657 stock purchase warrants in exchange
for a $500,000 note payable to ASSI, Inc. plus accrued interest of $4,164.
See accompanying notes to consolidated financial statements.
(Concluded)
-6-
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. GOING CONCERN
The accompanying financial statements for the year ended June 30, 1999 have
been prepared assuming that the Company will continue as a going concern. As
described below, the Company's recurring losses from operations, negative
working capital, and stockholders' deficit raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described below. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
At June 30, 1999, the Company had a working capital deficit of $823,364 and a
stockholder's deficit of $1,863,828. The Company also has had operating
losses of $3,913,593, $495,140, and $2,722,292 for the years ended June 30,
1999, 1998 and 1997, respectively.
In 1999, the Company signed an agreement with TDK International ("TDK"), a
global electronic components manufacturer with a distribution division of
children's edutainment software. TDK provided $2.1 million in the current
year in accordance with the agreement. The Company has entered into future
TDK development and distribution contracts totalling $2.2 million.
Management plans to reduce monthly operating costs, and to eliminate non-
value added costs. Management also seeks to obtain other sources of
financing to help fund their operations. Furthermore, management intends to
expand their product offerings and to strengthen their distribution channels
thereby raising the level of sales to sufficiently fund operations.
2. 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. (BWTL) (collectively, the "Company"), creates, develops, produces,
publishes and distributes 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.
-7-
<PAGE>
The Company's major customer for the years ended June 30, 1998 and 1997 was
Simon & Schuster Interactive Distribution Services ("SSIDS"). In 1999 SSIDS
transferred the Company's business to the MacMillan Distribution ("MD")
division. MD accounted for 52% of the consolidated revenues for the year
ended June 30, 1999. SSIDS accounted for 64% and 65%, of consolidated
revenues for the years ended June 30, 1998 and 1997 respectively. Universal
Home Video accounted for 22% of consolidated revenues for the year ended June
30, 1998, but did not account for more than 10% of consolidated revenues for
the years ended June 30, 1999 or 1997.
The Company's accounts receivable at June 30, 1999 are primarily due from MD.
JVC Disc America, Co. ("JVC") accounted for approximately 60% and 67% of
consolidated purchases for the year ended June 30, 1999 and 1998,
respectively. Wynalda Litho, Inc. accounted for approximately 22% of
consolidated purchases for the year ended June 30, 1999. Accounts payable to
JVC accounted for 33% and 65% of consolidated accounts payable and accrued
expenses as of June 30, 1999 and 1998, respectively.
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 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 and related
packaging materials, are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis.
-8-
<PAGE>
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 one and one-half to five years.
Leasehold improvements are amortized over the shorter of the lease term or
the estimated life of the improvement.
Long-Lived Assets - The Company periodically reviews the carrying value of
long-lived assets, and if undiscounted future cash flows are believed to be
insufficient to recover the remaining carrying value of a long-lived asset,
the carrying value is written down to its estimated fair value in the period
the impairment is identified.
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, 1999, 1998 and 1997, $507,476,
$225,000, $40,000, respectively, of such royalties were written-off 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 distributors is recognized as reported by such
distributors, net of estimated returns. Reserves for returns are based on
management's and third-party distributors' 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,
1999, all internal software development costs have been expensed because
software development costs subsequent to the technological feasibility stage
have not been material.
-9-
<PAGE>
Segment Reporting - As required by Statement of Financial Accounting
Standards ("SFAS") No. 131,"Disclosures about Segments of an Enterprise and
Related Information", the Company has reviewed its business activities and
determined that it does not have more than one operating segment as defined
by this statement. This determination was based on the management approach
which focuses on the way management organizes the Company's business
activities for making operating decisions and assessing performance. The
Company operates in one industry segment which includes the creation,
development, production, publishing and worldwide distribution of interactive
educational and entertainment software properties for personal computers.
Net Income (Loss) per Common Share - 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>
1999 1998 1997
<S> <C> <C> <C>
Basic EPS -
Weighted-average common shares
outstanding during the period 5,816,742 4,665,527 4,368,462
Incremental shares assumed to be
outstanding related to stock
options granted - 343,836 -
--------- --------- ---------
Diluted EPS -
Weighted-average common shares and
potential common shares during the
period 5,816,742 5,009,363 4,368,462
========= ========= =========
</TABLE>
Warrants to purchase approximately 812,000, 4,825,000 and 5,628,000 shares of
the Company's common stock at $4.60-$5.80 per share were outstanding for the
years ended June 30, 1999, 1998 and 1997, respectively, but were not included
in the computation of diluted EPS because the warrants were antidilutive.
Reclassifications - Certain reclassifications have been made to the 1998 and
1997 consolidated financial statements to conform with the current year's
presentation.
4. INVENTORIES
Inventories consisted of the following as of June 30:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Finished goods $229,992 $147,718
Raw materials (components) 99,376 269,497
-------- --------
$329,368 $417,215
======== ========
</TABLE>
-10-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30:
<TABLE>
<CAPTION>
Useful
1999 1998 Lives
<S> <C> <C> <C>
Leasehold improvements $ 7,781 $ 7,781 5 years
Computer equipment 628,786 618,499 1.5 year
Office furniture and equipment 79,539 83,343 5 years
--------- ---------
716,106 709,623
Accumulated depreciation and
amortization (470,832) (300,494)
--------- ---------
$ 245,274 $ 409,129
========= =========
</TABLE>
As of June 30, 1998, the Company had property and equipment with a total cost
of $21,631 and accumulated depreciation of $16,400, recorded under capital
leases (see Note 5). All capital leases expired during fiscal year 1999.
5. COMMITMENTS AND CONTINGENCIES
Employment Contracts - The Company has entered into employment contracts with
three of its employees, including one officer, 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, 1999:
<TABLE>
<CAPTION>
Years Ending
June 30,
<S> <C>
2000 $445,000
2001 360,000
2002 120,000
--------
$925,000
========
</TABLE>
Certain of the employment contracts provide for commissions based on net
revenues. Commissions under employment contracts for the years ended June
30, 1999, 1998 and 1997, amounted to $42,632, $53,086 and $41,633,
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.
-11-
<PAGE>
Future minimum lease payments as of June 30, 1999, due through May 31, 2002
under such leases, are as follows:
<TABLE>
<CAPTION>
Operating Lease Rent Deferred
Leases Payments Expense Rent
<S> <C> <C> <C>
2000 $144,698 $140,031 $ 4,667
2001 144,698 140,031 4,667
2002 132,642 136,534 3,892
-------- -------- --------
$422,038 $416,596 $ 13,226
======== ======== ========
</TABLE>
Rent expense under operating lease agreements totaled $156,511, $150,516 and
$106,474 for the years ended June 30, 1999, 1998 and 1997, respectively,
which are included in general and administrative expenses in the consolidated
statements of operations.
Capital Leases - The Company leased certain equipment and computers under
capital lease obligations with interest at rates ranging from 20.00% to
27.93% per annum. The leases expired in fiscal year 1999.
MacMillan/Simon & Schuster Distribution Agreement - On June 1, 1996, the
Company entered into a two-year distribution services agreement with SSIDS,
which terminated on May 31, 1998. Until February 5, 1999, when the Company
signed a new contract with MD, they operated with no formal distribution
agreement with these entities. The agreement grants MD exclusive right to
sell, distribute and provide inventory, warehousing and fulfillment services
for the Company's licensed products, in certain defined markets and
territories.
Pursuant to this agreement, MD 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.
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. 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 sales in the consolidated statement of operations. There
were no such royalties in fiscal year 1999.
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, 1999, 1998 and 1997, the
Company paid a total of $342,651, $408,016 and $403,036, 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 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.
-12-
<PAGE>
On April 24, 1998, the Company entered into a settlement agreement with ASSI,
Inc., NCD, Inc.; The Boston Group L.P.; Vincent J. Bitetti; Ulrich E.
Gottschling; Mark A. James; and Robert G. Kalik. Pursuant to the Settlement
Agreement, the Company has settled with prejudice two legal proceedings that
were pending against it, its Chairman and Chief Executive Officer Vincent J.
Bitetti, and its former 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
settlement 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 ended 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, which have 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.
On April 26, 1999 a former employee initiated a lawsuit claiming breach of
employment contract. The former employee claims a guaranteed bonus and
related penalties of $91,250 should be payable to him. The Company has
accrued for management's estimate of the settlement amount. The related
accrual is included in accounts payable and accrued expenses.
6. 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.
-13-
<PAGE>
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.
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 of $500,000, plus accrued interest of $4,164.
7. 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 of the Company.
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 grants 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 compensation expense was charged to operating
expenses for the year ended June 30, 1999 because all options were vested at
June 30, 1998.
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 1,000,000 options
for shares of the Company's common stock.
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.
-14-
<PAGE>
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, 1999 under both of the aforementioned plans:
<TABLE>
<CAPTION>
Weighted-
Average
Number Price
of Shares per Share
<S> <C> <C>
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 $1.34
Granted 60,000 $0.72
Exercised (219,428) $0.06
Canceled (231,248) $1.48
--------- -----
Balance, June 30, 1999 665,219 $1.66
========= =====
</TABLE>
The following summarizes pricing and term information for options outstanding
as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Weighted-
Number Average Weighted- Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 30, Contractual Exercise at June 30, Exercise
Prices 1999 Life Price 1999 Price
<S> <C> <C> <C> <C> <C>
$0.06 64,871 5 $0.06 64,871 $0.06
$0.625 -.$1.1875 329,349 6.3 $1.10 294,349 $1.14
$1.31-$1.97 68,833 8.6 $1.50 52,167 $1.35
$2.0625- $2.75 142,166 8.8 $2.38 87,750 $2.32
$4.5625-$5.00 60,000 8.5 $4.93 60,000 $4.93
------- -------
665,219 7.1 $1.66 559,137 $1.63
======= =======
</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 1999, 1998 and 1997 pursuant to SFAS No. 123 was
approximately $33,140, $538,027 and $685,182, respectively. Had the Company
adopted SFAS No. 123, pro forma net income (loss) would have been
($4,291,717), $195,398 and ($3,353,702), and pro forma basic net income
(loss) per share would have been $(0.74), $0.04 and
-15-
<PAGE>
$(0.77) for 1999, 1998 and 1997, 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
111%, a risk-free interest rate of 5.81%, and expected option lives of four
years.
8. INCOME TAXES
The provision for income taxes for the years ended June 30, 1999, 1998 and
1997 comprises minimum state taxes only.
A reconciliation of the provision for income taxes with the expected income
tax (benefit) provision computed by applying the federal statutory income tax
rate to income (loss) before provision for income taxes for the years ended
June 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax (benefit) computed at federal
statutory tax rate $(1,392,174) $ 175,700 $(933,422)
State and local taxes 1,600 1,600 1,600
Expenses not deductible for income
tax purposes 30,270 7,603 8,817
Other (268,977) 9,362 77,846
Change in the valuation allowance 1,630,881 (192,665) 846,759
----------- --------- ---------
$ 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, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Reserves and accrued liabilities $ 118,856 $ 79,027 $ 77,506
Net operating loss carryforwards 4,609,760 3,018,708 3,212,884
Valuation allowance (4,728,616) (3,097,735) (3,290,390)
----------- ----------- -----------
$ - $ - $ -
=========== =========== ===========
</TABLE>
At June 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $12,000,000 and $6,000,000, respectively,
available to offset future taxable federal and state income, respectively.
The federal and state carryforwards expire in varying amounts through 2019
and 2004, 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. Approximately 67% ($8,200,000) of the net
operating loss carryforward is subject to limitation.
-16-
<PAGE>
9. RELATED-PARTY TRANSACTIONS
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, respectively, which is included in general and
administrative expenses. No such expenses were incurred for fiscal year
1999.
10. LINE OF CREDIT
In September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services. The factoring agreement provides for
borrowings of up to $1,500,000 of the Company's qualified accounts
receivable balance, 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. At June 30, 1999, $331,043 was outstanding under
the line of credit, included in short-term borrowings in the consolidated
balance sheet.
11. STOCK DE-LISTING
As of September 10, 1999 the Company's shares have been delisted from the
Nasdaq Stock Market. The Company's common stock is expected to be eligible
for trading on the over the counter (OTC) Bulletin Board.
******
-17-
<PAGE>
EXHIBIT 10.20
SOUND SOURCE INTERACTIVE INC.
IONA SOFTWARE LTD.
REPUBLISHING ** MARKETING ** DISTRIBUTION
AGREEMENT
CHILDREN'S EDUCATION & EDUTAINMENT SOFTWARE
-------------------------------------------
This Agreement is made and entered into as of this first day of June, 1998,
which supersedes the Agreement dated December 5, 1996 which was as this new
Agreement is by and between:
Sound Source Interactive, Incorporated, a California Corporation, and carrying
on business at:
26115 Mureau Road, Suite B
Calabasas, CA 91302-3126
United States of America
hereinafter "SSII"
and
IONA Software Limited a company incorporated in Ireland and carrying on business
at:
Unit 6, IDA Enterprise Centre,
East Wall Road
Dublin 3, Ireland
hereinafter "IONA"
<PAGE>
Page 2
WHEREAS:
"SSII" is engaged in licensing, creating, developing and marketing and is
the sole and exclusive owner and / or licensee of the computer software products
(hereinafter "Articles") specified in Schedule "A" as attached hereto, and made
a part hereof, including the documentation and operating manuals therefor;
"SSII" proposes extending the market for the "Articles" by granting to
"IONA" the right to republish, market, distribute and sell copies of the same
outside the United States of America, within the countries (hereinafter
"Territory") as set forth in Schedule "B", which is made a part hereof, and in
accordance with conditions as set forth herein and as attached hereto;
"IONA" is engaged in the business of republishing, manufacturing marketing,
distributing and selling localized language versions of computer software and
wishes to acquire from "SSII" the right to carry on such business with respect
to the "Articles" as set forth in Schedule "A";
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, "IONA" and "SSII" agree as follows:
1. GRANT OF RIGHTS / SERVICES
A. "SSII" hereby grants to "IONA" and "IONA" hereby accepts the exclusive
right to republish the "Articles" (as set forth in Schedule "A") for the
purpose of creating localized language versions of the "Articles" and to
republish, manufacture, market, distribute, display, and sell the localized
language versions throughout the "Territory" (as set forth in Schedule
"B").
<PAGE>
Page 3
B. "SSII" shall not itself nor through agents or third parties publish,
republish, manufacture, market, distribute, display or sell the localized
language versions (non-English language version) in the "Territory" while
this "Agreement" is in force.
C. "SSII" shall not be liable to "IONA" for any loss or damage incurred as a
result of any unauthorized republishing, manufacturing, marketing,
distribution, displaying or of "Articles" in the "Territory" during the
term of this "Agreement".
D. "SSII" grants to "IONA" the right to make such adaptations (pending
original licensor approval) to the "Articles" as are necessary to develop
localized language versions of them and allow "IONA" to exercise its rights
under paragraph (a) and without prejudice to the generality of the
foregoing the right to use disks, manuals, CD's and read only memories and
the right to translate the "Articles" into any language approved by "SSII"
as listed in and in accordance with Schedule "A" and "B" of this
"Agreement" or as incorporated herein by amendment hereto. However, in
exercising its rights herein, "IONA" is not authorized to make any changes
to the function or content audio and / or visual) of the "Articles" without
the written consent of "SSII".
E. "SSII" does NOT grant to "IONA" ANY rights under paragraph (I-A) to
publish, republish, manufacture, market, distribute, sale, nor in any way
use the "Articles" through-sharing services or networks unless pre-approved
by "SSII".
<PAGE>
Page 4
F. As and when "SSII" develops new software products and chooses to have them
sold in the languages and in the "Territory" as listed in Schedule "B",
"IONA" is hereby granted right of first refusal and shall have sixty (60)
days from receipt of an "SSII" Beta CD to exercise such right of first
refusal. That period can be extended to ninety (90) days if requested in
writing by "IONA" then agreed to in writing by "SSII" to accept such offer.
Should "IONA" accept any or all such further software product, it shall be
regarded as a constituent part oft his "Agreement" and added by amendment
hereto and incorporated into the schedules herein accordingly.
2. TERM
A. This "Agreement" shall commence on July 1, 1998 and shall endure for a
period of thirteen (13) months through July 31, 1999 (the "Term"), subject
always to prior termination as herein specified and subject to continued
effectivity of "SSII"s" licensed properties.
B. Both parties shall use their best efforts to reach a mutual agreement on
any disputes, controversies or differences which may arise between the
parties, out of or in connection with this Agreement.
C Notwithstanding 2. A., either party may terminate this Agreement without
cause by giving ninety (90) day written notice to the other party. If such
notice is given by "SSII", "IONA" shall have a ninety (90) day sell off
period for all existing "SSII" licensed inventory and all work in progress
(W.I.P.) inventory.
<PAGE>
Page 5
MASTER DISK & TECHNICAL INFORMATION
A. "SSII" shall forthwith upon execution of this Agreement furnish "IONA" with
one master disk of the "Article" and reproducible copies of all available
file maintenance documentation, drawings, data, upgrade and "bug" lists
that are necessary to enable "IONA" to republish, manufacture, market,
distribute, sell and support the Articles", including but not limited to
the information contained in Schedule "C" "Master Disk & Technical
Information", as attached hereto.
B. "SSII" shall keep "IONA" fully informed of and issue "IONA" with any
changes, additions or modifications to the master disk and to such
documentation, drawings, data upgrade- and "bug " lists that have affect on
marketing, operations, performance, cost or support by furnishing "IONA"
with one reproducible copy of the modified master disk, within a fortnight
(14 days) of release of such revisions by "SSII".
C. "SSII" shall offer limited technical support of owner's (Rhode Island Soft
Systems, Digital Media, Inc. and Way Forward Technologies) "Source Code".
4. LICENSE FEE
A. "IONA" agrees to pay "SSII" the Republishing Fee as set forth in Schedule
"E" and made a part hereof as the same may be amended from time to time by
mutual agreement between the "SSII" and "IONA". The republishing fee will
be a percentage of "Net Sales."
<PAGE>
Page 6
B. The term "Net Sales" shall mean all moneys billed or billable by "IONA,"
from the exercise of its rights to distribute and sell licensed "Articles"
in the "Territory" before any allowances or discounts which have been
deducted from the normal selling price, inclusive of interest, monetary
correction, and any other payment charges whatsoever, less the following
items only:
(i) any sales, excise or value added taxes, which are
separately stated, and which are required to be
collected from customers as part of net sales, and
which are payable to taxing authorities; and
(ii) actual returns; and
(iii) actual quantity discounts; and
(iv) the actual cost of any premium purchased for
inclusion in a "bundle" with another "Article" and
(v) excluding freight, (if separately invoiced).
C. It is specifically understood and agreed that no deduction may be made for
any bad debts, or any reserves therefor, any manufacturing costs, importing
costs, selling costs, advertising costs, any real estate taxes, business
license taxes, net income taxes, franchise taxes, withholding taxes or any
other taxes not billed as part of net sales.
D. "Net Sales" shall not include any sales by "IONA" or its 'affiliated
companies to itself or its affiliated companies, the primary purpose of
which is the transfer of "Articles" for eventual resale. Republishing Fees
as a result of such sales shall be based upon and paid when the "Article"
is ultimately sold to the distributor, retailer, consumer or other
unaffiliated third party.
<PAGE>
Page 7
E "IONA" will pay all taxes, customs, duties, assessments,
excise except as provided in 4-B (i), and other charges
levied upon the importation of or assessed against the
"Article" under this "Agreement," as well as all "IONA's"
costs of doing business and "SSII" shall have no liability
therefor.
F. It is a material term and condition of this "Agreement"
that "IONA" report net sales on a country-by-country
and title-by-title basis. In the event "IONA" fails to do so,
"SSII" shall have the right to terminate this "Agreement,"
in accordance with the provisions herein.
G. "IONA" shall account to "SSII" the Republishing Fee by
making payment in accordance with Schedule "E" which is
made a part hereof.
5. INDEMNIFICATIONS:
A. "SSII" hereby indemnifies "IONA" and shall hold it harmless from any loss,
liability, damage, cost or expense arising out of any claims or suits which
may be brought or made against "IONA" by reason of the breach by "SSII" of
the warranties or representations as set forth herein.
B. "IONA" hereby indemnifies and agrees to hold "SSII" and its agents,
servants, employees, officers and directors harmless from any loss,
liability, damage, cost or expense arising out of any claims or suits which
may be made against "SSII" by reason of or alleging any unauthorized or
infringing use by "IONA" of any patent, process, trade secret, copyright or
other similar property in connection with the "Articles" or the Trademarks
covered by this
<PAGE>
Page 8
"Agreement" or by reason of any alleged defects (design, manufacturing,
handling or other).
6. APPROVALS / QUALITY / SAMPLES:
A. "IONA" agrees that the "Articles" as well as all packaging, labels,
press releases, advertising, promotion display or other material
prepared in connection with the "Articles" ("Collateral Materials"),
shall be of the highest standard and quality and shall ensure that all
"Articles" and the distribution thereof, comply with all applicable
laws throughout the "Territory".
B. "IONA" shall submit to "SSII" and "SSII" shall have absolute approval of
all republished "Articles" and all "Collateral Materials" at all relevant
stages of development and application thereof. "IONA" may not republish,
manufacture, market, display, distribute or sell any "Articles" until and
unless "IONA" has received "SSII"s" prior written approval. The terms of
this paragraph shall be deemed material to the "Agreement".
C. In the event "IONA" is not the manufacturer of the "Articles", "IONA" shall
be subject to the prior written approval of "SSII and its Licensor(s),
(which approval shall not be unreasonably withheld), entitled to utilize a
third party manufacturer in connection with the manufacture and production
of the "Articles" provided that such manufacturer shall execute a letter in
the form of Exhibit 1 attached hereto and by this reference made a part
hereof. In such event, "IONA" shall remain primarily obligated to "SSII"
and its Licensor(s) under all of the provisions of this "Agreement". In no
event shall any such authorization include the right to grant any
additional authorization or any sublicense whatsoever.
<PAGE>
Page 9
D. Any submission not expressly approved in writing by "SSII" within fourteen
(14) days after submission shall be deemed disapproved. "SSII" will provide
"IONA" with written reasons for its disapproval. All such material
submitted by "IONA" to "SSII" shall be at "IONA's" expense.
E. "IONA" shall supply "SSII" with twenty-five (25) samples of each Article in
each localized language produced, at the time of first distribution. A
Republishing Fee shall not be payable on such samples. "SSII" may purchase
additional samples (for promotional purposes) as reasonably necessary at
"IONA's" actual cost.
F. "SSII" may purchase from "IONA" localized language version of "Articles" as
authorized and produced here under at actual cost, for direct sale within
the United States of America, its Territories, Commonwealth Nations and
Free Associated States.
7. COPYRIGHT AND TRADEMARK
A. All ownership of copyrights and trademarks in "Articles" republished
hereunder, as well as all artwork, packaging, copy, literary text,
advertising material of any sort, shall be in such names and all such items
shall bear copyright and trademark notices and any other legal notices as
"SSII" directs.
B. "IONA" shall furnish all applicable notices and markings as appropriate
and as otherwise required by local governments within the "Territory."
<PAGE>
Page 10
8. RESERVATION OF RIGHTS:
A. All rights of "SSII" not expressly granted herein to "IONA" are hereby
expressly reserved by "SSII" or its designees without restriction.
B. "IONA" acknowledges that the right to republish as granted herein, does not
include any right, title, or interest in or to the Proprietary Subject
Matter nor to any copyrights, patents, and / or trademarks therein or
associated therewith.
C. "IONA" acknowledges that this Agreement relates solely to the Proprietary
Subject Matter. "IONA" is not, by virtue of this Agreement acquiring any
right whatsoever in any motion picture or television production or other
endeavor which is based upon, derivative of, or otherwise related to the
Proprietary Subject Matter, including without limitation, remakes, sequels,
sound recordings, publications, or copyrights and / or trademarks in the
Proprietary Subject Matter.
D. With respect to the Proprietary Subject Matter, "SSII" reserves unto itself
and / or its designees the right to manufacture, sell, advertise, promote,
display and otherwise exploit software product similar and / or identical
to the "Articles" outside "Territory."
<PAGE>
Page 11
9. UNDERTAKINGS by "SSII"
A. "SSII" shall respond to requests from "IONA" for end user software support
in accordance with the level of support specified in Schedule "D" as
attached hereto and incorporated herein. For such purposes "SSII" shall
employ and maintain employment of suitably qualified personnel (English
speaking only) to operate an efficient call control desk during normal
office hours of 0730 to 1700, Pacific Standard or Daylight Saving Time,
Monday through Friday inclusive, excluding public holidays as celebrated in
the United States of America.
