<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1999
--------------
Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-28604
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SOUND SOURCE INTERACTIVE, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-426046
-------- ---------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26115 MUREAU ROAD, SUITE B, CALABASAS, CALIFORNIA 91302-3126
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(818) 878-0505
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
________________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be file by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No ______
------
The number of shares outstanding of the issuer's common stock as of May 20,
1999 was 5,869,402
-----------
Transitional Small Business Disclosure Format (check one):
Yes ____ No XXX
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<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE NINE MONTH PERIODS ENDED
March 31, 1999 AND 1998
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - March 31, 1999 3
Condensed Consolidated Statements of Operations -
Three month periods ended March 31, 1999 and 1998, 4
Nine month periods ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows -
Nine month periods ended March 31, 1999 and 1998 6-7
Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Forward Looking Statements 13-14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
Financial Data Schedule 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 215,161
Accounts receivable - net 195,882
Inventory - net 524,032
Prepaid royalties 1,695,625
Prepaid expenses and other 216,853
--------------
Total current assets 2,847,553
Property and equipment - net 279,413
--------------
TOTAL ASSETS $ 3,126,966
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,376,082
Accrued royalties 1,657,296
Capital lease obligations 795
Deferred revenues 11,942
Line of Credit 110,640
--------------
Total current liabilities 3,156,755
--------------
Stockholders' Equity:
Common stock - $.001 par value, 20,000,000 shares
authorized, 5,869,402 shares issued and outstanding 5,869
Warrants 559,928
Additional paid-in capital 14,302,877
Accumulated deficit (14,898,463)
--------------
Total stockholders' equity (29,789)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,126,966
--------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Net revenues $ 967,769 $1,189,470
Cost of sales 361,457 336,881
---------- ----------
Gross profit 606,312 852,589
---------- ----------
Operating costs and expenses:
Marketing and sales 404,355 454,874
Compensation in connection with
common stock and common stock options
issued for services rendered 88,095
Other general and administrative 411,371 334,144
Research and development 361,524 511,856
---------- ----------
Total operating costs and expenses 1,177,250 1,388,969
Operating (loss) income (570,938) (536,380)
Other income (expense) (16,770) 307,958
---------- ----------
(Loss) income before provision for income taxes (587,708) (228,422)
Provision for income taxes 0 800
---------- ----------
Net (loss) income $ (587,708) $ (229,222)
========== ==========
Basic (loss) income per share $ (0.10) $ (0.05)
========== ==========
Diluted (loss) income per share $ (0.10) $ (0.05)
========== ==========
Weighted average number of common
shares outstanding - Basic 5,869,272 4,506,949
========== ==========
Weighted average number of common
shares outstanding - Diluted 5,869,272 4,506,949
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Net revenues $ 3,957,584 $5,262,439
Cost of sales 1,657,837 1,801,372
----------- ----------
Gross profit 2,299,747 3,461,067
----------- ----------
Operating costs and expenses:
Marketing and sales 1,832,056 1,404,759
Compensation in connection with
common stock and common stock options
issued for services rendered 264,285
Other general and administrative 1,361,666 538,533
Research and development 1,197,835 1,086,576
----------- ----------
Total operating costs and expenses 4,391,557 3,294,153
Operating (loss) income (2,091,810) 166,914
Other income (expense) (48,582) 293,727
----------- ----------
(Loss) income before provision for income taxes (2,140,392) 460,641
Provision for income taxes 3,200 800
----------- ----------
Net (loss) income $(2,143,592) $ 459,841
=========== ==========
Basic (loss) income per share $ (0.37) $ 0.10
=========== ==========
Diluted (loss) income per share $ (0.37) $ 0.10
=========== ==========
Weighted average number of common
shares outstanding - Basic 5,800,194 4,442,477
=========== ==========
Weighted average number of common
shares outstanding - Diluted 5,800,194 4,555,263
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(2,143,592) $ 459,841
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Depreciation and amortization 133,540 98,017
Allowance for sales returns 410,478 (130,678)
Allowance for bad debt reserves (703,421)
Common stock and common stock options
issued for services rendered 264,285
Changes in operating assets and liabilities:
Accounts receivable 1,776,773 1,473,400
Inventories (106,817) (248,776)
Prepaid royalties 170,419 (338,016)
Prepaid expenses and other (11,302) (193,038)
Accounts payable and accrued expenses (827,077) (315,576)
Accrued royalties 42,134 160,254
Deferred revenues (33,058) (12,000)
------------ -----------
Net cash used by operating activities (588,502) 514,292
------------ -----------
Cash flows from investing activities-
Purchases of property and equipment (3,824) (26,458)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,224 6,053
Payments on capital lease obligations (2,118) (8,563)
Net borrowings under Line of Credit 110,640
----------- ----------
Net cash provided by (used in) financing activities 113,746 (2,510)
Net change in cash and cash equivalents (478,580) 485,324
Cash and cash equivalents, beginning of period 693,741 590,459
----------- ----------
Cash and cash equivalents, end of period $ 215,161 $1,075,783
=========== ==========
</TABLE>
6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Supplemental disclosure of cash flow information -
1999 1998
---- ----
Cash paid during the period for:
Interest $ 51,040 $ 21,773
========= ========
Income taxes $ 3,200 $ 800
========== ========
On February 17, 1998, the Company acquired all of the outstanding common stock
of BWT Labs, Inc. for the assumption of approximately $99,798 of liabilities.