B. "SSII" shall prepare, compile, maintain and update the master disks and
related documentation at its own cost to enable "JONA" to satisfactorily
develop localized language versions and to market, distribute, sell and /
or otherwise support the "Articles"in accordance with the terms of this
Agreement and to provide "IONA" with such documentation or sufficient
access thereto or to the appropriately qualified personnel for such
purposes.
C "SSII" shall satisfactorily resolve any defect in the "Article" and for
such purpose shall forthwith take all such action and / or make available
all such facilities to rectify the defect. This only extends to operation
on systems as used in the USA. Any factors unique to other nations is the
responsibility of "IONA" to adjust or compensate for.
D "SSII" shall provide "IONA" at mutually agreed intervals or at such
reasonable times or at the request of "IONA" with information concerning
"Articles", enhancements, current developments, support and any changes
relating to ultimate users, customers and activities of competitors and
such other matters and information in any way relating to the constructive
performance of this "Agreement".
<PAGE>
Page 12
E "SSII" warrants that the "Articles" are reliable and robust for the
purposes of marketing, is not-infringing on third party intellectual
property rights and complies with all rules and regulations laid down by
any society, institution or other body to which the "Articles" may relate
and that "SSII" shall continually reflect any changes required by such
societies, institutions or bodies.
F. "SSII" warrants to "IONA" that each master disk of the
software issued to "IONA" upon execution hereof or from
time to time hereafter shall be free from such faults,
defects, "bugs" or inadequacies as would restrict "IONA"
from marketing and / or supporting the "Articles".
G. "SSII" agrees that within a period of five (5) working days from
notification of the same and in any other case, as soon as possible, to
rectify or replace free of charge a Master Disk of an "Article" found
faulty, defective or inadequate, upon receipt of "IONA", and shall
forthwith replace each such master disk of the "Article" with one
incorporating appropriate corrections.
10. MUTUAL UNDERTAKINGS of "SSII" and "IONA"
It is mutually understood and agreed that neither "SSII" nor "IONA" shall incur
any liability on behalf of the other or in any way to pledge to the others
credit or accept any order or make any contract binding upon the other without
obtaining prior written consent.
<PAGE>
Page 13
11. UNDERTAKINGS by "IONA":
A. "IONA" agrees to use its best efforts and optimum abilities in its
endeavors to republish, manufacture, market, distribute and sell copies of
the "Articles" and generally to market the "Articles" in a form which at
least meets the same standards of quality as that established by "SSII" in
the original "SSII" released product.
B. "IONA" agrees to support the "Articles" in good operational order to such
standards as are generally accepted throughout the PC software application
industry.
C. "IONA" agrees not to market or deal with the "Articles" in any way with any
party so as to bring the "Article" or its name nor "SSII"s" name into
disrepute or in which would otherwise affect the marketability of the
"Article."
D "IONA" agrees to maintain and retain complete and
accurate books and records relating to any obligation
assumed by "IONA" under this "Agreement." "SSII" or its
designee through the use of a certified public accountant,
upon two weeks prior notice and during the term of this
"Agreement" and for two years following the expiration
or termination, to inspect and examine and make copies
'of such books, records, and correspondence, as "SSII" may
deem appropriate to determine the accuracy of account
ings and reports made pursuant to this "Agreement." All
accountings and reports made pursuant to the "Agreement"
and all accountings and reports rendered by
"IONA" under this "Agreement" shall be deemed "binding"
unless objected to in writing by "SSII" within two years
of the statement's being rendered.
<PAGE>
Page 14
12. LIABILITY:
"SSII" shall not be liable to "IONA" or any other person for loss or damage
arising directly in connection with the "Article" developed by "IONA" or any
modification, variation, enhancement or upgrade thereof, and any documentation,
manual or training relating thereto.
13. COPYRIGHTS:
"SSII" agrees to protect and save harmless and defend at its own expense "IONA"
from and against any and all claims of infringement of copyrights, patents,
trade marks, industrial designs or other property rights issued under the laws
of any country affecting the "Article."
14. CONFIDENTIAL INFORMATION:
The parties have imparted and may from time to time impart to the other certain
confidential information relating to the "Article," successor "Article" or other
software, marketing or support thereof including specifications and copyright
manuals therefor.
Each party hereby agrees that it will use such confidential information solely
for the purposes of this Agreement and that it shall not disclose, whether
directly or indirectly, to any third party such information other than as
required to carry out the purposes of this Agreement.
Where disclosure is essential, such party will prior to any disclosure obtain
from such third parties duly binding agreements to maintain in confidence the
information to be disclosed to the same extent at least as the parties are so
bound hereunder.
<PAGE>
Page 15
15. EXPIRATION or TERMINATION of "AGREEMENT":
A. Notwithstanding any other provisions herein contained, this Agreement may be
terminated by notice in writing from the non- breaching party if any of the
following events shall occur: (1) If the other party shall commit any act
of bankruptcy, shall have a receiving order made against it, shall make or
negotiate for any composition or arrangement with or assignment for the
benefit of its creditors or present a petition or have a petition presented
by a creditor for its winding up or shall enter into any liquidation (other
than for the purpose of reconstruction or amalgamation), shall call a
meeting of its creditors, shall have a receiver of all or any of its
undertakings or "assets appointed, shall be unable to pay its debts, shall
cease to carry on business or avail of any debtor relief law; (2) If the
other party shall at any time be in default under this Agreement and shall
fail to remedy such default within thirty (30) days from receipt of notice
in writing specifying such default.
B. If any such event referred to in (1) or (2) above shall occur, termination
shall become effective forthwith or on such later date set forth in such
notice.
C. In the event "SSII" commits a material breach of this "Agreement", "SSII"
shall reimburse "IONA" 50% of the Localization costs expended to the date
of termination if termination date is within the first six (6) months of
the effectivity date of this "Agreement".
<PAGE>
Page 16
D. In the event "IONA" does not commence in good faith to republish,
manufacture, market, distribute, and sell each "Article" throughout the
"Territory" and on or before the Marketing Date specified in Schedule "B"
(page 1) "IONA" shall, by default, forfeit that specific nation(s) as an
authorized "Territory" which or wherein "IONA" fails to meet said marketing
date requirements.
E. "IONA" agrees to use its best efforts to republish manufacture, distribute
and sell the "Articles" throughout the Territory, specifically, it shall:
(i) Republish, manufacture, distribute and sell "Articles" in such price
and quality brackets as are required to meet competition by manufacturers
of similar articles;
(ii) Make and maintain adequate arrangements for the distribution of the
"Articles" throughout the "Territory;"
(iii) Will not deliver or sell "Articles" outside the "Territory" or
knowingly sell "Articles" to a third party for delivery outside the
"Territory."
F. This "Agreement" may be terminated without cause by
either party by giving ninety (90) days written notice to
the other party. Sell-off period will not be effected by
the exercise of such termination rights.
G. "SSII" shall have the right to terminate this "Agreement"
without prejudice to any right which it may have in the
promises, whether in law, or in equity, or otherwise, upon
the occurrence of any one or more of the following events
(herein called "defaults"):
(i) If "IONA" defaults in the performance of any of its
obligations provided for in this "Agreement;" or
(ii) If "IONA" shall fail to make any payment due
hereunder on the date due; or
<PAGE>
Page 17
(iii) If "IONA" fails to deliver any of the statements herein referred to
or to give access to the premises and / or records pursuant to the
provisions hereof to "SSII"s" authorized representatives for the
purposes permitted hereunder, and such failure shall continue for
ten (10) days after written notice thereof is sent by "SSII" to
"IONA;" or
(iv) If any governmental agency finds that the "Articles" produced by
"IONA" are defective in any way, manner or form; or
(v) If "IONA" shall republish, manufacture, sell or distribute,
whichever first occurs, any of the "Articles" without the prior
written approval of "SSII" as provided herein; or
(vi) If "IONA" has made a material misrepresentation or has omitted to
state a material fact necessary to make the statements misleading.
16. RENEWABILITY:
Ten days prior to the expiration of this Agreement, the parties shall have
completed negotiations in good faith with a view to its renewal.
17. FORCE MAJURE:
"IONA" shall be under no liability to "SSII" in any way whatsoever for
destruction, damage, delay or any other matters of the nature whatsoever arising
out of war, rebellion, civil commotion, strikes, lock-outs and industrial
disputes, fire, explosion, earthquake, act of GOD, flood, drought or bad
weather, the unavailability of delivers or supplies or requisitioning or other
act or order by any
<PAGE>
Page 18
government department, council or other constituted body that could not have
been reasonably foreseen by a reasonably prudent business officer in the
'Territory".
18. ASSIGNMENT:
This "Agreement" is NON-ASSIGNABLE without the prior written consent of "SSII",
nor shall this "Agreement" inure to any other company in the event "IONA"
amalgamates or is incorporated by another, without "SSII's" written approval.
19. NOTICES:
Any notice required or permitted under the terms of this Agreement or required
by statute, law or regulation shall (unless otherwise provided) be in writing
and shall be delivered in person, sent by registered- mail or by DHL or Federal
Express, properly posted and fully pre-paid in an envelope properly addressed or
to such other address as may from time to time be designated by notice
hereunder. Any such notice shall be in the English language and shall be
considered to have been given at the time when actually delivered, or in any
event within fourteen (14) days after it was mailed in the manner as herein
provided.
20. AGREEMENT:
This Agreement supersedes any arrangements, understandings, promises or
agreements made or existing between the parties hereto prior to or
simultaneously with this Agreement and constitutes the entire understanding
between the parties hereto. Except as otherwise provided herein, no addition,
amendment to or modification of this Agreement shall be effective unless it is
in writing and signed by and on behalf of both.
<PAGE>
Page 19
21. HEADINGS:
The headings of the paragraphs of this Agreement are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
22. SEVERABILITY:
In the event that any of these terms, conditions or provisions shall be
determined invalid, unlawful or unenforceable to any extent such term,
condition, or provision shall be severed from the remaining terms, conditions
and provisions which shall continue to be valid to the fullest extent permitted
by law.
23. LAW:
The parties hereby agree that this Agreement and the provisions hereof shall be
construed in accordance with U.S. law and it is agreed that the Courts of
California, in and for the County of Los Angeles, have jurisdiction to settle
any disputes which may arise out of or in connection with this Agreement.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
the day and year as herein set forth at the effectivity date.
SIGNED for and on behalf of "SSII"
_____________________________ _____________
SIGNED for and on behalf of "IONA"
_____________________________ _____________
<PAGE>
Page 20
"SSII" - "IONA" EXHIBIT I
----------
Sound Source Interactive, Inc.
Attn.: Legal Compliance Section
2985 E. Hillcrest Drive, Suite A
Westlake Village, CA 91362
Gentlemen:
This letter will serve as notice to you that pursuant to Paragraph 6-C of
the Agreement dated June 1, 1998 between you and IONA Software Ltd., we have
been engaged as the manufacturer for IONA Software in connection with the
manufacture of the "Articles" as defined in the aforesaid Agreement. We hereby,
acknowledge we are cognizant of the terms and conditions set forth in said
Agreement and hereby, agree to observe those provisions of said Agreement which
are applicable to our function as manufacturer of the "Article (s)". It is
understood that this engagement is on a royalty free basis. We further agree
that we shall have no right to manufacture, sell or utilize the "Articles" or
Trademarks to advertise, promote or publicize ourselves or such manufacture in
any, manner of form.
We understand that our engagement as the manufacturer for "IONA" is subject
to your written approval. We request, therefore, that you sign in the space
below, thereby showing your acceptance of our engagements as aforesaid.
Very truly yours,
( manufacturer )
By-: ____________________ _____________________
Signature date
____________________ _____________________
print name phone / fax
_____________________________________________________________________
address
AGREED TO AND ACCEPTED BY:
SOUND SOURCE INTERACTIVE, INC.
_______________________________ ________________
signed date
AGREED TO AND ACCEPTED BY:
"PRIMARY LICENSOR"
_______________________________ ________________
signed date
<PAGE>
Page A-1
SCHEDULE "A" "Articles"
- -------------- ----------
Titles of the computer software referred to in the "Agreement" as the "Articles"
and as set forth herein below made a part of and incorporated into the
"Agreement" as follows:
MOVIEBOOK - TITLE:
- ------------------
BABE: A LITTLE PIG GOES A LONG WAY
FREE WILLY 2
THE LAND BEFORE TIME
AN AMERICAN TAIL
ALL DOGS GO TO HEAVEN II
ACTIVITY CENTER - TITLE
- -----------------------
THE LAND BEFORE TME
CASPER: A SPIRITED BEGINNING
LEARNING ADVENTURE - TITLE
- --------------------------
LOST IN SPACE
THE LAND BEFORE TIME - MATH ADVENTURE
<PAGE>
Page B-1
SCHEDULE "B" "Language & Territories"
- ------------ ------------------------
"LANGUAGE:"
"Articles" licensed and approved by "SSII" to be developed and manufactured by
"IONA" in the Localized Languages as set forth herein below ONLY, is made a part
of and is incorporated into the "Agreement" as follows:
French Spanish
Swedish Italian
Danish Japanese
German Portuguese
Dutch Norwegian
Finnish
MARKETING DATE:
"IONA" shall republish, manufacture, distribute and commence the marketing,
throughout the "Territory" of 90% of the "Articles" (titles and languages) not
later than December 31, 1998. Sequence of titles and languages selection shall
be in accordance with "IONA's" own sound business judgment If "IONA" fails to
commence marketing and distribution of "Articles" in any country of or
substantial portion of the "Territory", "SSII", in addition to any another other
remedies available to it hereunder, may, by giving 'written notice thereof to
"IONA", to terminate the license granted hereunder With respect to such
"Articles" within such portion of the "Territory". Notice shall be effective
thirty (30) days after being given.
<PAGE>
Page B-2
"TERRITORY"
"SSII" authorizes the "Localized Language" version of "Articles to be
distributed for sale by "IONA" in the following countries, which constitute the
"Territory It as referred to herein and is incorporated into and made a part of
the "Agreement":
1. European nations of
<TABLE>
<CAPTION>
<S> <C> <C> <C>
France Spain Portugal Italy
Germany Netherlands Belgium Denmark
Norway Sweden Finland Iceland
</TABLE>
in Localized non-English language version only
2. South American nations / products are limited to:
BABE FREE WILLY 2
- ---- ------------
Brazil Brazil
Argentina Argentina
Chile Chile
Colombia Colombia
Bolivia Bolivia
Ecuador Ecuador
Peru Peru
CASPER LBT A/C
- ------ -------
Brazil Brazil
Argentina Argentina
Chile Chile
Colombia Colombia
Bolivia Bolivia
Ecuador Ecuador
Peru Peru
Product - by - Product / Country - by - Country basis in Localized non-English
language version only
<PAGE>
Page B-3
Asian nations:
Product - by - Product / Country - by - Country basis
in Localized non-English language version only
Japan: MovieBooks only.
<PAGE>
Page C-1
SCHEDULE "C" "MASTER DISK & TECHNICAL INFORMATION"
- ------------
"SSII" will supply to "IONA" information on:
1. Program files on disk;
Where the files are to be found; menu files and control programs.
2. Data files on disk;
Where the files are to be found; their structure, e.g. records, fields,
characters (enough information to enable "IONA" to access the data)
3. Interaction of program / data files
4. Utility programs / recovery programs to look at data files; for the
reconstruction of data / records and executables.
A. Bug list on current release and updates
B. Documentation
C. Information on future plans / development
<PAGE>
Page D-1
SCHEDULE "D" "Support Level"
- -----------------
A. Call Control Desk (0730 to 1700 M-F)
B. Rhode Island Soft Systems Technical Support
C. Digital Media International
D. Way Forward Technologies
E. Other
<PAGE>
Page E-1
SCHEDULE "E" "Republishing Fee & Payment"
- ------------
All payment to "SSII" shall be in United States Dollars, although the
computation of revenues will be in local currencies.
1. Republishing Fee
A. Royalty for the first one hundred and twenty days (0- 120) from
the date of release of each localized SKU shall be 25% of Net Sales
or S3.00 per unit, which ever is greater.
B. Royalty for each localized SKU that has been released for over
one hundred and twenty (120 +) days shall be 25% of Net Sales or
$2.00 per unit, which ever is greater.
C. Royalty for each localized SKU that has been released for over two hundred
and ten days (210 +) shall be 25% of the Net Sales or S1.50 per unit, which ever
is greater.
2. Republishing Fee shall be payable
No later than twenty days after the close of the calendar quarter in which
product is sold by "IONA" in the format set forth on page E-2 hereof. All
payments to "SSII" shall be in United States Dollars, although the computation
of revenues will be in local currencies.
Payments shall be made via 'Wire Transfer":
3. Reporting & Report Format:
Reports are due quarterly, per "Article" / per Language, whether or not a
Republishing Fee is due. The Reports shall be on a title-by-title, country by
country basis..
Report format shall be the same as that set forth on page E-2.
<PAGE>
Page E-2
SCHEDULE "E"
- -------------
PRODUCT: BABE: A LITTLE PIG GOES A LONG WAY
----------------------------------
COUNTRY QTY SOLD $US
- ------- -------- ---
Br BRAZILIAN
- --------------------------------------------------------------------------------
DK DANISH
- --------------------------------------------------------------------------------
N DUTCH
- --------------------------------------------------------------------------------
K FINNISH
- --------------------------------------------------------------------------------
F FRENCH
- --------------------------------------------------------------------------------
G GERMAN
- --------------------------------------------------------------------------------
T ITALIAN
- --------------------------------------------------------------------------------
J JAPANESE
- --------------------------------------------------------------------------------
H NORWEGIAN
- --------------------------------------------------------------------------------
Po PORTUGUESE
- --------------------------------------------------------------------------------
E SPANISH
- --------------------------------------------------------------------------------
S SWEDISH
<PAGE>
EXHIBIT 10.21
SOUND SOURCE INTERACTIVE, INC.
&
T D K RECORDING MEDIA EUROPE
REPUBILISING ~ MARKETIG ~ DISTRIBUTION
AGREEMENT
CHILDREN'S EDUCATION & EDUTAINMENT SOFTWARE
-------------------------------------------
This Agreement, made and entered into as of this first day of November, 1998, is
by and between:
Sound Source Interactive, Incorporated, a California Corporation, and carrying
on business at:
26115 Mureau Road,
Suite B Calabasas, CA 91302-3126
United States of America
Hereinafter "SSII"
And
T D K Recording Media Europe SA, a company located in the Grand Duchy of
Luxembourg and carrying on business at:
Z.I. Bommelscheuer
L-4901 Bascharge
Grand-Duchy of Luxembourg
Hereinafter "TDK"
E - 1
<PAGE>
WHEREAS:
"SSII" is engaged in licensing, creating, developing and marketing and is
the sole and exclusive owner and / or licensee of the computer software products
(hereinafter "Articles") specified in Schedule "A" as attached hereto, and made
a part hereof, including the documentation and operating manuals thereof;
"SSII" proposes extending the market for the "Articles" by granting to
"TDK" the right to republish, market, distribute and sell copies of the same
outside the United States of America, within the countries (hereinafter
"Territory") as set forth in Schedule "B", which is made a part hereof, and in
accordance with conditions as set forth herein and as attached hereto;
"TDK" is engaged in the business of republishing, manufacturing, marketing,
distributing and selling localized language versions of computer software and
wishes to acquire from "SSII" the right to carry on such business with respect
to the "Articles" as set forth in Schedule "A";
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, "TDK" and "SSII" agree as follows:
1. GRANT OF RIGHTS / SERVICES
A. "SSII" hereby grants to "TDK" and "TDK" hereby accepts the exclusive
right to republish the "Articles" (as set forth in Schedule "A") for
the purpose of creating localized language versions of the "Articles"
and to republish, manufacture, market, distribute, display, and sell
the localized language versions throughout the "Territory" (as set
forth in Schedule "B").
B. "SSII" shall not itself nor through agents or third parties knowingly
publish, republish, manufacture, market distribute, display or sell the
localized language versions (non-English or American English language
version) in the "Territory" while this "Agreement" is in force.
C. "SSIl" shall not be liable to "TDK" for any loss or damage incurred as
a result of any unauthorized republishing, manufacturing, marketing,
distribution, displaying or of "Articles" in the "Territory" during the
term of this "Agreement "
D. "SSII" grants to "TDK" the right to make such adaptations (pending
original licensor approval) to the "Articles" as are necessary to
develop localized language versions of them and allow "TDK" to exercise
its rights under paragraph 1-A and without prejudice to the generality
of the foregoing the right to use disks, manuals, CD's and read only
memories and the right to translate the "Articles" into any language
approved by "SSII" as listed in and in accordance with Schedule "A" and
"B" of this "Agreement". Adaptations mean also the right
E - 1
<PAGE>
for "TDK" to adapt the "Articles" by making such changes as "TDK" deems
appropriate to bring the "Articles" in line with the specific cultural
requirements of each country within the "Territory".
However, in exercising its rights herein, "TDK" is not authorized to
make any change to the function or content (audio and / or visual) of
the "Articles" without the written consent of SSIl" (such consent not
to be unreasonably withheld) except for necessary adaptations required
by each localized language. All approvals shall be deemed given unless
"TDK" is notified to the contrary within twenty-one (21) calendar days
of "SSII" receipt of localized adaptation requirements. Once given,
approval shall be irrevocable.
E. In the event "TDK" does not commence the distribution or the sale of
the localized language versions specified in Schedule "B" within the
"Territory" six (6) months after the delivery of the Localization Kit,
"TDK" grants "SSII" the right to republish, manufacture market,
distribute, and sell the localized language versions that "TDK" failed
to distribute in the "Territory" within the period mentioned above.
F. "SSII" does NOT grant to "TDK" ANY rights under paragraph (1-A) to
publish, republish, manufacture, market, distribute, sale, nor in any
way use the "Articles" through time-sharing services or networks or
rentals except on line demos of products for promotional purposes (as
set forth in Clause 7-A)unless pre-approved by "SSII"'.
G. As and when "SSII" develops new software products and chooses to have
them sold in the languages and in the "Territory" as listed in Schedule
"B", "TDK" is hereby granted right of first refusal and shall have
sixty (60) days from receipt of an "SSII" Beta CD to exercise such
right of first refusal. That period can be extended to ninety (90) days
if requested in writing by "TDK" and if then agreed to in writing, by
"SSII" to accept such offer. Should "TDK" accept any or all such
further software product, it shall be regarded as a constituent part of
this "Agreement" and added by amendment hereto and incorporated into
the schedules herein accordingly."SSII" shall not distribute such
software or grant any third party any rights in such software prior to
expiry of the relevant period referred to in this paragraph 1-
For the Term of this Agreement, "TDK" shall have a right of first
refusal in the manner set forth in this Agreement.In the event that
"SSH" publishes any "Articles" or new software in PSX, Nintendo 64,
Sega Dream Cast or Gameboy format and wishes to license the rights to
adapt such titles for distribution in the Territory, "SSII" shall
notify "TDK" in writing, of its intention to do so. "SSII" shall then
negotiate exclusively with "TDK" with respect to such rights for a
ninety (90) day negotiation period commencing on the date that "TDK"
receives such notice. Should "TDK" accept any or all such further
formats, it shall be regarded as a constituent parts of this Agreement
and added by amendment hereto and incorporated into the Schedules
herein accordingly. "SSII" shall not distribute such formats or grant
any third party any rights in such formats prior to expiry of the
relevant period referred to in this paragraph 1-
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H. In addition, "SSIP agrees to negotiate exclusively with "TDK" to
distribute the "Articles" mentioned in Schedule "A" in an extended
"Additional Territory" as set forth in Schedule "E".
2. TERM
A. This "Agreement" shall commence on November 1, 1998 and shall endure
for a period of thirty-six (36) months through October 31, 2001 (the
"Term"), subject always to prior termination as herein specified and
subject to continued effectivity of "SSII's" licensed properties.
B. Both parties shall use their best efforts to reach a mutual agreement
on any disputes, controversies or differences which may arise between
the parties, out of or in connection with this Agreement.
3. MASTER DISK & TECHNICAL INFORMATION
A. "SSII" shall forthwith upon execution of this Agreement furnish "TDK"
with two Localization Kits of each "Article" and reproducible copies of
all available file maintenance documentation, drawings, data, upgrade
and "bug," lists that are necessary to enable "TDK" to republish,
manufacture, market, distribute, sell and support the "Articles". Each
Localization Kit delivered to "TDK" shall comply with the checklist
mentioned in Schedule "C" "Localization Kit & Technical Information"
attached hereto.
B. "SSII" shall keep "TDK" fully informed of and provide "TDK" with any
changes, additions or modifications to the master disk and to such
documentation, drawings, data upgrade and "bug" lists that have effect
on marketing, operations, performance, cost or support by furnishing
"TDK" with one reproducible copy of the modified "Master disk, within a
fortnight (14 days) of release of such revisions by "SSII".
C. "SSII" shall offer limited technical support of "Source Code".
4. LICENSE FEE
A. As set forth below, "TDK" shall pay "SSII" a Republishing fee of four
(4) USD ($4.00) per unit for all units of the localized language
versions sold by "TDK" such fee based on total invoiced sales less
returns. For the avoidance of doubt no royalties shall be payable on
review, advertising samples or other promotional copies. Except as
otherwise set forth herein, royalties shall be due and payable within
forty-five (45) days of the close of each calendar quarter. In
addition, as set forth below, "TDK" guarantees to "SSII" a total
minimum royalty advance payment of nine hundred thousand ($900,000.00)
USD. The total minimum non-refundable Republishing fee
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advance payment shall be recoupable against royalty payments due to
"SSII" for the first two hundred and twenty-five thousand (225,000)
units sold anywhere in the Territory. This total minimum royalty
advance payment shall be paid in accordance with the schedule mentioned
below:
"TDK" guarantees to "SSII" a total minimum royalty advance payment of
nine hundred thousand ($900,000.00) USD. The total minimum
nonrefundable Republishing fee advance payment shall be recoupable
against royalty payments due to "SSII" for the first two hundred and
twenty-five thousand (225,000) units sold anywhere in the Territory.
This total minimum royalty advance payment shall be paid in accordance
with the schedule mentioned below:
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Land Before Time 50,000 units $4.00 $200,000.00 (US)
Math Adventure
- -------------------------------------------------------------------------------------------------
Land Before Time 50,000 UNITS $4.00 $200,000.00 (US)
Kindergarten Adv.
- -------------------------------------------------------------------------------------------------
Babe Pre-School 30,000 units $4.00 $120,000.00 (US)
- -------------------------------------------------------------------------------------------------
Babe Early Reader 30,000 units $4.00 $120,000.00 (US)
- -------------------------------------------------------------------------------------------------
Casper Early Reader 40,000 units $4.00 $160,000.00 (US)
- -------------------------------------------------------------------------------------------------
An American Tail 25,000 units $4.00 $100,000.00 (US)
- -------------------------------------------------------------------------------------------------
Total 225,000 units $4.00 $900,000.00 (US)
- -------------------------------------------------------------------------------------------------
</TABLE>
The Advances shall be paid by "TDK" with respect to each Localized Version
to "SSII" according to the following, schedule:
1) Forty percent (40%), three hundred and sixty thousand dollars (US)
($360,000.00) of the total advance for the six "SSII" Software
titles upon execution of this Agreement and in exchange for "TDK's"
receipt of Localization Kits for all six titles designated in
Schedule "A".
2) Thirty percent (30%) of the total advance, two hundred and seventy
thousand dollars (US) ($270,000.00) for the localized version of
each "SSII's" software total to be paid upon "TDK's" submission to
"SSII" of the "Gold Master" (first localized version per title).
3) Thirty percent (30%) of the total advance, two hundred and seventy
thousand dollars (US) ($270,000.00) of the total advance for each
localized version of each "SSIP software title to be paid within
sixty (60) days after first customer ship date of such localized
version.
B. In the event that the parties enter into an agreement (as set forth in
Article I H for the "Additional Territory" mentioned in Schedule E
"TDK" shall pay a Re-publishing fee of four US dollars ($4.00) per unit
of the "Articles" sold by "TDK" in the
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<PAGE>
"Additional Territory" mentioned in Schedule "E", such fee to be based
on total invoiced sales less returns. For the avoidance of doubt, no
re-publishing fee shall be payable on review, advertising, samples and
on promotional copies.
C. Within thirty (30) days after the March 31, June 30, September 30 and
December 31 of each year during the period this "Agreement" shall be in
force and effect, "TDK" hereby undertakes to submit to "SSII", even in
case of no sales, a statement in writing, setting forth with respect to
the preceding quarterly period:
a) The quantities of "Articles" manufactured by "TDK".
b) The quantities of "Articles" sold Territory by Territory,
specifying the quantities for each type (language) of "Articles"
referred to in Schedule "A".
c) The royalty amount of each type of said "Articles" sold due to
"SSII". "TDK" shall pay to "SSII" in US dollar within forty-five
(45) Days after the end of each quarterly period, the royalty due
hereunder.
D. In case of expiration or termination of this "Agreement'', all
"Articles" manufactured prior but remaining in stock with "TDK" at the
date of expiration or termination can be sold, distributed, used, or
disposed of by "TDK" as set forth in Clause 15.F. 'TDK" shall respect
the reporting obligation as set forth in Clause 4.C.
E. All payments to "SSII" referred to in this Agreement" shall be effected
by wire transfer in US dollars to Sound Source Interactive, Inc. bank
number: WELLS FARGO BANK, 8812 CORBIN AVENUE, NORTHRIDGE, CALIFORNIA
91324, USA Name of Account: Sound Source Interactive, Inc., Business
Checking Acct. Acct No.: 0747-563716 ABA Routing # 121-000248
F. All stamp duties, taxes and other similar levies originating from or in
connection with the execution of this "Agreement" under Luxembourg law
shall be borne by "TDK". However, in the event that the government of a
country imposes any income taxes on payments hereunder by "TDK" to
"SSII" and requires "TDK" to withhold such tax from such payments.
"TDK" may deduct such tax from such payments. In such event, "TDK"
shall promptly furnish "SSII" with tax receipts issued by appropriate
tax authorities so as to enable "SSII" to support a claim for credit
against income taxes which may be payable by "SSII" in the United
States of America.
G. In order that the royalties and reports provided for in Article 4 may
be verified, "TDK" agrees to ensure that full, complete and accurate
books and records shall be kept, covering all sales or other disposals
of "Articles" by "TDK", for a period of two (2) years following each
quarterly report.
H. It is agreed that the books and records of "TDK" may be audited from
time to time, but not more that once in each calendar year, by an
independent certified public accountant appointed by "SSII" and
reasonably acceptable to "TDK", to the extent
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<PAGE>
necessary to verify the accuracy of the aforementioned statements and
payments. Such inspection shall be completed at "SSII's" own expense.
I. Re-publishing fees are set forth in Article 4 and made a part hereof as
the same may be amended from time to time by mutual agreement between
the "SSII" and "TDK". The republishing fee will be based on a "per unit
sold" and not subject to adjustments for:
i. any sales, excise or value added taxes, which are separately stated,
and which are required to be collected from customers as part of net
sales, and which are payable to taxing authorities; and
ii. actual returns; and
iii. actual quantity discounts; and
iv. the actual cost of any premium purchased for inclusion in a "bundle"
with another "Article" and
v. excluding freight, (if separately invoiced).
J. It is specifically understood and agreed that no deduction may be made
for any bad debts, or any reserves therefor, Vy manufacturing costs,
importing costs, selling costs, advertising, costs, any real estate
taxes, business license taxes, net income taxes, franchise taxes,
withholding taxes or any other taxes not otherwise accounted for in the
"Agreement".
K. "Total Unit Sales" shall not include any sales by "TDK" or its
affiliated companies to itself or its affiliated companies, the primary
purpose of which is the transfer of "Articles" for eventual resale. Re-
publishing Fees as a result of such sales shall be based upon and paid
when the "Article" is ultimately sold to the distributor, retailer,
consumer or other unaffiliated third party.
L. "TDK" will pay all taxes, customs, duties, assessments, excise except
as provided in 4 F (i) and other charges levied upon the importation of
or assessed against the "Article" under this "Agreement," as well as
all "TDK" costs of doing, business and "SSII" shall have no liability
therefor.
M. It is a material term and condition of this "Agreement" that "TDK"
report total unit sales on a country-by-country and title-by-title
basis.
5. INDEMNIFICATIONS:
A. "SSII" hereby indemnifies "TDK" and shall hold it harmless from any
loss, liability, damage, cost or expense arising out of any claims or
suits which may be brought or made against "TDK" by reason of the
breach of the warranties or representations as set forth herein.
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<PAGE>
B. "TDK" hereby indemnifies and agrees to hold "SSII" and its agents,
servants, employees, officers and directors harmless from any loss,
liability, damage, cost or expense arising out of any claims or suits
which may be made against "SSII" by reason of or alleging any
unauthorized or infringing use by "TDK" of any patent, process, trade
secret, copyright or other similar property in connection with the
"Articles" or the Trademarks covered by this "Agreement" or by reason
of any alleged defects (design, manufacturing, handling or other) of
the "Articles" manufactured by "TDK" other than as a result of any
breach of this "Agreement" by "SSII "..
6. APPROVALS / QUALITY / SAMPLES:
A. "TDK" agrees that the "Articles" as well as all packaging labels, press
releases, advertising, promotion display or other material prepared in
connection with the "Articles" ("Collateral Materials"), shall be of
the highest standard and quality and shall ensure that all "Articles"
and the distribution thereof, comply with all applicable laws
throughout the "Territory".
B. "TDK" shall submit to "SSII" and "SSII" shall have absolute approval of
all republished "Articles" and all "Collateral Materials" at all
relevant stages of development and application thereof. "TDK" may not
republish, manufacture, market, display, distribute or sell any
"Articles" until and unless "TDK" has received "SSII's" prior written
approval. The terms of this paragraph shall be deemed material to the
"Agreement".
C. In the event "TDK" is not the manufacturer of the "Articles", "TDK"
shall be subject to the prior written approval of "SSII" and it's
Licensor(s), (which approval shall not be unreasonably withheld),
entitled to utilize a third party manufacturer in connection with the
manufacture and production of the "Articles" provided that such
manufacturer shall execute a letter in the form of Exhibit 1 attached
hereto and by this reference made a part hereof. In such event, "TDK"
shall remain primarily obligated to "SSII" and its Licensor(s) under
all of the provisions of this "Agreement". In no event shall any such
authorization include the right to grant an additional authorization or
any sublicense whatsoever.
D. "TDK" will send the "Gold Master Candidate" for the localized language
versions to "SSII" in a timely, fashion to permit "SSII"' to complete
the acceptance described in Article 6.D prior to the initial
publication of the localized language version. Acceptance shall be
deemed given unless "TDK" is notified to the contrary within twenty-one
(21) calendar days of "SSII's" receipt of "Gold Master Candidate". The
"Gold Master Candidate" will be deemed acceptable as the "Gold Master"
when (i) they perform at a level of performance equal to or greater
than that of the "SSII" title; and (ii) the changes in the "Articles"
have been made in accordance with the requirements mentioned in Article
1. In addition to the "Gold Master Candidates", "TDK" will send samples
of printed documentation and packaging to "SSII" for
E - 1
<PAGE>
approval in a timely fashion to permit "SSII" to review such materials,
such acceptance not to be unreasonably withheld. Acceptance shall be
deemed given unless "TDK" is notified to the contrary within twenty-one
(21) calendar days of "SSII's" receipt of such materials. Once given,
approval shall be irrevocable. All such material submitted by "TDK" to
"SSII" shall be at "TDK's" expense.
E. "TDK" shall supply "SSII" with twenty-five (25) samples of each
"Article" in each localized language produced, at the time of first
distribution. A Republishing fee shall not be payable on such samples.
F. "SSII" may purchase from "TDK" localized language versions of
"Articles" as authorized and produced hereunder at a reasonable price
(such price shall include costs, sales expense and a reasonable margin)
for direct sale outside the Territory and the Additional Territory. The
License Fee shall not be payable on such purchases.
7. ADVERTISING AND PROMOTIONAL ACTIVITIES
A. "TDK" shall be entitled for the term of this Agreement to realize
advertising campaigns of the "Articles" by printed media, radio and TV
advertising throughout the Territory.
"TDK" has the right to use free of charge "SSII's" name, image,
likeness, software characters, software animations and other elements
of the "Articles" for printed media, on-line, radio and TV advertising
throughout the Territory.
"TDK" shall also be entitled to establish an Internet site (or create a
page(s) in connection with "TDK's*' Internet site) subject in all
respects to approval in accordance with 7-D below, containing
information and advertising related to the "Articles".
B. "TDK" shall be entitled for the term of this Agreement to create
marketing communication material and Press release to promote the
Software throughout the Territory.
"TDK" shall be entitled to use, at its own expense, "SSII's" name,
image, likeness, software characters, software animations and other
elements of the "Articles" for production of promotional items such as
posters, stickers, header cards, leaflets, catalogues, demos, and any
other promotional items that "TDK" deems necessary for promotional
activities.
"TDK" shall also be entitled to use software characters, software
animations, demos and other elements of the software on "TDK" products
for the purpose of promoting "Articles"
C. "SSII" will provide "TDK", free of charge, with sufficient existing
photographs, logos, software character pictures and software animations
and other elements of the "Articles"
E -1
<PAGE>
for the purpose contemplated in clauses A and B. This material will be
delivered to "TDK" forthwith upon delivery of the Localization Kit.
"SSII" will provide "TDK", free of charge, with necessary guidelines
on material delivered to "TDK" for the purpose of allowing "TDK" an
appropriate usage of the material.
D. All material produced by "TDK" shall be submitted to I'"SSII"' for
prior approval. All approvals shall be deemed given unless "TDK" is
notified to the contrary within fifteen (15) days of "SSII's" receipt
of material. In the event that any request for approval is denied,
"SSII" shall provide specific reasons therefore and suggest how to
alter same to make it acceptable. Once given, approval shall be
irrevocable.
8. COPYRIGHT AND TRADEMARK:
A. All ownership of copyrights and trademarks in "Articles" republished
hereunder, as well as all artwork, packaging copy, literary text,
advertising material of any sort, shall be in such names and all such
items shall bear copyright and trademark notices and any other legal
notices as "SSII" directs.
B. "TDK" shall furnish all applicable notices and markings as appropriate
and as otherwise required by local governments within the "Territory.
9. RESERVATION OF RIGHTS:
A. All rights of "SSII" not expressly granted herein to "TDK" are hereby
expressly reserved by "SSII" or its designates without restriction.
B. "TDK" acknowledges that the right to republish as granted herein, does
not include any right, title, or interest in or to the Proprietary
Subject Matter nor to any copyrights, patents, and / or trademarks
therein or associated therewith.
C. "TDK" acknowledges that this Agreement relates solely to the
Proprietary Subject Matter. "TDK" is not, by virtue of this Agreement,
acquiring any right whatsoever in any motion picture or television
production or other endeavor which is based upon, derivative of, or
otherwise related to the Proprietary Subject Matter, including-,
without limitation, remakes, sequels, sound recordings, publications,
or copyrights and / or trademarks in the Proprietary Subject Matter.
D. With respect to the Proprietary Subject Matter, "SSII" reserves unto
itself and / or its designates the right to manufacture, sell,
advertise, promote, display and otherwise exploit software product
similar and / or identical to the "Articles" outside "Territory."
10. UNDERTAKINGS by "SSII"
A. "SSII" shall respond to requests from "TDK" for end user software
support in accordance with the level of support specified in Schedule
"D" as attached hereto and
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<PAGE>
incorporated herein. For such purposes "SSII" shall employ and maintain
employment of suitably qualified personnel (English speaking only) to
operate an efficient call control desk during normal office hours, of
0730 to 1700, Pacific Time, Monday through Friday inclusive, excluding
public holidays as celebrated in the USA, and via e-mail and the
internet.
B. "SSII" shall prepare, compile, maintain and update the master disks and
related documentation at its Own cost to enable "TDK" to satisfactorily
develop localized language versions and to market, distribute, sell and
/ or otherwise support the "Articles" in accordance with the terms of
this Agreement and to provide "TDK" with such documentation or
sufficient access thereto or to the appropriately qualified personnel
for such purposes.
C. "SSII" shall satisfactorily resolve any defect in the "Article" and for
such purpose shall forthwith take all such action and / or make
available all such facilities to rectify the defect. This only extends
to operation on systems as used in the USA. Any factors unique to other
nations is the responsibility of "TDK" to adjust or compensate for.
D. "SSII" shall provide "TDK", at mutually agreed intervals or at such
reasonable times or at the request of "TDK", with information
concerning, "Articles", enhancements, current developments, support and
any changes relating to ultimate users, customers and activities of
competitors and such other matters and information in any way relating
to the constructive performance of this "Agreement".
E. "SSII" warrants that the "Articles" are reliable and robust for the
purposes of marketing, is not infringing on third party intellectual
property rights and complies with all rules and regulations laid down
by any society, institution or other body to which the "Articles" may
relate and that "SSII" shall continually reflect any changes required
by such societies, institutions or bodies .
F. "SSII" warrants to "TDK" that each master disk of the software issued
to "TDK" upon execution hereof or from time to time hereafter shall be
free from such faults, defects, "bugs" or inadequacies as would
restrict "TDK" from marketing and / or supporting the "Articles".
G. "SSII" agrees that within a period of five (5) working days from
notification of the same and in any other case, as soon as possible, to
rectify or replace free of charge a Master Disk of an "Article" found
faulty, defective or inadequate, upon receipt of "TDK", and shall
forthwith replace each such master disk of the "Article" with one
incorporating, appropriate corrections.
11. MUTUAL UNDERTAKINGS of "SSII" and "TDK"
It is mutually understood and agreed that neither "SSII" nor "TDK"
shall incur any liability on behalf of the other or in any way to
pledge to the others credit or accept any
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<PAGE>
order or make any contract binding upon the other without obtaining
prior written consent and that nothing in this "Agreement" should be
interpreted as creating a partnership between the parties.
12. UNDERTAKINGS by "TDK":
A. "TDK" agrees to use its best efforts and optimum abilities in its
endeavors to republish, manufacture, market, distribute and sell copies
of the "Articles" and generally to market the "Articles" in a form
which at least meets the same standards of quality as that established
by
"SSII" in the original "SSII" released product.
B. "TDK" agrees to use its reasonable endeavors to support the "Articles"
in good operational order to such standards as are generally accepted
throughout the PC software applications of similar nature and quality
of "Articles".
C. "TDK" agrees not to market or deal with the "Articles" in any way with
any party so as to bring the "Article" or its name nor "SSII's" name
into disrepute or in which would otherwise affect the marketability of
the "Article."
12. LIABILITY:
"SSII" shall not be liable to "TDK" or any other person for loss or
damage arising, directly in connection with the "Article" developed by
"TDK" or any modification, variation, enhancement or upgrade thereof,
and any documentation, manual or training relating thereto.
13. COPYRIGHTS:
"SSII" agrees to protect and save harmless and defend, at its own
expense, "TDK" from and against any and all claims of infringement of
copyrights, patents, trade marks, industrial designs or other property
rights issued under the laws of any country affecting the "Article."
14. CONFIDENTIAL INFORMATION:
The parties have imparted and may from time to time impart to the other certain
confidential information relating to the "Article," successor "Article" or other
software, marketing or support thereof including specifications and copyright
manuals therefor.
Each party hereby agrees that it will use such confidential information solely
for the purposes of this Agreement and that it shall not disclose, whether
directly or indirectly, to any third party such information other than as
required to carry out the purposes of, this Agreement.
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<PAGE>
Where disclosure is essential, such party will, prior to any disclosure, obtain
from such third parties duly binding agreements to maintain in confidence the
information to be disclosed to the same extent at least, as the parties are so
bound hereunder.
15. EXPIRATION or TERMINATION of "AGREEMENT":
A. "SSII" may terminate this "Agreement" with immediate effect by
registered mail notice in any of the following circumstances:
1) "TDK" defaults in due and punctual payment of any amount due to
"SSII" pursuant to this "Agreement" for more than thirty (30) days
after written notice of summons to pay from "SSII";
2) "TDK" is in breach of any other provision contained in this
"Agreement" and such breach has not been remedied within thirty
(30) days from "SSII" written notice;
3) "TDK" is declared bankrupt or put under receivership;
4) "TDK" or any of its employees deliberately make false statements in
reports;
5) If employees, officers or directors of "TDK" commit or are under
formal investigation for allegedly having committed criminal acts
or other acts of moral turpitude which could damage "SSII's"
reputation.
B. "TDK" may terminate this "Agreement" with immediate effect by
registered mail notice in any of the following circumstances:
1) "SSII" is in breach of any other provision contained in this
"Agreement" and such breach has not been remedied within thirty
(30) days from "TDK's" written notice, especially for the breach of
"SSII's" obligation to license all the rights to "TDK".
2) "SSII" is declared bankrupt or put under receivership;
3) If any dispute arises between any of the persons directly or
indirectly interested in the management or shareholdership of
"SSII's" business which affects the business relationship between
"TDK" and "SSII";
4) If employees, officers or directors of "SSII" commit or are under
formal investigation for allegedly having committed criminal acts
or other acts of moral turpitude which could damage "TDK's"
reputation.
C. In the event "SSII' commits a material breach of this "Agreement",
"SSII" shall reimburse "TDK" (i) 50% of the Localization costs expended
to the date of
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<PAGE>
termination (ii) 100% of the advance payment if termination date is
within the first six (6) months of the effectivity date of this
"Agreement". The remedies set out in this section 15.C are in addition
to and not instead of remedies provided by law.
D. "TDK" agrees to use its reasonable endeavors to republish, manufacture,
distribute and sell the "Articles" throughout the "Territory" provided
always that, in the exercise of "TDK's" reasonable judgment, it makes
good commercial sense to do so, specifically, it shall:
1) Republish, manufacture, distribute and sell "Articles" in such
price and quality brackets as are required to meet competition by
reputable manufacturers of similar articles;
2) Make and maintain adequate arrangements for the distribution of the
"Articles" throughout the "Territory".
3) Not deliver or sell "Articles" outside the "Territory" or knowingly
sell "Articles" to a third party for delivery outside the
"Territory".
E. Upon termination pursuant to Article 15. A, "TDK" shall immediately
cease any further license, sale, distribution, use or disposal of any
"Articles" mentioned in Schedule "A", if applicable, and "TDK" may at
its discretion (i) return all units in "TDK's" possession or control to
"SSII"or destroy such units, in which case no royalty for said returned
units will be due and payable, or (ii) retain said units for sale or
distribution and pay the royalty due as if all such units had been sold
during, the calendar quarter prior to the quarter in which "SSII"
delivered notice of termination.
F. Upon termination pursuant to Article 15. B, "TDK" may at its discretion
sell, distribute, use or otherwise dispose of all units already
manufactured and pay the royalty due pursuant to this Agreement. Under
no circumstances shall either party be liable to the other for
incidental or consequential damages, whether foreseeable or not,
including lost profits, direct or indirect damages, costs of goods,
promotion, advertising or any other cost, charge or damage.
16. WARRANTIES:
A. "SSII" represents, warrants and covenants to "TDK" as follows:
(a) "SSII" has the full right and legal authority to enter into and fully
perform this "Agreement" in accordance with its terms;
(b) "SSII" is fully able to grant "TDK" the rights it grants herein and
represents that these rights are granted free and clear of any and all
claims and encumbrances and that the exercise by "TDK" of such rights will
not infringe the rights of any third party;
E - 1
<PAGE>
(c) "SSII" declares that is authorized to grant the rights of use concerning
the "Articles" mentioned in Schedule "A" of this "Agreement" and which are
the subject of this "Agreement" and it vouches for the "TDK's" right to the
same;
(d) "SSII" guarantees that referring to the production, utilization and
exploitation of the "Articles", all rights of manufacture and use required
for the exploitation of the "Articles" as contemplated in this "Agreement"
have been duly acquired and do not infringe upon any personal or other
rights of software utilization by a third party. "SSII" must hold "TDK"
harmless in this matter from and against claims made by third parties
related to third parties holding rights on such "Articles".
(e) For the avoidance of doubt all rights wholly controlled by "SSII" shall be
licensed to "TDK" for use in accordance with this "Agreement" without
charge.
(f) "SSII" declares and warrants that the rights hereby granted have neither
been granted in whole nor part to a third party, that a third party neither
has the right to exercise them nor has been entrusted with the care of such
rights and that "SSII" will not seek to exploit such rights itself. "SSII"
indemnifies "TDK" as well as any other party who may obtain the rights
granted in this "Agreement" from claims of a third party, which may be
imposed in connection with the utilization of rights granted in this
"Agreement".
(g) This "Agreement" when executed and delivered by "SSII" and "TDK" will be
le-al, valid and binding, obligations enforceable against "SSII" in
accordance with its terms, except to the extent that enforcement thereof
may be limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally;
(h) The execution, delivery and performances of this "Agreement" by "SSII" does
not and will not violate or cause a breach of any other agreements or
obligations to which it is a party or by which it is bound, and no approval
or other action by any governmental authority or agency is required in
connection herewith; Each of the foregoing representations, warranties and
covenants shall be true at all times. "SSII" acknowledges that each of such
representations, warranties and covenants are deemed to be material and
have been relied upon by "TDK" notwithstanding any investigation made by
"TDK". "SSII" has not entered and will not enter into any agreement,
commitment or other arrangement, which affects or diminishes any of the
rights herein granted to "TDK".