The Company has accounted for such transaction under the purchase method of
accounting and ascribed the amount to property and equipment.
See notes to condensed consolidated financial statements
7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its
wholly-owned subsidiaries (collectively referred to as the Company). The
operating results for interim periods are unaudited and are not necessarily an
indication of the results to be expected for the full fiscal year. In the
opinion of management, the results of operations as reported for the interim
period reflect all adjustments which are necessary for a fair presentation of
operating results.
Note B - Accounts Receivable
- ----------------------------
The lower than anticipated revenue for the three months ended March 31, 1999
directly impacted the balance due in Accounts Receivable of $215,161, inclusive
of domestic sales generated through Macmillan Digital Publishing (MDP).
Pursuant to a new sales and distribution agreement between the Company and MDP,
MDP continues to provide sales, distribution, warehousing and order fulfillment
services for all of the Company's products throughout North America. The new
distribution agreement between the Company and MDP was entered into on February
5, 1999 and expires on January 31, 2001. The majority of the Company's
international republishing and distribution is provided by TDK Recording Media
Europe.
Note C - Cash and Cash Equivalents
- ----------------------------------
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
Note D - Determination of Earnings Per Share Computation
- --------------------------------------------------------
In fiscal 1998 the Company adopted the Financial Accounting Standards Board's
SFAS No. 128 "Earnings Per Share" (EPS). During the three month and nine month
periods ended March 31, 1999, the Company incurred a loss from operations.
Accordingly, for those periods, all potentially dilutive incremental shares are
antidilutive and are therefore excluded from the computations of EPS. As of
March 31, 1998, the Company had issued options to purchase a total of 873,773
shares of the Company's common stock. Of such amount, options to purchase
584,923 shares of common stock are included in the above diluted earnings per
share computation for the three month period ended March 31, 1998. Of the
remaining 288,850 outstanding options to purchase shares of common stock,
268,850 options were excluded from the above diluted earnings per share
computation for the three month period ended March 31, 1998 as they were not
vested as of March 31, 1998, and 20,000 options to purchase shares of common
stock were excluded as their inclusion would have been antidilutive.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Net Sales. Net sales decreased by 18.6 percent from $1,189,470 for the three
months ended March 31, 1998 to $967,769 for the three months ended March 31,
1999. This decrease is primarily attributable to: (i) existing children's
software and entertainment utility titles generating lower than anticipated
revenue at retail as compared to prior periods and (ii) sales of new titles also
performing less than expected. The disappointing threatrical releases of Babe:
Pig in the City(TM) and The King & I(TM), on which the Company had based new key
children's software titles, both translated to decreased revenues for the
Company.
Cost of Sales. Cost of sales increased by $24,576 from $336,881 for the three
months ended March 31, 1998 to $361,457 for the three months ended March 31,
1999. Cost of sales as a percentage of revenue also increased from 28.3 percent
to 37.4 percent during these respective periods. The increase in cost of sales
as a percentage of revenues is primarily due to changes in product mix and lower
priced items.