(k) The "SSII" Localization Kit'will be free from faults, bugs or other defects
and capable of performing in accordance with the requirements imposed on
developers of games for the PC and/or Apple computers and, to the extent
that "TDK" is granted the relevant rights.
(l) There is no litigation and "SSII" is not aware of any pending or threatened
litigation with respect to the "Articles".
B. "TDK" represents, warrants and covenants to "SSII" as follows:
E -1
<PAGE>
(a) "TDK" has the full right and legal authority to enter into and fully
perform this "Agreement" in accordance with its terms;
(b) This "Agreement" when executed and delivered by "TDK" and "SSII" will be
legal, valid and binding obligations enforceable against "TDK" in
accordance with its terms, except to the extent that enforcement thereof
may be limited by bankruptcy, insolvency or other similar laws affecting
creditor's rights generally; The execution, delivery and performances of
this "Agreement" by "TDK" does not and will not violate or cause a breach
of any other agreements or obligations to which it is a party or by which
it is bound, and no approval or other action by any governmental authority
or agency is required in connection herewith;
(c) Each of the foregoing representations, warranties and covenants shall be
true at all times. "TDK" acknowledges that each of such representations,
warranties and covenants are deemed to be material and have been relied
upon by "SSII" notwithstanding any investigations made by "SSII"'.
(d) "TDK" is not entitled to transfer sub-license or assign any rights granted
in this "Agreement" to a third party without "SSII's" prior written consent
(such consent not to be unreasonably withheld).
17. SUCCESSORS AND ASSIGNS:
Neither party shall assign its rights and/or obligations under this
"Agreement" without the prior written approval of the other party (such
approval not to be unreasonably withheld). This "Agreement" and all of the
terms and provisions hereof will be binding upon, and will inure to the
benefit of, the parties hereto, and their respective successors and
approved assigns.
18. MISCELLANEOUS:
(a) Each of the individuals executing, this "Agreement" certifies that he or
she is duly authorized to do so.
(b) The rights and remedies set forth herein are intended to be cumulative, and
the exercise of any one right or remedy by either party shall not preclude
or waive its exercise of any other rights or remedies hereunder or pursuant
to law.
(c) This "Agreement" may be executed in counterparts.
19. RENEWABILITY:
Three months prior to the expiration of this "Agreement", the parties shall
have completed negotiations in good faith with a view to its renewal.
20. FORCE MAJEURE:
E - 1
<PAGE>
"TDK" shall be under no liability to "SSII" in any way whatsoever for
destruction, damage, delay or any other matters of the nature whatsoever
arising out of war, rebellion, civil commotion, strikes, lock-outs and
industrial disputes, fire, explosion, earthquake, act of God, flood,
drought or bad weather, the unavailability of deliveries or supplies or
requisitioning, or other constituted body that could not have been
reasonably foreseen by a reasonably prudent business officer in the
"Territory". At any time following ninety (90) days after commencement of a
force major event, either party may elect to terminate the term of this
"Agreement" pursuant to clause 15.F
21. NOTICES:
Any notice required or permitted under the terms of this Agreement or
required by statute, law or regulation shall (unless otherwise provided) be
in writing and shall be delivered in person, sent by registered mail or by
DHL or Federal Express, properly posted and fully pre-paid in an envelope
properly addressed or to such other address as may from time to time be
designated by notice hereunder. Any such notice shall be in the English
language and shall be considered to have been given at the time when
actually delivered, or in any event within fourteen (14) days after it was
mailed in the manner as herein provided.
22. AGREEMENT:
This Agreement supersedes any arrangements, understandings, promises or
agreements made or existing between the parties hereto prior to or
simultaneously with this Agreement and constitutes the entire
understanding, between the parties hereto. Except as otherwise provided
herein, no addition, amendment to or modification of this Agreement shall
be effective unless it is in writing, and signed by and on behalf of both
parties.
23. HEADINGS:
The headings of the paragraphs of this Agreement are inserted for
convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
24. SEVERABILITY:
In the event that any of these terms, conditions or provisions shall be
determined invalid, unlawful or unenforceable to any extent such term,
condition, or provision shall be severed from the remaining terms,
conditions and provisions which shall continue to be valid to the fullest
extent permitted by law.
25. LAW:
E - 1
<PAGE>
The Parties hereby agree that this Agreement and the provisions hereof
shall be construed in accordance with U.S. law and it is agreed that the
Courts of California, in and for the County of Los Angeles, have
jurisdiction to settle any disputes which may arise out of or in connection
with this Agreement.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
the day and year as herein set forth at the effective date.
SIGNED for and on behalf of Sound Source Interactive, Inc. "SSII"
- ---------------------------------- --------------------------------------------
SIGNED for and on behalf of TDK Recording; Media Europe S.A. "TDK"
- ---------------------------------- --------------------------------------------
E -1
<PAGE>
SCHEDULE "A" "Articles"
- ------------
Titles of the computer software referred to in the "Agreement" as ie "Articles"
and as set forth herein below made a part of and incorporated into the
"Agreement" as follows:
- -------------------------------------------------------------------------------
MOVIEBOOK - TITLE
- -----------------
- ------------------------------------- WIN / MAC
AN AMERICAN TAIL
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ACTIVITY CENTER - TITLE
- -----------------------
- ------------------------------------- WIN / MAC
BABE Preschool
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LEARNING ADVENTURE - TITLE
- --------------------------
- -------------------------------------
BABE: Early Reader Win/Mac
Casper: Early Reader Win/Mac
LAND BEFORE TIME: Math Adventure Win/Mac
ANF BEFORE TIME: Kindergarden Adv. Win/Mac
- -------------------------------------------------------------------------------
E - 1
<PAGE>
SCHEDULE "B" "Language & Territories"
- ------------
LANGUAGE:
"Articles" licensed and approved by "SSII" to be developed and manufactured by
"TDK" in the Localized Languages as set forth herein below ONLY, is made a part
of and is incorporated into the "Agreement" as follows:
French German
Spanish UK England
Italian Swedish
MARKETING DATE:
"TDK" intends to introduce these six (6) languages in six (6) months after the,
delivery of the Localization Kit. "TDK" has no obligation to commence the
distribution of the localized languages versions in all the nations of the
Territory within six (6) months after the delivery of the Localization Kit.*
In case that "SSII" wishes to introduce other languages in he Territory, "TDK"
is granted the right of first refusal and shall have sixty (60) days from
receipt of "SSII" proposal to exercise such right of first refusal. If "TDK"
wants to introduce other languages in the Territory, "TDK" and "SSII" will
negotiate in good faith the ten-ns and conditions of the Agreement.
[Hand written notation "IF" not scanned/included in italics:]
* If "TDK" fails to introduce all the localized languages in the time mentioned
above, "TDK" grants "SSII" the right to introduce the missing localized
languages by itself or through any other third party in the Territory after this
period.
E -1
<PAGE>
"TERRITORY'
"SSII" authorizes the "Localized Language" version of "Articles" to be
distributed for sale by "TDK" in the following countries, which constitute the
"Territory" as referred to herein and is incorporated into and made a part of
the "Agreement":
European nation of:
- ------------------------------------------------------------------------------
1) All EU nations:
- ------------------------------------------------------------------------------
Austria Greece
- ------------------------------------------------------------------------------
Belgium Rep. Of Ireland
- ------------------------------------------------------------------------------
Denmark Italy
- ------------------------------------------------------------------------------
Finland The Netherlands
- ------------------------------------------------------------------------------
France Portugal
- ------------------------------------------------------------------------------
Germany Spain
- ------------------------------------------------------------------------------
Grand-Duchy of Luxemborg Sweden
- ------------------------------------------------------------------------------
United Kingdom
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
2)Non EU nations
- ------------------------------------------------------------------------------
Andora Norway Switzerland Israel
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
3) Spanish speaking Latin
American nations
- ------------------------------------------------------------------------------
Argentina Ecuador Paraguay
- ------------------------------------------------------------------------------
Bolivia El Salvador Peru
- ------------------------------------------------------------------------------
Chile Guatemala Puerto Rico
- ------------------------------------------------------------------------------
Columbia Honduras Trinidad & Tobago
- ------------------------------------------------------------------------------
Costa Rica Mexico Uruguay
- ------------------------------------------------------------------------------
Cuba Nicaragua Venezuela
- ------------------------------------------------------------------------------
Dominican Republic Panama
- ------------------------------------------------------------------------------
In Localized non-American English language version only.
- ------------------------------------------------------------------------------
E - 1
<PAGE>
S C H E D U L E " C " "GOLD DISK & TECHNICAL INFORMATION"
- ---------------------
"SSH" will supply to "TDK" information on:
1. Program files on disk;
Where the files are to be found; menu files and control programs.
Data files on disk,
Where the files are to be found; their structure, e.g. records, fields,
characters (enough information to enable "TDK" to access the data)
3. Interaction of program / data files
4. Utility programs / recovery programs to look at data files; for the
reconstruction of data / records and executables.
Bug list on current release and updates
B. Documentation
C. Information on future plans / development
E - 1
<PAGE>
SCHEDULE "D" "Support Level"
- ------------
A. Call SSII Control Desk (0730 to 1700 M-F)
B. Way Forward Technologies
C. Other
E - 1
<PAGE>
SCHEDULE "E" "Additional Territory"
- ------------
"SSII" agrees to guarantee "TDK" the option to include the "Articles" set forth
in Schedule "A" in the following "Additional Territories" and respective "
Languages":
- ------------------------------------------------------------------------------
Albania Estonia Morocco
- ------------------------------------------------------------------------------
Algeria Hungary Poland
- ------------------------------------------------------------------------------
Bosnia-Herzegovina Iceland Romania
- ------------------------------------------------------------------------------
Bulgaria Latvia Serbia-Montenegro
- ------------------------------------------------------------------------------
Croatia Lithuania Slovakia
- ------------------------------------------------------------------------------
Cyprus Macedonia Slovenia
- ------------------------------------------------------------------------------
Czech Republic Malta Tunisia
- ------------------------------------------------------------------------------
12 CIS states (Russia, Ukraine, Belarus, Georgia, Armenia, Azerbaijan,
Kazakhstan, Kyrgyzstan, Tajilustan, T urkmenistan, Moldova, and Uzbekistan).
No option fee for the Additional Territory and the relevant languages shall be
due to "SSII"'. If "SSII11 wishes to cover some countries of the Additional
Territory and wants to introduce other languages, "TDK" is granted right of
first refusal and shall have sixty (60) days from receipt of 11SSII11 proposal
to exercise such right of first refusal. If "TDK" wants to commence distribution
of the "Articles77 in the Additional Territory in the relevant languages, "TDK"
and "SSII" will negotiate in good faith the terms and conditions of the
Agreement.
E - 1
<PAGE>
EXHIBIT 10.22
APPENDIX
--------
TO
--
REPUBLISHING - MARKETING - DISTRIBUTION
---------------------------------------
AGREEMENT
---------
Between
Sound Source Interactive, Incorporated
A Corporation, having its registered office in 26115 Mureau Road,
Suite B, Calabasas, CA 91302-3126, United States of America
Hereinafter "SSII"
And
TDK Recording, Media Europe S.A.
A company having its registered office in Z.1. Bornmelscheuer,
L-4901 Bascharage, Grand-Duchy of Luxembourg
Hereinafter "TDK"
Whereas,
The parties decided to enter into a republishing - marketing - distribution
agreement ("Agreement"). In extension to the Agreement, SSII agreed to warrant
the manufacture and market of the "Articles" to TDK for the duration of the term
of the Agreement.
NOW, THEREFORE, it as been agreed as follows:
ARTICLE I - WARRANTY
With respect to the "Proprietary Subject Matter", SSII warrants that all
"Articles" are and shall continue to be under current and continuing license
from original Licensor and thereby available to TDK to manufacture and market
for the duration of the term of the Agreement.
ARTICLE 2 - BINDING CONDITION
This Appendix is an integral part of the republishing - marketing - -
distribution agreement signed between SSII and TDK and can not be executed
separately. The same binding obligations stipulated in the republishing -
marketing - distribution agreement governs this Appendix.
So done in duplicate, in Luxembourg, on 11, December 1998.
SIGNED for and behalf of Sound Source Interactive, Inc. "SSII"
SIGNED for and on behalf of TDK Recording Media Europe S.A. "TDK"
1
<PAGE>
ADDENDUM TO REPUBLISHING -
MARKETING - DISTRIBUTION AGREEMENT
This Addendum, made and entered into as of this first day of March, 1999, is by
and between;
Sound Source Interactive, Incorporated, a California Corporation, and carrying
on business at:
26115 Mureau Road, Suite B
Calabasas, CA 91302-3126
United States of America
Hereinafter referred as "SSII"
And
TDK Recording Media Europe S.A., a company located in the Grand Duchy of
Luxembourg and carrying on business at:
Z.1. Bommelscheuer
L-4902 Bascharage
Grand-Duchy of Luxembourg
Hereinafter referred as "TDK"
WHEREAS,
SSII and TDK have entered on November 1st, 1998 into a Republishing -
Marketing - Distribution Agreement (the "Agreement") whereby SSII has appointed
TDK as its exclusive Licensee for various SSII software titles (hereinafter
called "Articles") in the Territory (as defined in Schedule "B" of the
Agreement).
The parties agreed in the Agreement that TDK had to guarantee SSII a total.
minimum royalty advance payment of nine hundred thousand US dollars ($900,000).
This minimum royalty advance payment has to be paid in accordance with a payment
schedule mentioned in the Agreement (as set forth in Article 4.A).
According to the initiative of SSII, SSII and TDK agreed to modify the
amount of the advance royalties and the payment schedule accordingly.
Furthermore, SSII decided to grant TDK a right of first refusal on new
software titles.
Considering the foregoing TDK agrees on limited exceptions to the
Agreement.
NOW, THEREFORE, IT HAS BEEN AGREED AS FOLLOWS:
Article 1: Modification of advance royalties' amount and payment schedule:
- --------------------------------------------------------------------------
Pursuant to the payment schedule (as described in Article 4.A of the Agreement),
TDK already paid 40%, three hundred and sixty thousand US dollars ($360,000), of
the total minimum advance royalties. According to the payment schedule, the rest
of the total minimum advance royalties, five hundred and
2
<PAGE>
forty thousand US; dollars ($540,000), shall be divided in two payments of two
hundred and seventy thousand US dollars ($270,000) each.
Due to the new proposal made by SSII, TDK agrees to pay immediately at the date
of signature of the Addendum a total minimum advance royalties' amount of five
hundred thousand US dollars ($500,000) instead of two payments of two hundred
and seventy thousand US dollars ($270,000). Therefore, SSII agrees to grant TDK
a discount of forty thousand US dollars ($40,000) on the total minimum advance
royalties mentioned in the Agreement.
Consequently, the total minimum advance royalties due by TDK to SSII shall be
eight hundred and sixty thousand US dollars ($860,000) instead of nine hundred
thousand US dollars ($900,000). The table below and the new total minimum
royalty advance payment agreed between the parties shall definitely replace the
table and the total minimum royalty advance payment mentioned in Article 4.A of
the Agreement.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Land Before Time 45,000 units $4.00 $180,000
Math Adventure
- ----------------
- -----------------------------------------------------------------------------
Land Before Time 45,000 units $4.00 $180,000
Kindergarten Adv.
- -----------------
- -----------------------------------------------------------------------------
Babe Pre-School 30,000 units $4.00 $120,000
- ---------------
- -----------------------------------------------------------------------------
Babe Early Reader 30,000 units $4.00 $120,000
- -----------------
- -----------------------------------------------------------------------------
Casper Early Reader 40,000 units $4.00 $160,000
- -----------------------------------------------------------------------------
An American Tail 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Total 215,000 units $4.00 $860,000
- -----------------------------------------------------------------------------
</TABLE>
The total minimum royalty advance payment shall be recoupable against royalty
payments due to SSII for the first two hundred and fifteen thousand (215,000)
units of the Articles sold anywhere in the Territory.
Article 2: New Software Titles:
- -------------------------------
2.1) Right of first refusal:
-----------------------
In addition to the modification of the Agreement, SSII grants to TDK a ninety
(90) day "right of first refusal" review period (as set forth in Article 1.G of
the Agreement) for the following titles:
Land Before Time;
Maisy;
King &, 1;
Lost in Space LA;
Lost in Space MA;
Bernstain Bears (1);
Bernstain Bears (2).
Since the review period already started in December 31, 1998 the review period
shall expire on March 31, 1999.
3
<PAGE>
TDK may exercise its right of option on the titles which TDK judges as making
good commercial sense to market in the Territory.
TDK accepts to develop localized language versions of the new software titles,
which have been chosen by TDK (under the same conditions as set forth in the
Agreement).
2.2) License fee:
------------
The Republishing Fee due by TDK to SSII on the localized. language versions of
the new software titles shall be subject to the same conditions as stated in the
Agreement.
On titles that TDK exercised its right of option, TDK shall pay to SSII a
minimum royalty advance payment per title, as stated in the table below:
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Land Before Time 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Maisy 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
King &, 1 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Lost in Space 0 units $4.00 $.00
Learning Adv.
- -----------------------------------------------------------------------------
Lost in Space Math Adv. 0 units $4.00 $.00
- -----------------------------------------------------------------------------
Bernstain Bears (1) 6,250 units $4.00 $25,000.
- -----------------------------------------------------------------------------
Bernstain Bears (2) 6,250 units $4.00 $25,000.
- -----------------------------------------------------------------------------
</TABLE>
Consequently, the total minimum royalty advance payment, which is the sum of the
minimum royalty advance payment per title chosen by TDK will be defined in
Schedule A and this Schedule A shall be regarded as a constituent part of this
Addendum.
This total minimum royalty advance payment shall be recoupable against royalty
payments due to SSII as described in Schedule A.
This total minimum royalty advance payment shall be paid in accordance with the
schedule mentioned below:
(a) Forty percent (40%) of the total advance for the titles chosen by TDK
upon execution of the option and in exchange for TDK's receipt of the
relevant Localization Kits.
(b) Thirty percent (30%) of the total advance for the localized version of
each SSII's new software title to be paid upon TDK's submission of the
Gold Master (first localized. version per title).
(c) Thirty percent (30%) of the total advance for each localized version
of each SSII's new software title to be paid within sixty (60) days
after first customer ship date of such localized version.
Article 3: Duration:
- --------------------
3.1) Concerning the modification of the minimum royalty advance payment and
payment schedule (as set forth in Article I above), this Addendum shall
commence on the date set forth above and shall continue until the
expiration or termination of the Agreement, unless terminated in accordance
with Article 4 below.
4
<PAGE>
3.2) Concerning the New Software Titles (as set forth in Article 2 above), this
Addendum shall commence on April 1st, 1999 and shall endure for a period of
thirty-six (36) months through March 31st, 2002 unless terminated in accordance
with Article 4 below.
Article 4: Termination:
- -----------------------
TDK may terminate this Addendum with immediate effect by registered mail notice
addressed to SSII if SSII is declared insolvent or bankrupt or put under
receivership.
In case of termination of the Agreement or this Addendum due to SSII's
insolvency or bankruptcy or receivership of SSII, if SSIVS Original Licensors
authorize TDK to continue the republishing, marketing and distribution of the
Articles within the Territory, TDK shall not be entitled to claim the refund of
advance payments or Localization costs. On the contrary, if TD ' K's rights on
the Articles in the Territory expire after SSII's insolvency or bankruptcy or
receivership of SSII, SSII shall reimburse TDK (1) fifty percent (50%) of the
Localization costs spent till the date of termination, and (ii) hundred percent
(100%) of the advance payments less royalty amounts of the Articles sold within
the Territory before the termination date.
TDK may (without being bound) terminate the Addendum in the same circumstances
than specified in the Agreement.
Article 5: Miscellaneous:
- -------------------------
This Addendum must be read in conjunction with the Agreement. All provisions of
the Agreement not amended by this Addendum shall remain in full force and
effect.
IN WITNESS WHEREOF the parties hereto have caused this Addendum to be executed
the day and year as herein set forth at the effective date.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
Sound Source Interactive, Inc. TDK Recording Media Europe S.A.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Mr. Vincent J. Bitetti, CEO Mr. Masatoshi Shikanai, Executive Vice
President
- ------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
TDK RECORDING MEDIA EUROPE S.A.
Z.1. Bommelscheuer
P.O. Box 120
L-4902 BASCHARAGE
Grand Duchy of Luxembourg
Tel.: 50 50 11
Fax: 50501400
Sound Source Interactive
26115 Mureau Road, Suite B
Calabasas, California 91302-3126
United States of America
Bascharage March 12, 1999
To the attention of Mr. Vincent BITETTI
- ---------------------------------------
Subject: Addendum to Republishing - Marketing - Distribution Agreement.
- ---------
Dear Mr. Bitetti,
Please find enclosed your copy of the Addendum to the republishing -
Marketing -Distribution Agreement signed between TDK and SSII.
Sincerely yours,
Alexander FINK
6
<PAGE>
ADDENDUM N. 2 TO REPUBLISHING -
MARKETING - DISTRIBUTION AGREEMENT
This Addendum N.2, made and entered into as of this 14day of April, 1999, is by
--
and between;
Sound Source Interactive, Incorporated, a California Corporation,
and carrying on business at:
26115 Mureau Road, Suite B
Calabasas, CA 91302-3126
United States of America
Hereinafter referred as "SSII"
And
TDK Recording Media Europe S.A., a company located in the Grand Duchy of
Luxembourg and carrying on business at:
Z.1. Bommelscheuer
L-4902 Bascharage
Grand-Duchy of Luxembourg
Hereinafter referred as "TDK"
WHEREAS,
SSII and TDK have entered on November 1st, 1998 into a Republishing -
Marketing - Distribution Agreement (the "Agreement") whereby SSII has appointed
TDK as its exclusive Licensee for various SSI I software titles (hereinafter
called "Articles") in the Territory (as defined in Schedule "B" of the
Agreement).
SSII and TDK have entered on March 1st, 1999 into an Addendum to the
Agreement in which TDK agreed to modify the royalty advance payment and the
payment schedule. SSI1 agreed to grant TDK a right of first refusal for new
software titles.
TDK agrees to exercise its right of option on the titles hereinafter mentioned.
Since the agreed conditions mentioned in the Addendum signed on the 1st of March
1999 have been modified, the new conditions shall be stated in a new Addendum
("Addendum n.2").
Considering the foregoing SSI1 and TDK agree on limited exceptions to the
Agreement and to the Addendum.
NOW, THEREFORE, IT HAS BEEN AGREED AS FOLLOWS:
Article 1: New Software Titles:
- -------------------------------
1.1 Grant of rights:
----------------
7
<PAGE>
SSII hereby grants to TDK and TDK accepts the exclusive right to republish the
new software titles mentioned below for the purpose of creating localized
language versions of those new software titles and to republish, manufacture,
market, distribute, display and sell the localized language versions throughout
the Territory (* specified Schedule B, page 2 of the Agreement). The new
software titles licensed and approved by SSII to TDK are as follows:
Land Before Time (P/A)
Maisy (1)
Maisy (2)
King &, I (Thinking Adventure)
Berenstain Bears (1)
Berenstain Bears (2)
1.2) License fee:
------------
TDK shall pay SSII a Republishing Fee of four USD ($4.00) per unit for all units
of localized language versions of the new software titles sold by TDK such fee
based on total invoiced sales less returns. For the avoidance of doubt no
royalties shall be payable on review, advertising samples or other promotional
copies. Except as otherwise set forth in the Agreement, royalties shall be due
and payable within forty-five (45) days of the close of each calendar quarter.
In addition, TDK guarantees to SSII a total minimum royalty advance payment of
four hundred and fifty thousand USD ($450,000). The total minimum Republishing
fee advance payment shall be recoupable against royalty payments due to SSII for
the first hundred and twelve thousand five hundred (112,500) units sold anywhere
in the Territory. This total minimum royalty advance payment shall be paid in
accordance with the schedule mentioned below:
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Land Before Time 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Maisy (1) 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Maisy(2) 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
King & 1 25,000 units $4.00 $100,000
- -----------------------------------------------------------------------------
Berenstain Bears (1) 6,250 units $4.00 $ 25,000
- -----------------------------------------------------------------------------
Berenstain Bears (2) 6,250 units $4.00 $ 25,000
- -----------------------------------------------------------------------------
Total 112,500 units $4.00 $450,000
- -----------------------------------------------------------------------------
</TABLE>
The total advances shall be paid by TDK with respect to each Localized Version
to SSII according to the following schedule:
(a) Thirty-five Percent (35%) of the total advance for the new software titles
upon execution of this Addendum n.2;
(b) Thirty-five percent (35%) of the total advance for the new software titles
in exchange for TDK's receipt of the each relevant Localization Kit. For
the avoidance of doubt, the payment shall be implemented on each individual
delivery of Localization kit and not by aggregated manner.
(c) Fifteen percent (15%) of the total advance for the localized version of
each SSII's new software title to bet paid upon TDK's submissions of the
Gold Master (each localized version per title). For the avoidance of doubt,
the payment shall be implemented on each individual submission of the Gold
Master and not by aggregated manner.
(d) Fifteen percent (15%) of the total advance for each localized version of
each SSII's new software title to be paid within sixty (60) days after
first customer ship date of each localized version. For
8
<PAGE>
the avoidance of doubt, the payment shall be implemented on each individual
customer ship date of the title and not by aggregated manner.
(d) In the event, SSII fails to deliver the relevant localization kit(s)
by the end of April 2000, the relevant title(s) is deemed to be
cancelled and void from this addendum and SSII grants TDK to reimburse
the first Thirty-five percent (35%) of the total advance payment of
relevant title(s) to TDK in 30 days.
Article 3: Term:
- ----------------
The Term for each new software title shall be as follows:
The Term shall commence at the delivery date of the Localization Kit and shall
continue for a period of thirty-six (36) months, unless terminated - in
accordance with Article 15 of the Agreement. The delivery date of each
Localization Kit shall be confirmed by TDK in Written.
Article 4: miscellaneous:
- -------------------------
4.1) Contents of Localization Kit:
-----------------------------
Each Localization Kit of the new software titles shall contain the complete
asset list.
4.2) Contractual link:
-----------------
Except as otherwise stipulated in this Addendum n.2, This Addendum n.2 must be
read in conjunction with the Agreement. All provisions of the Agreement not
amended by this Addendum shall remain in full force and effect.
IN WITNESS WHEREOF the parties hereto have caused this Addendum to be executed
the day and year as herein set forth at the effective date.
Sound Source Interactive, Inc. TDK Recording Media Europe S.A.
- --------------------------------- --------------------------------
Mr. Vincent J. Bitetti Masatoshi Shikanai
CEO Executive Vice President
9
<PAGE>
ADDENDUM N0 3, TO REPUBLISHING -
MARKETING - DISTRIBUTION AGREEMENT
This Addendum n.3, made and entered into as of this first day of June, 1999, is
by and between;
Sound Source Interactive, Incorporated, a California Corporation, and carrying
on business at:
26115 Mureau Road, Suite B
Calabasas, CA 91302-3126
United States of America
Hereinafter referred as "SSII"
And
TDK Recording Media Europe S.A., a company located in the Grand Duchy of
Luxembourg and carrying on business at:
Z.1. Bommelscheuer
L-4902 Bascharage
Grand-Duchy of Luxembourg
Hereinafter referred as "TDK"
WHEREAS,
SSII and TDK have entered on November 1st, 1998 into a Republishing -
Marketing - Distribution Agreement (the "Agreement") whereby SSII has appointed
TDK as its exclusive Licensee for various SSII software titles (hereinafter
called "Articles") in the Territory (as defined in Schedule "B" of the
Agreement).
SSII decided to publish Articles in PSX format and wishes to license the
rights to adapt such Articles for distribution to TDK (as specified in Article
1.G of the Agreement). However, no Articles are existing in PSX format for the
moment. It means that SSII will have to select some titles of the Articles in
the purpose to develop those titles in PSX format. Therefore, the parties agree
to co-operate in the selection of titles in PSX format.
Considering the foregoing SSII and TDK agree on limited exceptions to the
Agreement.
NOW, THEREFORE, IT HAS BEEN AGREED AS FOLLOWS:
Article 1: Grant of rights:
- ---------------------------
SSII hereby grants to TDK and TDK accepts the exclusive right to republish six
(6) titles of the Articles in PSX format for the purpose of creating localized
language versions of those six (6) titles and to republish, manufacture, market,
distribute, display and sell the localized language versions throughout the
Territory (as described in Article 4).
However, it is impossible for SSII to deliver to TDK any titles of the Articles
in PSX format due to the fact that no titles of the Articles are available in
PSX format for the moment. It means that the six (6)
10
<PAGE>
titles of the Articles in PSX format shall be defined in a mutual negotiation
and co-operation. Consequently, SSII shall notify TDK in writing the six (6)
titles that SSII proposes to develop in PSX format for TDK. The parties shall
negotiate during a fifteen (15) day negotiation period commencing on the date
that TDK receives each notice in the purpose to select the six (6) titles of the
Articles in PSX format which have the most profitable interests for both
parties.
Each title of the Articles in PSX format chosen by SSII and TDK shall be subject
to a written agreement signed by both parties and shall regarded as a
constituent part of this Addendum and added by appendix hereto and incorporated
into the Addendum herein accordingly.
Article 2: License fee:
- -----------------------
TDK shall pay SSI1 a Republishing Fee of two dollar and fifty cents ($2.50) per
unit for all units of localized language versions of the Articles in PSX format
sold by TDK such fee based on total invoiced sales less returns. For the
avoidance of doubt no republishing fees shall be payable on review, advertising
samples or other promotional copies. Except as otherwise set forth in the
Agreement, republishing fees shall be due and payable within forty-five (45)
days of the close of each calendar quarter. In addition, TDK guarantees to SSI1
a minimum republishing fee advance payment per title of five hundred thousand
USD ($500,000). The minimum non-refundable Republishing fee advance payment
shall be recoupable against republishing fee payments due to SSII for the first
two hundred thousand (200,000) units per title sold anywhere in the Territory.
Therefore, for six (6) titles the total minimum republishing fee advance payment
shall be as follows:
$500,000 x 6 titles = $3,000,000
Due to the fact that each title shall be defined during a negotiation process,
the payment of the minimum republishing fee advance payment shall be scheduled
and implemented in a title to title basis and not in an aggregated payment.
Therefore, the pay1ment schedule is as follows:
(a) Three hundred twenty-five thousand USD ($325,000) of the republishing fee
advance payment per title upon signature of each relevant Appendix (as
described in Article 1);
(b) Fifty thousand USD ($50,000) of the republishing fee advance payment per
title in exchange for TDK's receipt of each relevant alpha disc;
(c) Fifty thousand USD ($50,000) of the republishing fee advance payment per
title in exchange for TDK's receipt of each relevant beta disc;
(d) Seventy-five thousand USD ($75,000) of the republishing fee advance payment
per title in exchange for TDK's receipt of each Localization Kit.
In the event TDK rejects a title submission from SSII for any reason, SSII shall
be able to present such title to other distribution sources internationally.
Article 3: Language:
- --------------------
The Articles in PSX format licensed and approved by SSII to be developed and
manufactured by TDK in the Localized Languages as set forth herein as follows:
Dutch, French, German, Italian, Japanese, Spanish, Swedish and UK English.
Article 4: Territory:
- ---------------------
11
<PAGE>
SSII authorizes the Localized Language version of the Articles in PSX format to
be distributed for sale by TDK in the following countries, which constitute the
Territory as referred herein:
1) All nations mentioned in Schedule "B" of the Agreement;
2) Japan and Australia.
3) Cyprus, Iceland and Malta
Article 5: Term:
- ----------------
The Term for each title of Articles in PSX format shall be as follows:
The Term shall commence at the first release date of the localized language
versions and shall continue for a period of thirty-six (36) months, unless
terminated in accordance with Article 15 of the Agreement, The delivery date of
each Localization Kit shall be confirmed by TDK in written. In the event TDK
does not localize and distribute at least one Localized Language Version within
180 days (one hundred and eighty) of receipt of each Localization Kit,
international rights as granted herein shall revert back to SSII.
Article 6: Miscellaneous:
- -------------------------
6.1) Contents of Localization Kit:
-----------------------------
Each Localization Kit of each title of the Articles in PSX format shall contain
the complete asset list and the Master disc.
6.2) Contractual link:
-----------------
Except as otherwise stipulated in this Addendum n.3, This Addendum n.3 must be
read in conjunction with the Agreement. All provisions of the Agreement not
amended by this Addendum shall remain in full force and effect.
IN WITNESS WHEREOF the parties hereto have caused this Addendum to be executed
the day and year as herein set forth at the effective date.
Sound Source Interactive, Inc. TDK Recording Media Europe S.A.
- -------------------------------- ----------------------------------
Mr. Vincent J. Bitetti Mr. Masatoshi Shikanai
CEO Executive Vice President
12
<PAGE>
EXHIBIT 10.23
Electronic Software Distribution Agreement
Electronic Software Distribution Agreement
This Agreement is made and entered into on JULY 1, 1998 by and between
Digital River, Inc., its successors or assigns, 5198 West 76th Street Edina,
Minnesota, 55439 ("DR") and
SOUND SOURCE INTERACTIVE, Inc., located at
16115 Mureau Road, Suite "B", Calabasas, CA
91302, a California corporation (hereafter
referred to as "Vendor"), with its
principal office at the same address.
BACKGROUND
a. Vendor is the Owner of all rights (or has a license to sell) to the Software
as defined hereunder.
b. Vendor desires to enter into an Agreement with DR to allow DR to distribute
the Software.
c. DR desires to obtain the right to distribute the Software.
NOW THEREFORE, the parties hereby agree as follows:
I. DEFINITIONS
a. Software: the executable object code for Vendor's software identified on
Exhibit B, including all subsequent versions thereof provided to DR pursuant
to this Agreement.
b. Documentation: all computer readable and/or printed instructions, manuals and
other materials normally provided from time to time by Vendor to End Users
for use of the Software, that are identified on exhibit B, and all subsequent
versions thereof provided to DR pursuant to this Agreement.
c. End-User License Agreement ("EULA"): the computer readable license agreement
provided by Vendor that 2overns the use of the Product by End Users, and
which is to be included with each copy of the Product sold by DR hereunder.
d. DR Materials: computer readable materials provided by DR for inclusion in an
electronic package containing the Software, Documentation, and EULA, which
Materials have been approved by Vendor.
Digital River, Inc., Revised 1-26-99 Page 1 of 15
<PAGE>
Electronic Software Distribution Agreement
e. Product: a copy of the Software, Documentation, EULA and DR Materials, if
any, packaged in tangible packaged form for delivery in accordance with this
Agreement.
f. End User: person(s) or entity(ies) that acquire a Product for use rather than
resale or distribution.
h. Territory: all countries in the world except (i) countries to which export or
re-export of any Product, or the direct products of any Product is prohibited
by United States law without first obtaining the permission of the United
States Office of Export Administration or its successor, and (ii) countries
that may be hereafter explicitly excluded pursuant to the terms of this
Agreement.
i. Dealer: person(s) or entity(ies) that resell the Product.
2. LICENSE
a. Vendor hereby grants DR, within the Territory, a license and right to:
-----
1. Distribute the Product to the End User and/or Dealer as indicated on
Exhibit B;
2. Utilize the Vendor Trademarks in connection with the replication of the
Product, packaging and distribution of the Product, in a manner reasonably
specified by Vendor; and
3. Distribute in tangible form the Product to the End User and/or Dealer as
indicated on Exhibit
b. The rights granted to DR pursuant to this Agreement shall be deemed to
include the right to designate and sell to Dealers, which re-sell the Product
to the End User.
c. DR acknowledges that the Software and Documentation are the property of
Vendor or its licensors and that DR has no rights in the foregoing except for
those expressly granted by this Agreement.
3. VENDOR'S GENERAL OBLIGATIONS
a. Vendor shall deliver the current version of the Product to DR immediate
following execution of this Agreement. Vendor will provide DR with: (i)
copies of the tangible packaged-Software, (ii) Product specification
information in a single file, self extracting archive format, or in another
------
mutually agreeable computer readable form that can be reproduced by DR, (iii)
Documentation in a computer readable form mutually agreeable to the parties
that can be reproduced by DR, and (iv) all the items and materials specified
in the "Requirements Checklist" on Exhibit A.
b. Vendor shall provide DR with tangible packaged Products containing all new
releases, updates, or revisions of the Software and Documentation within a
reasonable time after each such release is made generally available by
Vendor. Vendor will notify DR of its plans for each
Digital River, Inc., Revised 1-26-99 Page 2 of 15
<PAGE>
Electronic Software Distribution Agreement
new release, update or revision of the Product within a reasonable period of
time prior to such release.
c. Vendor will provide all support and be fully responsible for all warranty
obligations relating to the Product. Such support and warranty shall be
provided in accordance with Vendor's then-current published software support
policy, or, in the absence of such a policy in a reasonable manner.
d. Vendor will provide DR, without charge, such technical information, current
maintenance documentation, and telephone assistance as is necessary to enable
DR to effectively reproduce, electronically package, and distribute the
Products by any means outlined herein.
4. WARRANTIES
a. Vendor represents that it has the right and authority to enter into this
Agreement and to grant DR the rights to the Software and Documentation -
ranted in this Agreement.
b. Vendor warrants to DR that the Vendor has all rights, title, and interest In
the Product or has obtained the right to grant the licenses set forth in this
Agreement. As of the execution date of this Agreement, Vendor represents that
to the best of Vendor's knowledge the Product does not infringe upon or
misappropriate the proprietary rights of any third party.
c. DR represents that it has the right and authority to enter into this
Agreement.
d. DR represents and warrants that it will use its best efforts to accurately
replicate the Product.
e. DR represents and warrants that except for encryption software, if any,
supplied by DR, all Products distributed by DR will not be altered in any
way.
5. PAYMENTS
a. Vendor agrees to pay DR the Initialization Fee specified on exhibit B. Vendor
agrees to allow DR to offset the unpaid Initialization Fee against any or all
other amounts owing to Vendor by DR under this agreement. If the net sales
from DR exceed $1,000.00 in the first complete calendar month of operation,
then DR will waive the Initialization fee. Products available from Vendor
will be installed on DR's server upon fulfillment of other obligations
pursuant to this Agreement. The Initialization Fee includes normal price
changes and version updates. All programming and other changes made after
initial site setup excluding normal price changes and version updates will be
charged to Vendor at $100.00 per hour ("Site Maintenance"). DR will not
charge Vendor for any maintenance or other related web site work without
prior Vendor's prior approval. Vendor agrees to pay the billed Site
Maintenance charges within 30 days from the date of billing. In the event
that Site Maintenance is not paid for within 30 days of billing, Vendor
agrees to allow DR to offset the unpaid Site Maintenance against any or all
other amounts owing to Vendor by DR under this, Agreement.
b. For each copy of a Product sold and delivered to an End User DR will purchase
the Product from Vendor as follows:
Digital River, Inc., Revised 1-26-99 Page 3 of 15
<PAGE>
Electronic Software Distribution Agreement
1. For each copy of a Product sold and delivered to an End User, generated
other than from Vendor's web site, DR will purchase the Product at a cost
equal to the cost outlined as the Distribution Cost on Exhibit B. Vendor
agrees not to sell the Product to any others for less than the Distribution
Cost outlined on Exhibit B. Vendor agrees to notify DR promptly of any
reductions in the Distribution Cost.
2. For purposes of this Agreement the combination of the % Cost and
Distribution Cost outlined in 5b.1. and 5b.2. shall be referred to as the
"Total Purchase Price".
c. No Total Purchase Price shall be due for copies of the Product returned to DR
for refund in accordance with the EULA. No Total Purchase Price shall be due
in the case of credit card chargebacks, unauthorized returns, or credit card
fraud. DR will use reasonable efforts to prevent such events and to recover
funds in the case of fraud.
d. Within thirty. (30) days after the end of each month, DR will remit payment
to Vendor of the Total Purchase Price due for the immediately preceding
month. DR will provide Vendor with a report (the "Report"), specifying the
number of copies of the Product that DR has shipped, or has requested the
Vendor to ship, as applicable, during the immediately preceding month and the
calculation of the Total Purchase Price due to Vendor in connection
therewith.
e. DR will provide to Vendor within thirty (30) days after the end of each
month, a report for the immediately preceding month showing the name,
address, phone number, e-mail address and certain other customer data along
with the quantity of the Product purchased by each End User that purchased
the Product from DR.
f. DR agrees to maintain adequate books and records relating to the distribution
of the Product to End Users and Dealers. Such books and records shall be
available at the principal office of DR for inspection by Vendor or its
representative during normal business hours, for the purpose of determining
the accuracy of the Total Purchase Price paid to Vendor for the 12 months
immediately preceding the start of the audit, in accordance with the terms of
this Agreement. Vendor shall have the right to conduct such an audit upon
twenty (20) days advance written notice not more than twice each year. In the
event that such an audit discloses an underpayment of the Total Purchase
Price, which is greater than five percent (5%), then DR shall pay the
reasonable costs of such audit, otherwise Vendor shall pay the costs of such
audit.
g. Any payment or part of a payment hereunder, which is not paid when due shall
bear interest at the rate of 1.5% per month from its due date until paid.
h. In addition, Vendor and DR agree to the Marketing payments listed on Exhibit
E, if any and agree that any marketing must be approved in writing by Vendor
prior to such marketing.
Digital River, Inc., Revised 1-26-99 Page 4 of 15
<PAGE>
Electronic Software Distribution Agreement
6. TANGIBLE DELIVERY OF PRODUCTS
a. The following provisions will apply to any Products listed on Exhibit B
which are to be delivered in tangible form by DR:
1. The Vendor shall provide DR with an inventory of the Products to be
warehoused and used by DR to fulfill orders for the Products. DR shall be
responsible for the delivery of the Products to the End User at a location
or locations designated by the End User.
2. The Products shall be delivered to DR prepackaged and ready for shipment and
delivery to the End User. The Vendor shall be solely responsible for the
shipment of the Products to DR and shall be solely responsible for all costs
and expenses associated with any such shipments. The Vendor shall bear the
entire risk of loss of or damage to the Products during shipments to DR.
3. Within fifteen (15) days after the date of this Agreement, the Vendor shall
provide DR with such warehoused quantities of the Products as may be
mutually agreed upon In writing by DR and the Vendor. On a periodic basis,
DR shall provide an Inventory detail to Vendor showing the current inventory
of the Products. Periodically, DR will issue warehouse purchase orders for
the estimated needs of Product to be physically shipped. The Vendor shall be
responsible for making prompt delivery of the Products to DR.
4. All shipments of Product to DR will be clearly labeled with DR's purchase
order number on the outside of the box. If DR is tracking serial numbers for
the Products, Vendor will provide with each shipment of Product a complete
list of the serial numbers of the Product enclosed in each box.
5. DR shall have no liability of any kind whatsoever as a result of any delay
in the delivery of the Products by the Vendor, or the delivery of the
Products to DR in non-conforming condition. Upon the termination of this
Agreement, at the Vendor's sole cost and expense, the unsold inventory of
the Products shall be returned to the Vendor.
7. CONFIDENTIALITY
a. Each party agrees that all binary code, inventions, algorithms, know-how,
ideas, and all other business, technical and financial information it obtains
from the other are the confidential property of the disclosing party
("Confidential Information"). Except as expressly and unambiguously allowed
herein, the receiving party will hold in confidence and not use or disclose
any Confidential Information and shall similarly bind its employees and
agents. The receiving party shall not be obligated under this Section 7 with
respect to information the receiving party can document:
1. is or has become readily available to the public through no fault of the
receiving party or its employees or agents; or
2. is received without restriction from a third part), lawfully in
possession of such information and lawfully empowered to disclose such
information; or
3. was rightfully in the possession of the receiving party without
restriction prior to its disclosure by the disclosing party.
Digital River, Inc., Revised 1-26-99 Page 5 of 15
<PAGE>
Electronic Software Distribution Agreement
4. is independently developed by the receiving party by its employees or
agents without access to the other party's similar Confidential
Information.
Each party's obligations with respect to Confidential Information shall continue
for the shorter of three (3) years from the date of termination of this
Agreement or until one of the above enumerated conditions becomes applicable.
Each party acknowledges that its breach of this Section 7 would cause
irreparable Injury to the other for which monetary damages are not an adequate
remedy. Accordingly, a party will be entitled to injunctive relief and other
equitable remedies in the event of a breach of the terms of this Agreement.
b. DR agrees not to: ( i ) disassemble, decompile or otherwise reverse engineer
the Software or otherwise attempt to learn the source code, structure,
algorithms or ideas underlying the Software; (ii) take any action contrary to
EULA except as allowed under this Agreement.
8. VENDOR TRADEMARKS
a. DR acknowledges that the Vendor Trademarks are trademarks owned or licensed
solely and exclusively by Vendor. DR agrees to use the Vendor Trademarks only
in the form and manner and with appropriate legends as prescribed by Vendor.
All use of Vendor Trademarks shall inure to the benefit of Vendor.
b. DR shall not remove, alter, cover or obfuscate any copyright notice or other
proprietary rights notice placed in or on the Products by Vendor.
9. INDEMNIFICATION
a. Vendor shall defend, indemnify, and hold DR harmless from and against any and
all liabilities, losses, damages, costs, and expenses (including, without
limitation, reasonable legal fees and expenses) associated with or incurred
as a result of any claim, action, or proceeding instituted against DR arising
out of or relating to the acts or failure to act of the Vendor, or any of its
affiliated companies, agents, employees or other related parties under this
Agreement including, without limitation, actions, claims, or proceedings
related to: ( i ) Vendor's performance of its rights and obligations under
this Agreement, (ii) the breach by Vendor of an), of the terms of this
Agreement or any of the representation and warranties contained herein; or (
iii ) the actual or alleged infringement of any intellectual property rights
arising out of Electronic Distributor's duplication, sale, distribution, or
other use of the Product pursuant to this Agreement.
b. DR shall indemnify and hold Vendor harmless from and against any and all
liabilities, losses, damages, costs and expenses (including reasonable legal
fees and expenses) associated with any claim or action brought against Vendor
that may arise from DR's improper or unauthorized replication, packaging,
marketing, distribution, or installation of the Product, including claims
based on representations, warranties, or misrepresentations made by DR, or
any other improper or unauthorized act or failure to act on the part of DR
c. If either Vendor or DR receives notice or knowledge of a claim as described
in 9.a. or 9.b. above, it will promptly notify the other party in writing and
give the other party all necessary information and assistance and the
exclusive authority to evaluate, defend, and settle such claim.
Digital River, Inc., Revised 1-26-99 Page 6 of 15
<PAGE>
Electronic Software Distribution Agreement
10. LIMITATION OF LIABILITY
The total liability of DR (including its subcontractors and dealers) for all
claims, whether in contract, tort (including negligence and product liability)
or otherwise, arising out of, connected with, or resulting from the distribution
of the Product or any other terms of this agreement shall not exceed the net
amount realized by DR hereunder. IN NO EVENT SHALL DR BE LIABLE FOR ANY LOSS OF
DATA, LOST PROFITS, OR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR
EXEMPLARY DAMAGES, EVEN IF DR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY PROVIDED HEREIN.
("Initial Term"). This Agreement will be automatically renewed for one
successive additional one (1) year term ("Renewal Term") unless terminated by
either party upon ninety (90) days written notice prior to the expiration of the
Initial Term or any Renewal Term.
b. This Agreement may be terminated by a party "for cause" immediately by
written notice upon the occurrence of any of the following events: (i.) If
the other party ceases to do business, or otherwise terminates its business
operations (except as permitted under Section 12.a.) or ( ii.) If the other
shall fall to promptly secure or renew any license registration, permit,
authorization or approval for the conduct of its business in the manner
contemplated by this Agreement or if any such license, registration, permit,
authorization or approval is revoked or suspended and not reinstated within
thirty (30) days. ( iii ) If the other materially breaches any provision of
this Agreement and falls to fully cure such breach within thirty (30) days o
f written notice describing the breach; or (Iv.) If the other party becomes
insolvent or seeks protection under any bankruptcy laws, creditor's
arrangement, composition or comparable proceeding, or if any such proceeding
is instituted against the other and not dismissed within ninety (90) days.
c. Upon termination of this Agreement for any reason, DR will immediately cease
distribution of the Products. DR shall remit all Total Purchase Prices due to
Vendor within sixty (60) days of such termination, less a Reserve of fifteen
percent (15%1) for estimated returns.
d. Termination by either party will not affect the rights of any End User under
the terms of the EULA.
12. GENERAL PROVISIONS
a. This Agreement may not be assigned by Vendor or by operation of law to any
other person, persons, firms, or corporations without the express written
approval of DR. DR shall be entitled to assign this Agreement in the event of
a merger, acquisition, joint venture, or a sale of substantially all of its
assets, or any similar transaction with prior consent of Vendor, which will
----------------------------------------
not be unreasonably withheld.