Marketing and Sales. Marketing and sales expenses decreased by 11.1 percent
from $454,874 for the three months ended March 31, 1998 to $404,355 for the
three months ended March 31, 1999, even though such expenses increased as a
percentage of sales from 38.2 percent to 41.8 percent, respectively. The
decrease in dollar amount is principally related to the Company's effort to
streamline internal costs. The Company anticipated such expenses related to
marketing and sales to decrease as a result of the transition in February 1999
to a new sales and distribution agreement for North America with Macmillan
Digital Publishing (MDP).
Research and Development. Research and development costs decreased by 29.4
percent from $511,856 for the three months ended March 31, 1998 to $361,524 for
the three months ended March 31, 1999, and decreased as a percentage of sales
from 43.0 percent to 37.4 percent, respectively. The decrease in such costs is
primarily associated with (i) the Company's decision to no longer invest in the
PC-based video games market and (ii) decreased personnel and hardware/software
costs associated with the development of these games. The Company anticipates
that research and development costs will continue to decrease as the Company
exits the non-family oriented software marketplace and concentrates its focus
entirely toward childrens titles. However, the Company may develop family
oriented software products for platforms other than the PC in the future, such
as DVD and video game console based titles, which would likely increase research
and development costs. In the event the Company develops products for these
additional platforms, there is no assurance that sales of these products may
offset any increased research and development costs.
9
<PAGE>
General and Administrative. General and administrative expenses increased from
$334,144 during the three months ended March 31, 1998 to $411,371 for the three
months ended March 31, 1999, reflecting an increase of 23.1 percent for the
respective periods. This increase was primarily due to (i) additional staffing
to support domestic and international sales, (ii) interest expenses as a result
of borrowings from the line of credit and (iii) increased depreciation expenses
pertaining to the aging of computer equipment.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $88,095
for the three months ended March 31, 1998 and relate to the vesting of common
stock options issued during fiscal 1994. No such expense was recorded in the
three months ended March 31, 1999 as all such options to purchase shares of
common stock were fully vested as of June 30, 1998.
Nine Months Ended March 31, 1999 Compared to the Nine Months Ended March 31,
1998
Net Sales. Net sales decreased by 24.7 percent from $5,262,439 for the nine
months ended March 31, 1998 to $3,957,584 for the six months ended March 31,
1999. This decrease is primarily attributable to (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(TM) theatrical releases
translated into lower than expected children's software revenue. Net sales for
the nine months ended March 31, 1999 also included revenue of $860,000 from TDK
Recording Media Europe (TDK), representing a non-refundable contract guarantee
against the Company's recently signed international republishing and
distribution agreement. The agreement with TDK extends through October 31, 2001
and the Company expects to begin shipping titles in August 1999.
Cost of Sales. Cost of sales decreased by 8.0 percent from $1,801,372 for the
nine months ended March 31, 1998 to $1,657,837 for the nine months ended March
31, 1999. However, cost of sales as a percentage of sales increased from 34.2
percent to 41.9 percent during these respective periods. The increase in cost
of sales as a percentage of revenues is primarily due to the transition of
distribution services from Simon & Schuster to Macmillan Digital Publishing
(MDP) and to changes in product mix and lower priced items.
Marketing and Sales. Marketing and sales expenses increased by 30.4 percent
from $1,404,759 for the nine months ended March 31, 1998 to $1,832,056 for the
nine months ended March 31, 1999, and increased as a percentage of sales from
26.7 percent to 46.3 percent, respectively. The change in dollar amount is
principally related to increased marketing and sales efforts to support the new
product releases during the beginning months of the current fiscal year, despite
major cuts and personnel changes during the last fiscal quarter. The Company
expects expenses related to marketing and sales to decrease as a percentage of
sales as the Company transitions into the new sales and distribution agreement
for North America with Macmillan Digital Publishing.
10
<PAGE>
Research and Development. Research and development costs increased by 10.2
percent from $1,086,576 during the nine months ended March 31, 1998 to
$1,197,835 for the nine months ended March 31, 1999, and increased as a
percentage of sales from 20.7 percent to 30.3 percent, respectively. The
increase in costs is primarily attributable to (i) increased personnel and
hardware/software costs associated with the development of PC based video games
in the beginning months of the current fiscal year and (ii) the continual
enhancement and research concerning the Company's current product lines.