-----------------------------
b. All notices and demands hereunder shall be in writing, and shall be served by
personal service or by mail at the address of the receiving party set forth
in this Agreement (or at such different address as may be designated by such
party by written notice to the other party). All notices and demands by mail
shall be certified or registered mail, return receipt requested, or by
nationally
Digital River, Inc., Revised 1-26-99 Page 7 of 15
<PAGE>
Electronic Software Distribution Agreement
recognized private express courier, and shall be deemed given upon the
earlier of; receipt or 5 days after mailing.
c. This Agreement shall be governed by and construed in accordance with the
substantive laws of the State of California.
d. Each party is acting as an independent contractor and not as an agent,
partner, or joint venture with the other party for any purpose. Except as
provided in this Agreement, neither party shall have the right, power, or
authority to act or to create any obligation, express or implied, on behalf
of the other.
e. The indemnification and confidentiality obligations set forth in the
Agreement and any other provision which by its sense and context is
appropriate, shall survive the termination of this Agreement by either party
for any reason.
f. The titles and headings of the various sections and paragraphs in this
Agreement are intended solely for convenience of reference and are not
intended for any other purpose whatsoever, or to explain, modify or place any
construction upon or on an), of the provisions of this Agreement.
g. No provisions in either party's purchase orders, or in any other business
forms employed by either party will supersede the terms and conditions of
this Agreement, and no supplement, modification, or amendment of this
Agreement shall be binding, unless executed in writing by a duly authorized
representative of each party to this Agreement.
h. The parties have read this Agreement and agree to be bound by its terms, and
further agree that it constitutes the complete and entire agreement of the
parties and supersedes all previous communications, oral or written, and all
other communications between them relating to the license and to the subject
hereof. No representations or statements of any kind made by either party,
which are not expressly stated herein, shall be binding on such part,
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth above.
<TABLE>
<S> <C>
VENDOR
DIGITAL RIVER, INC. Company
- ------------------------------------------------ Signature
Signature
- ------------------------------------------------
Date
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------
Name & Title:
- --------------------------------------------------
Name & Title:
- ------------------------------------------------------------------------------
</TABLE>
Digital River, Inc., Revised 1-26-99 Page 8 of 15
<PAGE>
Electronic Software Distribution Agreement
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
Date:
- ------------------------------------------------
Date:
- -------------------------------------------------------------------------------
</TABLE>
The rest of this page is intentionally blank.
-----
Digital River, Inc., Revised 1-26-99 Page 9 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT A
REQUIREMENTS CHECKLIST
The "checklist" of items needed to complete the process are:
1) Executed distribution Agreement.
2) Marketing Materials.
Text - Vendor must deliver this in a .txt file with the information clearly
delineated. All Maximum Character lengths INCLUDE spaces. Product Name (30
char. max.), Product Description (50 char. max.), Sales Pitch (255-char.
max.), Product Detail (2,000 char. max.)
Graphics - Product Picture .jpg or .gif, Trademarks/logos (. gif file).
Vendor must include any and all computer-readable product specification
sheets, collateral, or other information you deem appropriate (.html, pdf,
.gif or .txt file).
3) Trial versions of the Products if available.
DR may at its option publish this list or any revisions or ck4nges to it on its
web page. In this event, Vendor will be given the URL of the page containing
the revised data.
Digital River, Inc., Revised 1-26-99 Page 10 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT B
PRODUCTS & FEES
Distribution Cost -For each copy of a Product delivered to an End User DR will
purchase the Product at a cost equal to he Distribution Cost (the "Distribution
Cost").
Advertised Price - The average retail street price.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Product Name Vendor Part Digital (D) Advertised % EndUser (E) Distribution
Tangible (T) Price Cost Dealer (D) Cost
Both (B) Both (B)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
All Dogs Go To Heaven 60017 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Dragonheart 60016 $19.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
Free Willy 2 60006 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Free Willy Activity Center 60041 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Hercules & Xena 60033 $19.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
Movie Magic 60042 $19.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
Babylon 5 Vol. 1 50007 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Final Conflict 60036 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
I Love Lucy 60028 $19.95 $15.00
- ----------------------------------------------------------------------------------------------------------------
Jurassic Park: Lost World 60041 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Star Trek: Deep Space 9 60023 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Star Trek Voyager 60026 $19.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
Terminator 2 60015 $19.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Digital River, Inc., Revised 1-26-99 Page 11 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT B
PRODUCTS & FEES
Distribution Cost -For each copy of a Product delivered to an End User DR will
purchase the Product at a cost equal to the Distribution Cost (the "Distribution
Cost").
Advertised Price - The average retail street price.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Product Name Vendor Part Digital (D) Advertised % EndUser (E) Distribution
Tangible (T) Price Cost Dealer (D) Cost
Both (B) Both (B)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
An American Tail 60079 $19.95 $14.25
Animated Movie Box
- ----------------------------------------------------------------------------------------------------------------
Babe 60012 $19.95 $14.25
Animated Movie Box
- ----------------------------------------------------------------------------------------------------------------
Babe 60091 $29.95 $20.75
Animated Early Reader
- ----------------------------------------------------------------------------------------------------------------
Babe Animated 60092 $29.95 $20.75
Preschool Adventure
- ----------------------------------------------------------------------------------------------------------------
Casper Activity Center 60044 $19.95 $14.25
- ----------------------------------------------------------------------------------------------------------------
Casper Animated 60083 $29.95 $20.75
Early Reader
- ----------------------------------------------------------------------------------------------------------------
The Land Before Time 60027 $29.95 $20.75
Activity Center
- ----------------------------------------------------------------------------------------------------------------
The Land Before Time 60081 $29.95 $20.75
Kindergarten Adventure
- ----------------------------------------------------------------------------------------------------------------
The Land Before Time 60060 $19.95 $20.75
Math Adventure
- ----------------------------------------------------------------------------------------------------------------
The Land Before Time 60024 $29.95 $15.00
Animated Movie Book
- ----------------------------------------------------------------------------------------------------------------
Lost In Space Animated 60076 $29.95 $20.75
Learning Adventure
- ----------------------------------------------------------------------------------------------------------------
Lost In Space 60078 $29.95 $20.75
Math Adventure
- ----------------------------------------------------------------------------------------------------------------
The Abyss: 60045 $19.95 $20.75
Incident at -----
- ----------------------------------------------------------------------------------------------------------------
Babylon 5: Shadow Works 60035 $29.95 $14.75
- ----------------------------------------------------------------------------------------------------------------
Olympus: War of the Gods 60082 $29.95 $20.75
- ----------------------------------------------------------------------------------------------------------------
Lost In Space 60075 $19.95 $20.75
Entertainment ---
- ----------------------------------------------------------------------------------------------------------------
Star Trek: The Game 60047 $29.95 $14.25
Show
- ----------------------------------------------------------------------------------------------------------------
Zuul 60115 $20.75
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Digital River, Inc., Revised 1-26-99 Page 12 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT C
PRODUCT INFORMATION
Please fill out the following template for each Product
Product Name:
Vendor Name (up to 36 characters):
Product Description:
- --------------------
Weight of Product for physical Shipment.
Does this Product include electronic documentaion? (Y/N)
Does this Product include online help? (Y/N)
Does this Product have a demonstration version? (Y/N)
If yes, what differentiates the demo from the real Product?
What is the platform for this Product? (Mac, Win 3.X, Win95, NT, or UNIX)
What is the advertised price of this product?
Is this Product serialized? (Y/N)_______________________
Does this Product have an export band? (Y/N)
If yes, to which countries is export restricted or banned?
Digital River, Inc., Revised 1-26-99 Page 13 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT D
VENDOR DELIVERY
(nothing is to appear on this page)
Digital River, Inc., Revised 1-26-99 Page 14 of 15
<PAGE>
Electronic Software Distribution Agreement
EXHIBIT E
Coop Advertising Funds
If this exhibit is attached, and initialed by DR and Vendor in the space
provided, then the terms herein shall become an addition to the Payments section
of the Agreement as provided in 5h. of the Agreement. Nothing in this Exhibit E
is intended to change the other obligations or responsibilities contained in the
Agreement.
DR will accrue a coop advertising allowance ("COOP") in an amount equal to eight
five percent (8%) (5%) of the Total Purchase Price for sales of Vendor's
Products. Such allowance may be used to fund advertising, channel marketing and
promotions for Vendor's Product by DR including, but not limited to, purchasing
links to banners from focused Internet Web sites. Vendor agrees to allow DR to
offset this COOP against any or all other amounts owing to Vendor by DR under
this Agreement.
Vendor agrees to allow DR to offset this MDF against any or all other amounts
owing to Vendor by DR under this Agreement.
DR agrees that all Coop Advertising received from Vendor will be used to promote
the sales of Vendor's Products and must be approved by Vendor in writing prior
to the use thereof. DR agrees to provide a schedule / proof of performance
compliance and will maintain records of same for at least one year after
termination / expiration of this Agreement, for auditing purposes.
Please initial in the space below:
DR __________________________________
Vendor ______________________________
Digital River, Inc., Revised 1-26-99 Page 15 of 15
<PAGE>
EXHIBIT 10.24
MORGAN CREEK PRODUCTIONS, INC.
4000 Warner Boulevard
Building 76
Burbank, CA 91522
July 31, 1998
Vincent Bitetti,
Chairman and CEO
Sound Source Interactive, Inc.
26115 Mureau Road, Suite B
Calabasas, CA 91302
Dear Vincent:
This letter sets forth the intention of Morgan Creek Productions, Inc., a
Delaware corporation ("MCP") to form a joint venture with Sound Source
Interactive, Inc., ("SSII"). This letter sets forth the terms of the
understanding and will serve as the basis of a more detailed long form joint
venture agreement (the "Definitive Agreement") to be negotiated in good faith by
the parties. Until such a Definitive Agreement is negotiated and signed, this
letter once signed by all the parties hereto will represent a binding
obligation.
1. Formation of Joint Venture
MCP and SSII will form a joint venture (the "Venture") to develop an educational
interactive activity center suitable for children ages 4 to10 (the "Center"),
for use in the home solely on the PC and/or CD Rom format, based on "The King
and I" animated motion picture (the "Picture") to be released by MCP. The
parties expect that the Venture will either be a limited liability corporation
or partnership organized under Delaware law and that each of the parties will
hold a 50% interest in the Venture.
2. Initial Capitalization
SSII shall fund an initial investment of no less than $150,000 but no more than
$250,000 to the Venture as required in order to pay for product development of
the Center, in accordance with paragraph 3 below. MCP shall contribute a
nonexclusive license to use the animated characters from the Picture strictly in
connection with pre-approved marketing plans and/or elements of the Center, said
license to commence from the date of signing and continuing for two years
following the release of the product.
1
<PAGE>
3. Product Development
The Venture shall immediately commence development of the Center and shall
produce the Center on a production schedule that allows shipment to retail
outlets no later than 30 days prior to the theatrical release date of the
Picture; it being acknowledged and agreed that the initial theatrical release
date is currently March 19, 1999 and, accordingly, the Venture must be in a
position to ship units of the Center by February 19, 1999 unless otherwise
designated by MCP in writing; it being understood that MCP agrees to use best
efforts to turnaround concepts, drawings. Or any other materials submitted by
SSII for MCP approval within a forty-eight (48) hour period. To the extent that
MCP exceeds the 48 hour turnaround period. the product shipping deadline
(referred to above) will likewise be extended for SSIL SSII shall develop and
design the Center and shall be responsible for advancing the cost of developing
and designing the Center. MCP and SSII shall mutually approve the budget for the
development, design and manufacture of the Center with the budget determined on
a hard cost basis without any profit or mark up factor for SSII. The budget will
contain no overhead costs and no related party expenses shall be included in
"Development Costs" unless approved in writing by MCP. It is of the essence of
this agreement that the Center be of the highest quality in materials, design,
presentation and packaging and MCP shall have the right to approve all aspects
of the Center in its sole discretion including without limitation, designs,
content, materials, and packaging. To this end, MCP and SSII shall jointly
prepare a plan for implementing the design and approval process for the Center
in order that associated design and production costs can be minimized.
4. Marketing and Distribution
SSII shall market and distribute the Center through its regular distribution
channels for a period of two (2) years commencing with the initial release of
the Center. MCP and SSII shall mutually approve a marketing plan for the Center
including a budget for all marketing expenses and duplication costs. SSII shall
advance all marketing expenses and duplication costs for all units for the
Center. In addition. MCP shall have the right to approve any OEM/bundling
distribution arrangements proposed by SSII.
MCP and SSII shall mutually agree on distributors for the product based on the
best third party proposals submitted to the Venture. It is of the essence of
this agreement that all marketing and advertising materials related to the
Center be of the highest quality, and MCP shall have the right to approve all
aspects of the marketing and advertising materials in its sole discretion. MCP
and SSII shall be entitled to place their logos as presentation credits on the
Center and on the packaging, marketing and advertising materials for the Center
in equal size and prominence.
5. Split of Revenue
SSII shall account to the Venture on a monthly basis for the first three (3)
months following initial release of the Picture, with accounting periods ending
on the last business day of each month and with statements rendered by the
twenty fifth day after the
2
<PAGE>
end of the last month; thereafter, SSII shall account to the Venture on a
quarterly basis. In the event any income is received prior to the initial
release of the motion picture, SSII shall account to MCP for any such income in
a special accounting. SSII shall remit all gross revenue ("Proceeds") to the
Venture which shall be split as follows (and in the following order):
a. Venture shall pay all royalties and residuals to any actors, writers.
developers or hardware manufacturers in connection with the development of the
Center.
b. Reimbursement of Expenses
--------------------------
(i) SSII shall be reimbursed all direct, out of pocket costs and
expenses actually paid by SSII for distribution, marketing,
promotion and advertising of the Center (excluding overhead.
interest and G&A) and which are preapproved by MCP. In no event
shall SSII be reimbursed for expenses in an Amount exceeding
25% of Proceeds.
(ii) MCP shall be reimbursed to the extent MCP incurs distribution
and marketing expenses (such as those described in paragraph 6
below); such expenses shall be recouped pro rata with SSII's
expenses described in (i), above.
c. MCP and SSII shall each recoup their contributions to the costs of
development, design and manufacture of the Center as preapproved by MCP, on a
pro rata basis in proportion to their respective contributions: it being agreed
that MCP's contribution shall be deemed to be S50.000 per product manufactured
by the Venture in respect of the license contributed to the Venture (it being
understood that MCP shall have no obligation to fund any amounts to the
Venture).
The balance of the proceeds shall be split 50% to MCP and 50% to SSII and shall
be distributed as determined by the Venture.
6. Additional Products
Provided that the Center is timely released in accordance with paragraph 3
above. the Venture shall have the option, exercisable within 120 days after
initial release of the Center, to develop and produce one additional interactive
product suitable for children ages 4 to 10 ("Additional Product"). Any such
Additional Product must fall within the reasonable scope of SSII's production
capabilities, and MCP shall have the right to preapprove the product materials.
design and all other material aspects of the proposed product (the "Additional
Product"). In the event that Venture elects to produce the Additional Product,
the costs for the development, design, manufacture, marketing, promotion and
advertising of the Additional Product shall be advanced by SSII. If produced,
the Additional Product must be ready for shipment to coincide "day and date"
with the initial video release of the Picture. MCP plans to offer merchants
several choices of in-store video displays created for video exploitation of the
Picture; at least one such display choice available to merchants will feature.
promote and sell both the videotape
3
<PAGE>
release of the Picture and a Venture product. Further, MCP shall instruct its
distribution agents to include a "visual depiction" (i.e. photo, rendering,
etc.) of the in-store video display which features, promotes and sells both the
videotape release of the Picture and a Venture Product. MCP shall offer
merchants the option of an in-store video display, which promotes and/or sells
both the videotape release of the Picture and a Venture product. All other terms
applicable to the Center hereunder shall apply to the Additional Product, and
each such product shall be accounted for separately with no offsets or cross
collateralization.
7. Control of Venture
Management and control of the Venture will be by unanimous approval of each of
MCP and SSII. All management issues will require unanimous approval including,
but not limited to, the following:
(a) Liquidation and Sale of the Joint Venture Or any of Venture's assets;
(b) Approval of all expenditures;
(c) Approval of distributors for the Center, except as set forth in
paragraph 4 hereof;
(d) Distributions from the Venture to MCP and SSII other than as set forth
in Paragraphs 5(a), (b) and (c) hereof; and
(e) All Creative and business decisions regarding the Venture.
8. Ownership of Intellectual Property
SSII acknowledges that MCP shall own exclusive rights to any copyrights.
trademarks and other intellectual property licensed to the Venture by MCP. In
addition, the Venture shall exclusively own all rights to all copyrights.
trademarks and other intellectual property developed by the Venture (exclusive
of any intellectual property licensed to the Venture by MCP), including without
limitation all rights to the Center. Except as otherwise provided herein, MCP
shall be entitled to, exploit such copyrights, trademarks and other intellectual
property in any manner whatsoever without any payment of any royalties or other
compensation to the Venture. SSII shall contribute a non-exclusive license to
the Venture for its pre-existing computer tools, utilities, engines, processes,
software systems and designs, source and object codes, program logic,
interactive program structures, retrieval software systems user interface
designs, and other computer procedures and methods of operation and computer
software elements (the "Computer Elements") which are used in connection with
the Center. MCP acknowledges that SSII remains sole owner of the Computer
Elements, and MCP shall on]y have rights in the Computer Elements to the extent
they pertain to the Venture and its products. SSII warrants that SSII will
procure worldwide nonexclusive licenses in perpetuity from any third parties
whom may contribute property (similar to the Computer Elements) not owned by
SSII, to the Venture and its products.
4
<PAGE>
9. Relationship
This Letter of Intent and the Definitive Agreement shall not create any
additional fiduciary duties of the parties other than the duties expressly
contained herein and in the Definitive Agreement. Each of the parties shall be
free to undertake independent activities, but each party shall consult in good
faith with the other party prior to undertaking any independent activities which
may be competitive with the Venture.
10. Restriction on Assignment
This Agreement and SSII's rights and obligations hereunder shall not be
assignable without the prior written consent of MCP. Any purported assignment by
SSII without MCP's prior written consent thereof shall be null and void from the
making thereof.
11. Expenses
Each party shall bear its own costs and expenses in connection with the
negotiation of the Definitive Agreement and the consumation of the transactions
contemplated thereby.
12. Governing Law
California law shall govern this Letter of Intent and the Definitive Agreement.
13. Entire Agreement
This Letter of Intent represents the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior and/or
contemporaneous agreements and understandings. This Letter of Intent may only be
modified or amended by a written agreement of the authorized representatives of
the Parties.
14. Presumptions
In interpreting the terms and conditions of this Letter of Intent, no
presumption shall operate as a result of the role of any party hereto or such
party's counsel in drafting this Letter of Intent.
15. Counterparts
This Letter of Intent may be executed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
instrument.
16. Public Announcements
Except as otherwise required by law, including without limitation. any
disclosure required under federal or state securities law, SSII shall not
disclose the terms of this agreement or use file name of MCP or any entity
affiliated with MCP in any advertisement, news release or professional or trade
publication, or in any other manner
5
<PAGE>
unless MCP has given prior written consent. If SSII determines that it is
required to file with the Securities Exchange Commission this agreement or any
related agreement with MCP, SSII shall consult with MCP regarding the filing and
shall seek confidential treatment for such agreement and for all financial and
business terms therein.
17. Confidentiality
SSII understands and agrees that any materials, intellectual property, and/or
any other elements of or information about the Picture furnished to or disclosed
to the Venture or SSI1 by MCP are proprietary trade secrets of MCP and will be
kept strictly confidential and only made known to employees of SSII on a need to
know basis. Such information and any additional information concerning the
Venture's products and/or any aspects of the relationship between the parties
(including without limitation the terms of this deal) shall also be kept
strictly confidential and may not be released or disclosed to anyone other than
such employees who have a need to know, without the prior written consent of
MCP. No language in this agreement shall be construed as granting SSII
permission to release information in contradiction to this provision.
If the foregoing terms are acceptable to you. please confirm your acceptance by
signing below.
Very truly yours,
/s/ James G. Robinson
James G. Robinson
Chairman/CEO
Morgan Creek Productions, Inc.
Agreed to and Accepted this 9th day of Sept., 1998.
--- ------
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent Bitetti
_____________________________________
Its: CEO
6
<PAGE>
EXHIBIT 10.25
DISTRIBUTION AND FULFILLMENT
SERVICES AGREEMMNT
This agreement is made and entered into as of this 5th day of February,
1999 (the "Effective Date") by and between Macmillan Distribution, Macmillan
Digital Publishing USA, a division of Pearson p1c., with offices at 201 West
103rd Street, Indianapolis, IN 46290 ("MD") and Sound Source Interactive, a
Delaware corporation with offices at 26115 Mureau Road, Suite B. Calabasas, CA
91302 ("Company").
WHEREAS, MD is in the business of. among other things, distributing
software products;
WHEREAS, Company is in the business of developing and publishing software
products for interactive media and Company desires to grant to MD the right to
distribute its products;
WHEREAS, MD desires to distribute for Company its Licensed Products.
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and other good and valuable consideration, the receipt and sufficiency of which
-----
is hereby acknowledged, MD and Company agree as follows:
1. Certain Definitions.
1.1 "Licensed Products" means those SKU's of software products described in
Schedule A
(as such Schedule A shall be updated from time to time as set forth in
Paragraph 7 hereof), including related end-user documentation and
manuals, and such other artwork.. promotional and other materials
prepared by Company and included in such software products, and
provided to MD hereunder.
1.2 "SKU" means a version of a Licensed Product designed for DOS, WINDOWS,
Macintosh and am, other software or electronic versions (limited to CD-
ROM, not withstanding MD shall have right of first refusal for DVD ROM)
-----
of such Licensed Products. including without limitation versions
designed for set-top boxes and downloadable upgrades.
1.3 "Gross Revenue" means the actual amount billed by MD when converted
into U.S. dollars for Licensed Products shipped by MD (exclusive of
freight, insurance and taxes).
1.4 "Territory" means North America (including its territories and
possessions). "Additional Territory" means the world, excluding the
Territory.
1.5 "Returns Credit"means the amount credited or refunded by MD when
converted into U.S. dollars for actual returns of Licensed Product.
1.6 "Launch" means the sales process and effort associated with the
distribution of an SKU, within sixty (60) days of a pre-determined
release date for such SKU.
1
<PAGE>
1.7 "All Markets" means the following accounts; Office Superstores,
Computer Superstores, Mall Electronic Stores, (such as Electronic
Boutique and Babbages) Bookstores, Electronic Retail Outlets, General
Merchandise Discounters (such as Wal*Mart, Target etc.) with the
exception of TJ Max, Ross, Avon and Marshalls, Wholesaler Clubs, (such
as Costco and Sams Club) Toy Stores, Wholesalers Books, (Such as Inc-
----
Tam and Baker and Taylor) ) Wholesale Software, (Such as Navarre and
---
Merisel) On-line retailers, (Such as Amazon.com and Shopping.com)
Software Clubs, (excluding Family Software and Software of the Month
Club) Book Clubs, Video Clubs and Military Retail Stores
1.8 "Non-Exclusive Channels" includes the following but is not limited to;
The direct-to-consumer programs such as direct mail, telemarketing
--------
(such as 800 number sales), in-box coupon fulfillment and infomercials,
OEM sales, "soft bundles" of the Licensed Products -with non-software
products designed to generate a secondary market for the Licensed
Products, and non-traditional channels such as grocery stores.
-------
1.9 "Studio Licensor" shall mean a movie studio or other entertainment
company that has licensed to Company the primary content on which
certain Licensed Products may be substantially based and, in addition,
may have granted to Company and its designee the right to use its name.
logo and trademark in connection with such Licensed Product.
2. Grant of Rights/Services.
2.1 Distribution. Company hereby grants to MD the exclusive right to sell,
------------- -----
distribute and provide inventory. warehousing and fulfillment sen,1ces
for Company's Licensed Products, in All Markets in the Territory except
the Non-Exclusive Channels. The parties acknowledge and agree that the
Company may from time to time throughout the Term grant to MD: (a) the
non-exclusive right to distribute and provide inventory, warehousing
and fulfillment services for any or all of the Licensed Products in the
Non-Exclusive Channels in the Territory- and (b) the exclusive or non-
exclusive right to distribute and provide inventory, Warehousing and
------
fulfillment services for any or all of the Licensed Products, in all or
certain markets, in the Additional Territory. In addition, the parties
agree to consult with each other with respect to their solicitation of
sales in the Non-Exclusive Channels.
2.2 Trademark License.
a) Subject to the terms of this Agreement, Company hereby grants to
MD the non-exclusive Tight to use the name and logo of Company and
the applicable trademarks of Company alone or in conjunction with
MD's name, logo and marks in connection with the distribution of
----
the Licensed Products. Company shall have prior approval of
materials incorporating the name, logo or trademark of Company,
such approval not to be unreasonably withbeld or delayed. A
failure by Company to respond to MID in writing within five (5)
business days of Company's receipt of
2
<PAGE>
material incorporating its name.. logo or trademark shall
constitute Company's approval of such material (as pertains to the
Company only and notwithstanding the applicability of subparagraph
(b) below) submitted to by MD.
b) The parties understand that, in some instances, Company may have
the right to include in certain marketing, packaging, promotion,
----------
advertising, sales and distribution materials the name, logos and
trademarks of Company's Studio Licensors. In connection therewith.
Company hereby grants to MD the non-exclusive right to use the
name and lo2o of such Studio Licensors alone or in conjunction
with MD's and/or Company's 3-larrie, logo and marks in connection
with the distribution of Licensed Products. Company shall inform
MD of its rights With respect to the name, logo and trademarks of
its Studio Licensors and any requirements pertaining to Studio
Licensor approval of such materials. In all cases in which MID
submits such materials to Company for approval, Company will
inform MD that it has received such materials within twenty-four
(24) hours of receipt and AU use best efforts to expedite and gain
such Studio Licensor approval within ten (10) business days of
company's receipt of materials incorporating licensors name, logo
or trademark. At a minimum, Company shall respond to MD in writing
within ten (10) business days of Company's receipt of material
incorporating third-party names, 1020S or trademarks to advise MID
of the status of such Studio Licensor approval.
3. Obligations of MD.
3.1 Marketing and Promotion. IMD shall use commerically reasonable efforts
-------------------------
to actively promote and sell the Licensed Products. MID shall consult
'With COMPANY on a periodic basis regarding sales and marketing
opportunities for the Licensed Products, provided that final decisions
regarding such advertising and promotion practices shall remain at
MD's discretion. Subject to the prior consent of COMPANY. which shall
not be unreasonably withheld or delayed, y NO shall in its discretion
include Licensed Products in NO sales and marketing literature at MD's
expense.
3.2 Further, subject to the prior consent of COMPANY, which shall not be
unreasonably, withheld or delayed, MD shall in its discretion include
Licensed Products in direct mail materials, retail and consumer
promotion materials, advertising materials. public relations efforts.
telemarketing programs and trade shows as MD deems appropriate to
effectively carry out the terms of this Agreement, and all the costs
of including Licensed Products in such materials, efforts. programs
and trade shows shall be borne by COMPANY.
3.3 Books and Records: Audit Rights. MD shall maintain and retain complete
and accurate books and records relating to any obligation assumed by
MD under this Agreement, for a period of not less than two (2) years
following expiration or termination of this agreement. Company. or its
designee through the use of a certified public accountant, upon two
(2) weeks prior notice and during business hours, shall have the right
-----
once a year during the Term of this Agreement and for one (1) year
following the expiration or termination of this Agreement to inspect
and examine and make copies of such books, records, and
correspondence, as Company may deem appropriate to determine the
accuracy of accountings and reports made pursuant to this Agreement.
All accountings and reports rendered by NO under this A2reement shall
be deemed binding on Company unless objected to in writing by
Company:, within one (1) year of the statement's being rendered.
3
<PAGE>
3.4 Solicitation and Shipment of Orders. With respect to MD's distribution
rights hereunder. NO shall have the sole Tight and obligation to
solicit orders.. prepare shipping documents, manage transportation of
the Licensed Products, including shipping copies thereof., receive and
--------
process returns of the Licensed Products, bill all orders at discounts
and on such terms as are in accordance with standard MID terms and
conditions and practice, and collect all invoices.
3.5 Delivery of Licensed Products. Subject to Section 4.7, Company shall
-------------------------------
deliver from time to time copies of the Licensed Products f.o.b. MD's
warehouse in quantities and on dates mutually agreeable to the parties
and as necessary for MD to perform properly hereunder. Company shall
assume all risk of loss or damage to such Licensed Products until
delivered to and accepted by MD. The freight for shipping copies of
such Licensed copies to MD's warehouse facility or other designated
warehouse facilities shall be the responsibility of Company. All
freight costs associated with the fulfillment of all Licensed Products
-------
to retailers and distributors shall be borne by Company. MD shall not
make any changes or alterations to the Licensed Products delivered to
-------
it by Company.
4. Obligations of Company.
Company represents to MD that it is or intends to be the developer or
publisher of the Licensed Products. Company acknowledges that MD is assuming no
--------
responsibilities for any obligations With respect to the Licensed Products
except such as are expressly set forth in this Agreement. Company, farther
represents. covenants and agrees as follows:
4.1 Packaging. Company shall be responsible for manufacturing of all
packaging and associated materials for the Licensed Products.
4.2 Product and Packaging Design. All Licensed Products will be legibly
------------------------------
marked on the outside as to machine, medium and other operating
requirements such as memory, and AU be marked clearly either on the
outside or within the packaging to indicate that Company is solely
responsible for customer support and for any warranties with respect
to such Licensed Products. Company shall place on all packaging
information for the Licensed Products delivered to MD hereunder such
bar code information, I.S.B.-INT. numbers or other data as MI) has
requested as desirable to customers of the Licensed Products. In
addition, Company shall place the following designation on all
Licensed Products distributed hereunder beginning with The Land Before
Time Preschool Adventure, that have not been previously distributed
and on all reprints of existing Licensed Products, in a typeface
--------
consistent with the other packaging descriptive copy and in no event
smaller than I 0-point typeface: "Distributed by Macmillan
Distribution".
4.3 Product Maintenance. Company will inform MD Promptly of any known
--------------------
defects or operational errors in the Licensed Products. If such
material defects or operational errors result in a substantial
reworking of MD's existing inventory, Company shall bear the
reasonable labor and material costs for such handling at a cost to be
mutually agreed upon by the parties.
4
<PAGE>
4.4 Product Changes. Company shall use it best efforts to give MD a
-----------------
minimum of forty five (45) days prior written notice of any changes in
the Licensed Products, including, without limitation, any decision to
discontinue or materially enhance any Licensed Product.
4.5 Technical Support . Company shall be solely responsible for 0 customer
------------------
and technical support in connection with the Licensed Products
("Technical Support Services"). Company shall provide Technical
Support Services at least as comprehensive as that which Company
customarily provides for other software products made by it. Such
Technical Support Services provided by Company shall include. at a
minimum. making available a representative of Company or of the
Licensed Product's developer to answer questions regarding the
----------
Licensed Product during normal business hours.
4.6 Marketing Support. Company hereby agrees to all standard CO-OP
------------------
Practices of accounts covered by this agreement as outlined in
Schedule E. Company will also provide MD with reasonable cooperation
and support in MD's efforts hereunder, including without limitation
setting up an adequate pool of funds to ensure that it can accommodate
--------
cooperative advertising and other promotional expenses to support the
Licensed Products. 'N[D agrees to discuss and obtain approval of all
marketing co-op initiatives above and beyond Schedule with the Vice
President of Sales of Company, or any other individual designated by
the Chief Executive Officer of Company.
4.7 Purchase Orders. Company shall be solely responsible for maintaining
----------------
inventory levels and shall use reasonable best efforts to maintain
inventory levels of the Licensed Products at the MD warehouse (or that
of its designee) sufficient to process Company's purchase orders for
the Licensed Products within three (3) working days of receipt of the
order.
4.8 Insurance. During the Term of this Agreement, each party shall at all
----------
times maintain at its own cost the following minimum insurance
coverage in a form reasonably acceptable to the other and, upon the
request of the other, shall furnish certificates evidencing such
insurance: (i) comprehensive general liability insurance with a
combined single limit of at least One-Half Million Dollars (S500,000):
and (Iii) any other insurance coverage which the parties consider
necessary, or appropriate under the circumstances in the event there
are claims against any existing insurance policy with respect to the
-------
Licensed Products.
4.9 Distribution Outside of this Agreement. Company shall have full
---------------------------------------
responsibility for all aspects of its products distributed by anyone
other than MD (whether prior to or as expressly permitted by this
Agreement). Such responsibility shall include, without limitation, the
financial and administrative burden of distribution and return of such
product. 'Without limiting the foregoing, Company agrees that, upon
execution of this Agreement it will provide MD with a best-estimate of
the inventory of the Licensed Products in wholesale and retail
accounts or otherwise f manufactured but not sold. In addition,
Company shall notify all resellers that NO shall be its authorized
distributor
5
<PAGE>
as set forth in this Agreement, and shall designate itself or another
entity responsible for all product distributed prior to the Effective
Date of this Agreement or outside of this Agreement and make all other
reasonable efforts necessary to ensure that distribution/ return of
such products does not impair or conflict in any way with the rights
granted to MD hereunder.
5. Damaged Products; Returns; Inventory.
5.1 Damaged Products. Copies of the Licensed Products in MD's inventory
-----------------
which are not in salable condition (as determined by MD in accordance
with its standard terms and conditions and practice) shall.. at
Company's election to be exercised within thirty (30) days of MD's
request thereof, be returned to Company at Company's cost and expense
(and pursuant to its shipping instructions), sold as damaged
merchandise by Company7 . or destroyed at Company's sole cost and
expense. Company shall be entitled to physically inspect the Licensed
Products within the thirty (30) day period prior to making such
election. Upon the failure of Company to provide instructions to MD
within thirty (30) days following receipt of MD's notIce,N4D shall
return such inventory to Company at Company's sole cost and expense.
NO shall follow the same policies and practices regarding returned
and/or dama2ed Licensed Products as it does for its own products
and/or its other distributed lines. The distribution fees payable by
Company to NO on any sale of the Licensed Products as damaged
merchandise hereunder shall be based upon the mutual agreement of the
parties, and any proceeds of such sale shall be paid to Company in
accordance with the terms hereof.
5.2 Returns. MD shall send a \written notification (email, fax) to the
--------
designated Company representative of MD's acceptance of any one single
return in excess of two hundred and fifty, (250) units of Licensed
product. This notification shall be sent to NO within three (3)
business days of acceptance of an RA from one of MD's customers.
Company \),ill make its best effort to respond to that request (email
fax) within three (3) business days. MD reserves the right to
------
process a return in the event that the Company does not respond within
the period of time set forth in this agreement [three (3) business
days). Company shall pay the cost of freight on all returns of
Licensed Products if freight would not otherwise be paid by the party
returning such Licensed Products. Company shall be solely responsible
for all deductions for returns taken by customers of the Licensed
Products and for resolving any disputes regarding such returns. MD
shall not be responsible for resolving any disputes regarding any
returns taken by customers.
5.3 Inventory The inventory of Licensed Products and materials supplied
---------
by Company shall belong exclusively to Company. Company may remove
such inventory of Licensed Products from MD's warehouse at its 0,Am
expense and as it sees fit, subject to Company's obligations under
this Agreement. Except for copies of the Licensed Products received by
NO in damaged or otherwise non salable condition, MD shall assume all
risk of loss or damage, up to the per unit manufacturing cost, for all
-------
copies of the Licensed Products in its custody and
6
<PAGE>
control, provided that MD shall not be responsible for (i) any
Licensed Products returned in a hurt condition, or (ii) inventory
shrinkage that does not exceed 1.5% of the units inventoried
(including returns in inventory), it being understood that MD shall
-----
perform a physical inventor), of the Licensed Products in its
%warehouse at the end of the initial Term of this Agreement and
annually thereafter for so long as this Agreement remains in effect in
order to determine the level of inventory shrinkage.
6. Payment.
6.1 Compensation- In consideration for the performance of the
-------------
distribution, services performed by MD hereunder. ' D shall be
~A7ajehousina and fulfillment s . MD entitled monthly to a
Distribution Fee (as defined in Schedule C hereto) and to a
warehousing fee ("Warehousing- Fee"), which Warehousing Fee shall be
equal to the sum of twenty-five cents ($.25) per unit of Licensed
------
Product shipped by MD or its agents during such month plus forty cents
------
($.40) per unit of Licensed Product returned during such month. At the
time specified in Paragraph 6.2 below, MD shall pay Company a Monthly
Payment, which shall be an amount equal to Gross Revenue less: (i) the
Distribution Fee, (ii) the Warehousing Fee, and (iii) the Authorized
Deductions (as defined in Schedule C hereto). Cancellations of orders
are not subject to Distribution or Warehousing Fee's. Drop Shipments
direct to MD customers that do not enter MD's warehouse are not
subject to Warehousing Fees.
6.2 Payment/Statements. 'Within seven (7) business days of the end of each
------------------
month. shall issue to Company a report of Gross Revenue for the
Licensed Products. In addition. within fifteen (15) business days of
the end of each month, MD shall issue to Company a statement of Gross
Revenues for the Licensed Products for such month, as -well as an),
other charges or payments due under this Agreement, substantially in
the form of Schedule B hereto. The statement shall include the number
of copies of each of the Licensed Products shipped during the month,
the number of actual returns during the month, the amount of the
reserve for returns, the manner in which past reserves have been
applied, and an itemized listing of any other charges and fees charged
to Company pursuant to the terms hereof in connection with such
shipments.
Within sixty (60) business days after it renders such statement, MD
shall pay to Company the amounts set forth in Paragraph 6.1 above by
issuing a check to Company or, to the extent commercially feasible, by
directly depositing such amount in Company's bank account, as
specified by Company in writing in advance. In the event that the
Distribution Fee, the Warehousing Fee and/or the Authorized Deductions
in any given month exceed the Monthly Payment for such month, MD shall
issue an invoice to Company-for the-amount of such excess within
fifteen (15) business days of the end of such month, which invoice
shall be payable within sixty (60) days of receipt of such invoice by
Company and shall be payable by issuing a check to MD or, to the
extent commercially feasible, by directly depositing such amount in
MD's bank account, as specified by MD in writing in advance.
7
<PAGE>
6.3 Return Reserve. MD shall maintain a reserve against customer returns
---------------
("Return Reserve") equal to the amount set forth on Schedule C. MD
shall perform periodic return reserve reconciliation reports in order
to maintain the proper reserve balance, as determined in consultation
with Company. MD shall refund any return reserve overages in a timely
and appropriate manner, as is mutually agreed by the parties. In
addition, three (3) months after expiration or termination of this
Agreement (except as otherwise provided in Paragraph 9.3), MD shall
refund any balance remaining in this reserve unless MD is made aware
of upcoming returns that would be in excess of the return reserve
balance, in which case MI) w0tld retain the reserve in order to cover
the cost of such returns. MD reserves the right upon approval from
Company (which will not be unreasonably withheld or delayed) to retain
a return reserve greater than the amount set forth on Schedule C in
--------
such case that MD is made aware of upcoming returns that would be in
excess of the return reserve balance.
6.4 Demonstration./Promotional Copies. No payments shall be owing to
----------------------------------
Company, nor shall MD be entitled to a Distribution Fee, in connection
with Products furnished on a so-called "no charge" basis (not to
exceed 500 units per sku without written consent of Company) to
distributors, sub-distributors, dealers and others for demonstration
and promotion purposes. Any Licensed Products furnished for
demonstration and promotion purposes shall be done so in a reasonable
and customary manner and only to promote Company products.
6.5 Price Protection/Stock Balancing. If MD decides to issue price
---------------------------------
protection credits (all price protection/stock-balancing actions must
meet with prior COMPANY approval which shall not be unreasonably
withheld or delayed), the credits to be reimbursed shall be based on-
the difference-between the new price and the former price for the
portion of units distributed by MD which remain as unsold inventory of
MD's customers on the effective date of the price protection/stock
balancing action.
In connection with granting such price protection credits to its
customers, MD shall (i) give a good faith estimate of the inventory of
its customers (based upon documentation supplied by such customers)
and base its refund or credit on such estimate, and (~) update such
estimate on a periodic basis as it receives information from its
customers and (iii) process claims for price protection at any time
subsequent to a price protection/stock balancing action. MD shall make
reasonable efforts minimize the impact of such price protection
credits.
7. Future Licensed Products.
Company shall grant to MD, as set forth in Paragraph 2.1 hereof, the right
to distribute any and all other SKU products that Company develops. publishes or
for which Company gains distribution Tights (whether due to expiration of a
------
previous grant of distribution rights or otherwise) throughout the Term of this
-----
Agreement unless either (1) its contractual obligations as of the Effective Date
do not so permit, (ii) such product is developed jointly with or under license
to or with a Studio Licensor or another party that provides distribution
services itself (which in no event shall be more than four (4) products per
year), Or (iii) the parties otherwise agree in writing not to include such
product as a Licensed Product hereunder. Schedule A shall be amended to include
all such additional products as Licensed Products hereunder, and MD's
distribution of such new Licensed Products shall be governed by the terms of
this Agreement. In
8
<PAGE>
addition, Company shall inform '.MD of those products that fall within the
exceptions (i) - (iii) above and which, according]y, shall not be Licensed
Products hereunder.
8. Product Returns.
8.1 Defective Product. Company will inform MD and MD will inform Company
-------------------
promptly of any known defects or errors in the Licensed Products.
Company. at its option, will repair or replace, at no charge to MD,
------
all Licensed Products that are considered to be materially defective
or to contain material errors in the reasonable discretion of Company,
MD and MD's distributors and dealers. For purposes of this Agreement
material software defects and errors shall include, but not be limited
to: Licensed Products, when properly used in accordance with Company's
documentation, that do not operate in substantial conformity with the
description of the Licensed Products set forth in the documentation
accompanying the Licensed Products; Licensed Products, packaging or
accompanying documentation destroyed during shipment and defective
stickering during retail. Company will pay any and all out-of-pocket
expenses associated with correcting the material defects or error,
including the cost of delivering modified product, plus a reasonable
handling fee for such labor as may be necessary to process and handle
such defects; provided, however, that respect to Licensed Product,
packaging or documentation destroyed during shipment, Company's
---------
payment obligations as set forth in this Paragraph 8.1 shall be offset
by the amount of payment or other compensation received by MD, if any,
from any shippers or their insurers with respect to such damaged
Licensed Products.
If Company refuses to make necessary corrections, then, without
limiting and remedies of MD or obligations of Company hereunder, MD
shall have the right to withdraw the specific Licensed Products from
sale and Company shall reimburse MD for any actual and direct costs
associated with such withdrawal.
9. Term and Termination.
9.1 Term. The term (the "Term") of this Agreement shall commence on the
-----
Effective Date and shall continue until January 31, 2001. Thereafter,
this Agreement shall be renewable only upon mutual --A7irten consent
of both parties.
9.2 Termination.
------------
(a) Termination Without Cause. Either part), may terminate this
--------------------------
Agreement without cause upon ninety (90) days prior written
notice to the other party.
(b) Termination With Cause. Upon breach of a material obligation
hereunder by either party, the other part), may make written
notice of such material breach. If, after fifteen (15) days from
notice of such breach, the party in breach has failed to cure
such breach, the party having given notice may terminate the
Agreement.
(c) In addition, either part), may, at its option, immediately
terminate this Agreement without liability -upon occurrence of
any of the following events: if the other party has a receiver
appointed for it or its property: becomes insolvent
9
<PAGE>
or unable to pay its debts as they mature, or makes an assignment
for the benefit of its creditors; seeks relief or if proceedings
are commenced against MD or on its behalf under an), bankruptcy,
insolvency or debtor's relief law, and such proceedings have not
been vacated or set aside within sixty (60) days from the date of
commencement thereof, or is liquidated or dissolved.
9.3 Effect of Termination. The following provisions shall be in effect
----------------------
upon the effective date of the termination of expiration of this
Agreement:
(a) MD shall discontinue distribution of the Licensed Products.
(b) As soon as feasible after the effective date of termination or
expiration of this Agreement. MD will cease the use of any forms.
Promotional materials, or advertising referring to any titles of
the Licensed Products or to Company or any of its trademarks and
service marks.
(c) MD shall immediately f6m,ard to Company any and all unfilled
orders for the Licensed Products then in hand.
(d) Company shall be free to sell the Licensed Products to customers
by any means and by its own personnel or through any other
distributor.
(e) Each party's obligation to pay the other party for any amounts
which have become due shall continue.
(f) For a period of two (2) months after expiration or termination of
this Agreement (the "Returns Processing, Grace Period"), MD shall
continue to receive and process returns, to render receiving
reports and credits in accordance with its usual practices and to
render required statements and reports. After the end of the
Returns Processing Grace Period, MD shall have no responsibility
for processing returns. At that time Company shall be responsible
for processing all returns and shall reimburse customers of the
Licensed Products for all such returns.
(g) Upon expiration of this Agreement. MD may withhold amounts
otherwise due under this Agreement until the final accounting
settlement, ,which shall be rendered one (1) month after the end
of the Returns Processing Grace Period: provided, however, that
MD shall continue 10 Tender Its month.]y statements to Company
during, the period from expiration through the end of returns
processing.
(h) In the event of termination of this Agreement by MD due to
material breach by Company, MD will withhold amounts otherwise
due under this Agreement upon notice of termination until the
final accounting settlement, which shall be issued three (3)
months after the end of the Returns Processing Grace Period.
(i) In the event of termination by Company due to material breach by
MD, MD shall not be entitled to withhold amounts otherwise due
hereunder and shall continue to render statements and
accountings, along with payments to Company. for all sales and
support activity through the month of termination, with the final
accounting settlement to be issued one (1) month after the end of
the Returns Processing Grace Period.
10
<PAGE>
(j) If Company contracts with a new distributor who will begin
accepting returns immediately after the effective date of
expiration or termination, MD shall not withhold monies under
subparagraphs (g) and (h) above. In such event, MD shall continue
to issue accountings and payments due in accordance with the
terms of this Agreement for all sales and support activity
through the month of expiration or termination, with a final
accounting- to be issued three (3) months after the end of the
Returns Processing Grace Period.
(k) During the last month of the term of this Agreement, Company
shall instruct MD in writing as to the disposition of inventory
(including inventory received during the Returns Processing Grace
Period), and shall pay any crating or shipping expenses attendant
thereto at MD's cost. MD shall receive full credit in accordance
with Company's written instructions. Upon the failure of Company
to provide such instructions, MD shall return such inventory to
Company at Company's sole cost and expense. In the event Company
fails to accept such returns or to pay for such returns and/or
the inventory is returned to MD, MD may destroy such inventory
without liability. provided that no such destruction shall take
place sooner than thirty (30) days following the mailing of a
request, by certified or other receipted form of mail delivery,
advising Company of MD's intention to destroy a stated number of
copies absent written instructions from Company to the contrary.
10. Warranties and Indemnification.
10.1 Company Warranties. Company represents and warrants that:
(a) it has all necessary rights and authority to execute and deliver
this Agreement and perform its obligations hereunder. and to
grant to MD all rights purported to be granted herein and nothing
contained in this Agreement or in the performance of this
Agreement will place Company, in breach of any other contract or
obligation;
(b) the Licensed Products and all other materials delivered to MD
hereunder are and will be original to Company, except for (i)
material in the public domain or (ii) material as in which
permission has been obtained from the proprietary Tights owner
for Company to grant rights to MD hereunder and for MD to perform
to the full extent contemplated by this Agreement;
(c) it has not granted and will not grant any Tight in the Licensed
Products to any third party which are inconsistent with the
rights granted to MD in this Agreement.
(d) the Licensed Products and all other materials delivered to MD
hereunder, the audiovisual aspects of the Licensed Products and
any Company trademarks licensed to MD hereunder do not (i) invade
the right of privacy of any third person; (ii) contain any
libelous, obscene or otherwise unlawful material: (iii) infringe
an), patent, (iv) infringe any statutory or common law copyright
or (v) otherwise contravene any rights of any third
11
<PAGE>
person the Licensed Products do not contain ' any virus, Trojan
horse, worm or other software routine or hardware component
designed to permit unauthorized access, to disable, erase or
otherwise harm software, hardware or data, or to perform any
other such actions; and
(e) the Licensed Products shall be Year 2000 Compliant. "Year 2000
Compliant" shall mean that the Licensed Products shall not
experience any abnormality. malfunction or degradation in their
operation simply as a result of changing date values in
--------
connection With moving from the 20th to the 21st Century.
10.2 MD Warranties. MD represents and warrants that:
--------------
(a) it has all necessary rights and authority to execute and deliver
thisAgreement and perform its obligations hereunder;
(b) it shall not reverse engineer, reverse compile, or other-wise
disassemble the software relating to the Licensed Products; and
(c) it shall not sell, use, reveal, disclose or distribute the
Licensed Products: or any component thereof, to any person.
company or institution other than for the purposes set forth in
this Agreement.