The Company anticipates that research and development costs for CD ROMs will
decrease as the Company exits the non-family oriented software marketplace.
However, the Company may develop family oriented software products for platforms
other than the PC in the future, such as DVD and video game console based
titles. In the event the Company develops products for these additional
platforms, there is no assurance that sales of these products may offset any
increased development costs.
General and Administrative. General and administrative expenses increased from
$538,533 during the nine months ended March 31, 1998 to $1,361,666 for the nine
months ended March 31, 1999. Included in general and administrative expenses
for the nine month period ended March 31, 1998 is a one-time recovery of
$703,421 related to the collection of a bad debt which had been previously
reserved during fiscal 1996. Excluding this one-time recovery amount, general
and administrative expenses would have increased only 9.6 percent from
$1,241,954 for the nine month period ended March 31, 1998 to $1,361,666 for the
nine month period ending March 31, 1999. This increase is primarily attributable
to (i) additional staffing to support domestic and international sales, (ii)
interest expenses as a result of borrowings from the Company's line of credit
and (iii) increased depreciation expenses pertaining to the aging of computer
equipment.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $264,285
for the nine months ended March 31, 1998 and relate to the vesting of common
stock options issued during fiscal 1994. No such expense was recorded for the
six month period ended March 31, 1999 as all such options to purchase shares of
common stock were fully vested as of June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had a negative working capital balance of
($309,202) in comparison with working capital of $1,683,746 at June 30, 1998, a
variance of $1,992,948. Cash and cash equivalents decreased $475,580 directly
as a result of the Company's net loss for the nine months ended March 31, 1999
and reduction of outstanding accounts payable. Accounts receivable at March 31,
1999 also decreased $2,187,250 in comparison at June 30,1998 due primarily to
decreased sales and higher than anticipated returns of products generated
through the Company's North American distributor, it's international
distributors and other direct sales.
During the nine months ended March 31, 1999, current liabilities decreased by
18.4 percent from $3,866,234 at June 30, 1998 to $3,156,755 at March 31, 1999.
During September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides the Company with borrowing availability of up to
85% of the Company's qualified gross domestic accounts receivable, not to exceed
$1,500,000 in the aggregate, at a rate of 1.75% per month of the average gross
daily factoring account balance. The credit agreement, which renewed in
September 1998 to mature one year from the date of renewal, is secured by all
the assets of the Company. As of March 31, 1999, the Company had outstanding
borrowings under the agreement aggregating $107,000 plus $3,640 of accrued
interest with a remaining availability under the agreement of $1,393,000.
11
<PAGE>
The Company had experienced a significant decrease in sales during the last nine
month period, as compared to the same period of time in the prior fiscal year.
This decrease is principally related to the failure of non-family oriented
software products such as PC games and entertainment utilities to perform at
retail. The Company has withdrawn from the non-family oriented software products
marketplace. Although sales of children's educational titles are within
expectations, sales of games and utility-based entertainment titles were far
below expectations. As a result, the Company has discontinued all development,
marketing and sales of non-family oriented software products such as PC strategy
games, adventure games and Entertainment Utilities.
In addition, the Company has entered into two new sales, marketing and
distribution agreements for its family oriented software products. In North
America, the Company is represented by Macmillan Digital Publishing (MDP, as
previously defined), and in Western Europe the Company is represented by TDK
Recording Media Corporation. Consequently, the Company has reduced monthly
expenses related to (i) non-family oriented software product development and
(ii) internal sales and marketing functions. Additionally, on February 2, 1999,
the Company engaged the services of investment bank Wedbush Morgan to explore
strategic alternatives for the Company including, but not limited to, the
possible sale of the Company by way of merger or sale of all or a portion of the
stock or assets of the Company. The Company is currently researching the
exploitation of its current licenses into the DVD and video game console market
and is seeking partnerships in the development and distribution of these
platforms. The Company continues to search for new opportunities to obtain
family oriented software licenses, develop and sell products, and to purchase
products that are at or near completion of development. Additionally, the
Company is seeking new and innovative ways to deliver its products to consumers,
some of which may require large up-front cash resources. If the Company enters
into agreements in such business opportunities in the future, the Company will
require additional financing to fund its growth.