10.3 Company Indemnification. Company shall indemnify and hold MD and any
-------------------------
purchaser of the Licensed Products from MD harmless against any loss,
-------
liability, damage. cost or expense (including without limitation fees
-------
and disbursements of counsel incurred by MD in any action or
proceeding between Company and MID or between 'MD and any third
party), judgments and other expenses arising out of any breach Or
alleged breach by Company of this Agreement or an), covenant,
representation or warrant), made by it herein, or otherwise arising
out of the content of an), materials provided or prepared by Company
with respect to the Licensed Products. MD shall be entitled to assume
and control the defense and settlement of any such claim, and Company
shall Provide reasonable cooperation and assistance in defending
against any such claim. In addition to, and not in limitation of any
other rights of MD. Company shall bear all costs and expenses
incurred by MD as a result of the recall of an), Licensed Product
necessitated by any breach or alleged breach of this Agreement or any
covenant, representation or Warranty made by Company herein. Company
shall consult in good faith with MD regarding the necessity for
recalling any Licensed Product or providing substitute or
supplemental materials prior to instituting such a recall,
substitution or supplementation. MD shall have the right, in its sole
discretion, to demand immediate reimbursement of all costs and
expenses of any such actions or to charge them against Company's
account.
10.4 MD Indemnification. MD agrees to indemnify, hold harmless and defend
--------------------
Company against any loss, liability, damage, cost or expense
(including without limitation fees and disbursements of counsel
incurred by Company in any action or proceeding between Company and
MD or between Company and any third party), judgments and other
expenses relating to or arising out of any breach or alleged breach
-------
by MD of this Agreement or any covenant, representation or warranty
made by it herein. MD shall be entitled to assume and control the
defense and settlement of any such claim. MD's obligation to
indemnify is conditioned on Company notifying MD promptly of any
claim as to
12
<PAGE>
which indemnification will be sought. The par-ties agree to provide
each other with reasonable cooperation in the defense and settlement
of any such claim.
11. Confidentiality.
Each party agrees to treat the terms and conditions of this Agreement as
confidential information. In addition, each party ("Recipient") acknowledges
that, pursuant to the terms of this Agreement, it will come into possession of
certain financial information and records relating to the business of the other
party ("Disclosure"). Recipient agrees that any such information shall be
-------
treated as the confidential property of Discloser. Recipient agrees that it
shall take every reasonable precaution to safeguard the confidentiality of such
information with the same degree of care that it so exercises to protect the
confidentiality of its own proprietary information. Except as necessary to carry
out or enforce the terms of this Agreement, such confidential information shall
not be disclosed to others. Financial information provided or approved by
Discloser for distribution without restriction to third parties, information
already in Recipient's possession or in the public domain, or information
received by Recipient from third parties whether authorized or not to divulge
same, shall not be subject to this prohibition. Further. to the extent Recipient
is lawfully required to disclose such confidential information in the context of
any administrative or judicial proceeding, Recipient shall provide to Discloser
prior written notice of such required disclosure and an opportunity to oppose or
limit such disclosure.
12. Use of Trademarks; Tradenames; and Copyrights
12.1 Use by MD. MD hereby recognizes and concedes for all purposes that
----------
any copyrights, trademarks, trade names, or identifying slogans
affixed to, relating to, or contained in the Licensed Products as
prepared pursuant to the terms of this Agreement, or any accompanying
labels, containers and cartons, whether or not registered, constitute
the exclusive property of Company or its licensors'. MD agrees that
it shall only use, make reference to, or otherwise designate, either
orally or in writing, Company's trademarks or its licensors'
trademarks in the distribution of he Licensed Products, and shall not
transfer such right to use, reference, and designate such trademarks
to any other party. Upon termination of this Agreement in any manner
provided herein, MD will cease and desist from using all Company
copyrights, trademarks, trade names, or identifying slogans, and
furthermore, MD will at no time adopt for use, without Company's
prior written consent any word or mark which is similar to or likely
to be confused with said identifying marks.
12.2 Ownership by Company. MD shall not obtain or try to obtain for itself
---------------------
anywhere in the world, any trademarks, trade names, copyrights or
patents associated with the Licensed Products. MD acknowledges and
agrees all such items are the exclusive property of Company or its
licensors and agrees to immediately notify Company in writing of any
actual or suspected infringement. MD acknowledges that all rights
------
(including good Ail]) in Company's trademarks vest in Company and MD
shall, if and when requested by Company, enter into a "user
agreement" in the form reasonably required by Company without cost or
charge to MD. MD agrees not to use any of Company's trademarks as any
part of the name under which conducts its business; provided,
however, that MD may refer to itself as an authorized distributor of
The Licensed Products. MD agrees that it has or will acquire no right
-----
in Company's
13
<PAGE>
trademarks by virtue of its performance under this Agreement except
for the limited rights of use as provided by this Agreement, and MD
------
acknowledges and agrees that it has no rip-ht to and shall not use.
except as provided by this Agreement, any trademark consisting of or
including Words, signs, color combinations, or other distinctive
features identical with or similar to those used, applied for or
registered by Company.
13. General.
13.1 Exclusion of Certain Damages. EXCEPT TO THE EXTENT OF ANY
-----------------------------
INDEMNIFICATION OBLIGATION FOR THIRD PARTY CLAIMS UNDER SECTIONS 10-
3).AND 10.4, NEITHER PARTY SHALLUTINTIDER ANY CIRCUMSTANCES BE LIABLE
TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
PUNITIVE DAMAGES OR LOST OR IMPUTED PROFITS OR ROYALTIES ARISING OUT
OF THIS AGREEMENT OR ITS TERMINATION, WHETHER FOR BREACH OF WARRANT
OR.ANY OBLIGATION ARISING THEREFROM OR OTHERWISE, WHETHER LIABILITY
IS ASSERTED IN CONTRACT OR TORT (INCLUDING NEGLIGENCE AND STRICT
PRODUCT LIABILITY) AND IRRESPECTIVE OF WHETHER THE PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE. EACH PARTY
HEREBY WAIVES ANY CLAI.MS THAT THESE EXCLUSIONS DEPRIVE SUCH PARTY OF
ANT ADEQUATE REMEDY.
13.2 Notices. All notices or requests, including communications and
--------
statements which are required or permitted under he rems of this
Agreement, shall be in writing and shall be sent by telex or
facsimile, or sent by recognized commercial overnight courier, or
mailed by United States registered or certified mail.
Notices shall be effective upon receipt. Notices shall be sent to the
parties at the following addresses:
For MD:
Macmillan Distribution
Macmillan Publishing
201 West 1 03rd Street
Indianapolis, IN 46290
Attention: Doug Mills
FAX 4: (3 17) 5 81-4 92 0
With a copy of notices to:
Legal Department
1633 Broadway
NewYork, NY 10019
Attention: General Counsel
FAX :~: (212) 654-7535
14
<PAGE>
For Company:
Sound Source Interactive
26115 Mureau Road, Suite B
Calabasas, CA 91302
Attn: Vincent Bitetti
FA.X4: (818) 878-0007
13.3 Governing Law. THE VALIDITY OF THIS AGREEMENT, THE CONSTRUCTION OF
--------------
ITS TERMS AND THE ENITERPRETATION OF THE RIGHTS AND DUTIES OF THE
PARTIES HERETO SHALL BE GOVERNED BY.,VMD CONSTRUED EN' ACCORDANCE
WITH THE SUBSTANTIVE LAWS OF THE STATE OFNEW YORK, NOTW~JTHSTANDING
THE APPLICATION OF ANY CHOICE OF LAW OR RULE TO THE CONTRARY. THE
PARTIES AGREE TO SUBMIT TO THE EXCLUSIVE JUPJSDICTION OVER ALL
DISPUTES HER.EU`.NDER IN THE FEDERAL AND STATE COURTS IN THE STATE OF
NEW YORK LOCATED IN' NEW YORK COUNTY.
13.4 Force Maieure. Neither party will be deemed in default of this
--------
Agreement to the extent that performance of prevented by reason of
any act of God, fire, natural disaster, accident, act of government,
shortages of material or supplies or any other cause beyond the
control of such party; provided that the party interfered gives the
-----
other written notice thereof within ten (10) working days of any such
event or occurrence. In the event of such a Force Mailer, the time
for performance or cure will be extended for a period equal to the
duration of the Force Maieure, but not in excess of six (6) months.
13.5 Captions. All indices, titles, subject headings, section titles and
----------
similar items contained in this Agreement are provided for the
purpose of reference and convenience only and are not intended to be
inclusive, definitive or to affect the meaning, content or scope of
this Agreement.
13.6 Amendment. No amendment or modification of this agreement will be
made except by an instrument in writing signed by both parties. of
either party hereto to prosecute its right with respect to any single
or continuing breach of this Agreement act as a waiver of the right
of that party to later exercise any right or remedy granted hereunder
with respect to that same or any other breach of this Agreement by
the other party hereto.
13.7 Relationship. The relationship between MD and Company with respect to
--------------
all matters relating to this Agreement, will be that of independent
contractors. Each party agrees that under no circumstances is it an
------
agent, partner, franchisor/franchisee or joint venturer of the other,
and neither parry has or owes the other an), special or fiduciary
responsibility. Each part), acknowledges that it is not relying on
the other for legal advice of any kind and has had the opportunity to
review this Agreement with legal counsel of its own choosing.
15
<PAGE>
13.8 Severability. If any provision of this Agreement is found invalid or
--------------
unenforceable pursuant to judicial decree, such provision shall be
enforced to the maximum ex-tent permissible and the remainder of This
Agreement shall remain in full force and effect according to its
terms.
13.9 Binding Agreement./Assignment. The parties intend to be bound only
-------------------------------
upon full execution of a written agreement and no negotiation,
exchange of draft or partial performance shall be deemed to imp]y an
agreement. This Agreement, upon execution by both parties, will be
binding upon the parties hereto. This Agreement shall not be assigned
by either party, nor its rights or obligations hereunder assigned or
delegated, without the prior written consent of the other.
Notwithstanding the provisions of the preceding sentence. MD may
assign its rights or delegate its obligations under this Agreement
------ --------
without the consent of Company to any affiliated entity or to its
successor or the transferee(s) of all or substantially all of its
stock or all or substantially all of its business assets by reason of
merger. consolidation or sales or exchange of assets or other
------- --------
corporate reorganization.
13.10 Absence of Limitations. Nothing in this Agreement shall limit in any
---------------
way MD's right to undertake and carry out is development, publishing,
-----
distribution and/or marketing of its own or other party's software
products regardless of content or target market, including but not
limited to products that may be competitive With the Licensed
Products.
13.11 Entire Agreement. This Agreement and the Schedules hereto (Which are
----------
incorporated herein by this reference) constitute the entire
agreement between the parties and supersede all prior negotiations,
understandings, correspondence and agreements with respect to the
same subject matter.
13.12 Survival. The pro-6sions of Sections 9.3, 10, 11, 12 and 13 shall
---------
survive termination or expiration of this agreement.
Sound Source Interactive Macmillan Distribution
By: _________________________________ By: _________________________________
Title: ______________________________ Title: ______________________________
Date: ______________________________ Date: ______________________________
16
<PAGE>
SCHEDULE A
LICENSED PRODUCTS
[To Be Inserted]
17
<PAGE>
SCHEDULE B
STATEMENT TEMPLATE
[To Be Inserted)
18
<PAGE>
SCHEDULE C
CERTAIN PAYMENT TERMS DEFINED
Distribution Fee: an amount equal to (i) twelve percent (12%) of Gross Revenue
- -------------
for the Licensed Products for the month, (representing a 6% distribution fee and
a 6% affiliate management fee) less (ii) eight percent (8%) of the Returns
------
Credit for the Licensed Products for such month (the "Distribution Returns
Credit").
Authorized Deductions:
- ----------------------
i. the reserve for anticipated returns as provided for in Paragraph 6.3,
against which actual returns shall be applied;
ii. the price protection or stock balancing credit described in Paragraph
6.5. if any, for credits granted in the preceding month;
iii. the amount of costs associated with inventory and fulfillment, as set
forth in Paragraph 6. 1;
iv. an amount equal to actual bad-debt write-offs taken by MD for sales
of Licensed Product in the preceding months; and
v. the amount of any other deduction approved by Company (such as
promotional expenses or cooperative expenses set forth in Paragraph
4.6) that the parties have agreed shall be paid for or Credited by
------
Company which approved deduction shall be taken by MD in the month in
which such expenses are actually paid by MD or otherwise credited to
customers.
Return Reserve: Seventeen and one half percent (17.5%) of Gross Revenues.
- --------------
19
<PAGE>
SCHEDULE D
MACMILLAN DISTRIBUTION
1998 TERMS AND CONDITIONS
Distributor Program
Payment Terms: Net 60 days from invoice date.
Distribution Rights: North America only. The Company Vice President of Sales
must approve distribution beyond these areas, in writing.
Minimum Order: (1) case-pack
Discounts: MACMILLAN DISTRIBUTION reserves the right to decide, in
its sole discretion, at any time, which distributors it
shall sell its products through and whether any entity
qualifies or continues to qualify as a distributor. Two
additional discounts will be offered to distributors in
exchange for specific services listed below:
A. Distributor services discount of 3% off net software purchases (net software
-----------------------------------
purchases are defined as: purchases less returns). This discount is
identified on each invoice and reflects the distributor services
including, one or more of, but not limited to, the following:
[_] Advertising co-op assistance
[_] Electronic ordering (EDI)
[_] Mix assistance
[_] Pre-ticketing
[_] Plan-o-gramming
[_] Shipping and/or storage charges
To receive this discount, distributor must provide MACMILLAN
DISTRIBUTION with the following reports on a monthly basis within 10
business days from the close of each month:
[_] Inventory report with net sales by sku
[_] Net sales report by customer and by sku
20
<PAGE>
If the distributor fails to provide these reports within the required time,
MACMILLAN DISTRIBUTION at its sole discretion can chargeback the distributor the
total discount dollar amount given for that period.
B. Racking Services discount of 6% off net software purchases (net
-------------------------------
software purchases are defined as: purchases less returns), will only
be credited to distributors for sales to those retail accounts-to
which-distributor provides full racking services.
To receive credit for the racking service, the distributor must supply
MACMILLAN DISTRIBUTION with a written request for each account (and
all included products) that they are providing racking services to.
MACMILLAN DISTRIBUTION reserves the right to require proof of
performance for all racking claims. Credit for all racking claims will
be issued within 30 days following the close of the month provided
that MACMILLAN DISTRIBUTION receives the monthly reports outlined in
paragraph "A" of the section entitled "Discounts" above. Credits are
based on monthly net units to customers for which racking services
were provided, reflected on the monthly reports, calculated at the
distributor's net cost. THERE WILL BE NO DEDUCTIONS FROM INVOICE FOR
RACKING DISCOUNTS.
Please note, MACMILLAN DISTRIBUTION defines racking as monthly, in-store
personnel providing physical inventory management of MACMILLAN D7STRIBUTTGN
skus.
Freight Policy: F.O.B. destination via surface carrier,- retailer can
upgrade freight at their expense.
Defective Returns: Please follow the procedure listed below:
. 100% with MD approval.
. Freight F.O.B. origin.
. Returns must be received within 60 days of RA authorization.
Non-Defective Returns:
. 1 for 1 stock balancing with MD approval.
. Order must be received within 30 days of RA approval.
. Freight F.O.B. Destination.
. Return must be received within 60 days of RA authorization.
Price Changes:
. There will be a 30-day written notice of the pending price change.
. Return requests must be in writing and should be faxed to MACMILLAN
DISTRIBUTION, Attn: David Ellis at (317) 8177287.
. Upon review and approval, an RA form will be sent to you. No
deductions are allowed against open invoices or from invoice payments.
Use the RA form we provide and return to the MACMILLAN DISTRIBUTION
designated warehouse: MACMILLAN DISTRIBUTION, c/o Macmillan Returns
Department, 135 South Mt. Zion Road, Lebanon IN 46052.
21
<PAGE>
. Returns must be received within 60 days of R.A authorization.
. Freight for returns must be prepaid.
. Unauthorized returns will be refused. Returns of non-MACMILLAN
DISTRIBUTION product will be refused. Returns sent freight collect
will be refused.
Price Changes: MACMILLAN DISTRIBUTION reserves the right to change the price it
charges its customers for any product (sku). UPON WRITTEN
NOTIFICATION OF A PRICE CHANGE THAT IS A REDUCTION, MACMILLAN
DISTRIBUTION will provide price protection for existing
inventories at each retailer (in-store and warehouse inventory).
All requests for price protection must be received within 90 days
from the written notification date with appropriate proof of
inventory. Proof of inventory will be a report generated by the
customer that reflects their current inventory position at the
time the request is made. MACMILLAN DISTRIBUTION reserves the
right, at its sole discretion, to audit the customer's inventory
records.
Discounts: EDI
---
MACMILLAN DISTRIBUTION offers retailers a discount of 1 % off
net software purchases (net software purchases are defined as:
purchases less returns) in exchange for electronic ordering/
reporting (EDI). To receive the EDI discount, retailer must also
provide MACMILLAN DISTRIBUTION with an inventory report with
net sales by sku on a weekly or monthly basis within 10 business
days from the close of each month.
Retail Distribution Center (RDC) Discount Program
-------------------------------------------------
MACMILLAN DISTRIBUTION offers qualifying retailers a discount
of 2% off net software purchases (net software purchases are
defined as: purchases less returns). To qualify for this program,
the following qualifications must be met:
Retailer must maintain a distribution center with truck-height loading
and receiving dock capable of receiving multiple cartons on skids.
Retailer must order in carton quantities.
Retailer must order a minimum of 12 cartons per order.
Retailer must provide MACMILLAN DISTRIBUTION with an inventory report
with net sales by sku on a weekly or monthly basis within 10 business
days from the close of each month.
A retail distribution center can service any number of retail
locations. Retailers also have the option of supplementing retail
distribution center orders with orders at our standard terms.
Contact your sales representative for participation request form.
The EDI and RDC discounts are credited following the close of each
MACMILLAN DISTRIBUTION fiscal month.
22
<PAGE>
SCHEDULE D Continued
MACMILLAN DISTRIBUTION
1999 TERMS AND CONDITIONS
Retailer Program
Payment Terms: Net 60 days from invoice date.
Minimum Order: No minimum order quantities.
Freight Policy: F.O.B. destination via surface carrier; retailer may upgrade
freight at their expense. It is the customer's responsibility
to notify MACMILLAN DISTRIBUTION of any deadlines, special
handling or invoicing requests. All claims for damaged
shipments must be made within seven days of receipt of
merchandise by all consignees * to MACMILLAN DISTRIBUTION
Customer Service and to the delivering carrier.
Defective Returns: Please follow the procedure listed below:
Return requests must be in writing and should be faxed to:
MACMILLAN Distribution Attn: David Ellis at (317) 817 - 7287.
Upon review and approval, a RA form will be sent to you. Use the RA
form we provide and return to the MACMILLAN DISTRIBUTION designated
warehouse: MACMILLAN DISTRIBUTION, c/o Macmillan Returns Department,
135 Mt. Zion Road, Lebanon IN 46052.
Returns must be received within 60 days of R.A- authorization.
MACMILLAN DISTRIBUTION will pay freight on defective returns.
Unauthorized returns will be refused. Returns of non-MACMILLAN
DISTRIBUTION product will be refused.
Returns: Retailers may return legitimate overstock of product which was
purchased directly from MACMILLAN DISTRIBUTION with approval from MID
management.
Request for the price change credit must be received within 90 days of
notice.
23
<PAGE>
SCHEDULE E
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT PROGRAM DISCOUNT / FEE PAYMENT COMMENTS
Discounts (Invoice METHOD
Item)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributors T & C'S 3% Net Credit Gross less returns monthly
- -----------------------------------------------------------------------------------------------------------------------------------
Distributors T & C'S 6% Gross Credit Detailing; reports required
- -----------------------------------------------------------------------------------------------------------------------------------
Direct Retailers T & C'S 2% Net Credit Warehousing
- -----------------------------------------------------------------------------------------------------------------------------------
Direct Retailers T & C'S 1% Net Credit EDI Ordering
- -----------------------------------------------------------------------------------------------------------------------------------
GT Interactive Standard 60% of Net Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
Toys R Us Standard 90% of Net Invoice 10% for Detailing
- -----------------------------------------------------------------------------------------------------------------------------------
Beamscope* Standard 92% of Net or Parity Pricing Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
Ingram Micro Canada* Standard 92% of Net or Parity Pricing Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
MultiMicro* Standard 92% of Net or Parity Pricing Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
EB Canada* Standard 92% of Net or Parity Pricing Invoice Typically older Parity priced
- -----------------------------------------------------------------------------------------------------------------------------------
Major Connections Standard 40% of Street Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
AOL Standard 35% of Street Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
Library Video Standard Buy 4, Get 1 Free Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
Scholastic Standard 35% of Street Invoice
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fees (Co-op)
- -----------------------------------------------------------------------------------------------------------------------------------
Office Max Standard 5% Co-op Pass Through; 2 1/2% Pass-Through Product specific advertising is not paid by
Detailing the 5% fee
- -----------------------------------------------------------------------------------------------------------------------------------
Staples Standard 5% Co-op Pass Through;2% PM Pass-Through Product specific advertising is not paid by
Funds the 5% fee
- -----------------------------------------------------------------------------------------------------------------------------------
Staples Standard $5,000-$15,000 Slotting Per Pass-Through Fee based upon tnix size
Title
- -----------------------------------------------------------------------------------------------------------------------------------
AAFES Standard 10% of Gross Purchases Pass-Through Detailing stores
- -----------------------------------------------------------------------------------------------------------------------------------
Wal-Mart Canada Standard $500 CDN/$350 US (est) Pass-Through Slotting fee / sku / month
- -----------------------------------------------------------------------------------------------------------------------------------
Toys "R" Us Canada* Standard $500 CDN/$350 US (est) Pass-Through Slotting fee / sku / month
- -----------------------------------------------------------------------------------------------------------------------------------
Business Depot* Standard $25 CDN/$17.50 US (est) Pass-Through Slotting fee / facing / store / one time
(per store)
- -----------------------------------------------------------------------------------------------------------------------------------
Future Shop (Merisel)* Standard $500 CDN/$350 US (est) Pass-Through Slotting fee / sku / month
- -----------------------------------------------------------------------------------------------------------------------------------
Toys "R" US Standard 5% Co-op Accrual Credit Issued quarterly as Co-op expense
- -----------------------------------------------------------------------------------------------------------------------------------
Office Depot Standard 7% Co-op Pass Through Pass-Through Issued quarterly
- -----------------------------------------------------------------------------------------------------------------------------------
Fry's Standard 3% Co-op Pass Through Pass-Through Product specific advertising is not paid by
the 5% fee
- -----------------------------------------------------------------------------------------------------------------------------------
Electronics Boutique Standard $1,500 Sell Through Reporting Pass-Through Product specific advertising is not paid by
the 5% fee
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes
A) These discounts/fees are required to sell into the respective accounts.
B) It is likely that the requirements in any given program can be changed yearly
(if this occurs, we will prvide an update to te program)
C) Parity Pricing In Canada is at the sole discretion of the publisher and can
vary from title to title, the 92% of Net is not in addition to PP is required
if PP is not offered
D) Canadian accounts are noted with an (*)
Approval
____________________
Publisher
____________________
Name
____________________ __________________
Signed Date
24
<PAGE>
EXHIBIT 21.1
SOUND SOURCE INTERACTIVE INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
JUNE 30, 1999
Sound Source Interactive, Inc. (a California Corporation)
Biological Weapons Testing Laboratories, Inc.
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-11481 and 333-11483 of Sound Source Interactive, Inc. on Form S-8 of our
report dated September 10, 1999, appearing in this Annual Report of Form 10-KSB
of Sound Source Interactive, Inc. for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Los Angeles, California
October 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM SOUND
SOURCE INTERACTIVE, INC. AND SUBSIDIARIES FOR THE PERIOD JULY 1, 1998 THROUGH
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 857,143
<SECURITIES> 0
<RECEIVABLES> 591,393
<ALLOWANCES> (15,872)
<INVENTORY> 329,368
<CURRENT-ASSETS> 3,268,208
<PP&E> 716,106
<DEPRECIATION> (470,832)
<TOTAL-ASSETS> 3,530,244
<CURRENT-LIABILITIES> 4,091,572
<BONDS> 0
0
0
<COMMON> 5,869
<OTHER-SE> (1,869,697)
<TOTAL-LIABILITY-AND-EQUITY> 3,530,244
<SALES> 4,556,442
<TOTAL-REVENUES> 4,624,540
<CGS> 3,175,637
<TOTAL-COSTS> 5,362,496
<OTHER-EXPENSES> 7,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,194
<INCOME-PRETAX> (3,976,030)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (3,977,630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,977,630
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