YEAR 2000 DISCLOSURE
The ability of computers, software and other equipment microprocessors to
recognize and properly process data fields containing a 2-digit year commonly
referred to as the "Year 2000 Compliance" issue. As the year 2000 approaches,
such systems may be unable to accurately process certain date-based information.
The Company is currently evaluating the potential impact of year 2000 compliance
upon its operations. In addition, the Company is in the process of
communicating with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 Compliance issues. However, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company , or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The total cost to the company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or its
results of operations for any given year. These costs and the date on which the
Company plans to complete the Year 2000 Compliance modifications and testing
processes are based upon management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
12
<PAGE>
FORWARD LOOKING STATEMENTS
The preceding paragraphs of this Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding the Company's expectations, hopes, intentions or
strategies regarding the future. Forward-looking statements include, but are
not limited to: statements regarding the Company's sales and future revenues,
statements regarding future research and development costs and products, and
statements regarding the future flexibility of the Company's cash reserves. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below. Please consult the
risk factors listed from time to time in the Company's reports on Form 10-QSB
and 10-KSB and Annual Reports to Stockholders.
The Company does not provide forecasts of potential future financial
performance. While management of the Company is optimistic about the Company's
long-term prospects, the following issues and uncertainties, among others,
should be considered in evaluating its growth outlook.
1. Common Stock Compliance. On January 29, 1999, the Company received a letter
from Nasdaq regarding the failure of its common stock to satisfy the minimum
closing price requirement necessary for continued listing of the Company's
securities on the Nasdaq Small Cap Market (See Item 5 in Part II). Having not
complied with Nasdaq's minimum requirements by April 29, 1999, Nasdaq has
scheduled a hearing to be held on July 1, 1999 to evaluate whether the common
stock may continue to be listed on the Nasdaq Small Cap Market and avoid being
delisted. The delisting of the Company's common stock will most likely have an
adverse effect on its price.
2. Accounts Receivables and Liquidity. The lower than anticipated revenues for
the nine months ending March 31, 1999 reduced the Company's accounts receivables
and borrowing base collateral for its line of credit. Subsequently, the
Company's working capital had also been significantly reduced. (See Liquidity
and Capital Resources under Item 2). There can be no assurance that the
Company's continued commitment in obtaining a larger percentage of sales in the
marketplace through new family oriented software products and platforms will
translate into larger revenues and higher working capital by the fiscal year end
of June 30, 1999.
3. Technological Developments. The personal computer software industry is
characterized by rapid technological advancement and the uncertainty of new
breakthroughs and developments in emerging areas such as the Internet. There
can be no assurance that the Company's entrance into the DVD and video game
console based platform market will be met with success translating into larger
market share or increased revenues.
13
<PAGE>
FORWARD LOOKING STATEMENTS (CONTINUED)
4. Distribution Channels. Traditional retail distribution channels have been
experiencing a major restructuring and are fostering the development of
alternative distribution outlets. While the Company believes it has stabilized
its distribution channels by signing a new North America distribution agreement
with MDP and entered into a new international republishing and distribution
agreement with TDK, there can be no assurance that the increased participation
by these distributors will result in larger market share for the Company.
5. Licensed Properties. There is a risk factor inherent in any venture
involving licensed properties. Not every licensed product is guaranteed
success; only the software consumer can ultimately determine the outcome.
Additionally, there is no guarantee that the Company can obtain future licenses
of either the quality or the quantity necessary for the Company to reach its
goals.
6. Product Ship Schedules. Delays in product ship schedules can cause problems
with product fulfillment, revenue recognition and retailer orders.
7. Research and Development. Research and development costs can vary
significantly depending on the products currently in development and the
potential products the Company may choose to develop. The Company's commitment
to enter into the growing markets of DVD and video game console platforms also
has its risks. Research and development costs relative to these new platforms
can be substantially greater than those similar costs related to the development
of CD ROM products. There is no assurance that any future investment by the
Company into the development of alternative platforms such as DVD and video game
based consoles will result into significant gains in revenue and market share.
8. Consumer Preferences. Consumers ultimately determine the success of software
products. Not every product will be a hit and residual inventory may exist
depending on actual sell through.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors have been, and in the future may be,
involved in suits and actions incidental to the Company's business. On April
26, 1999, a lawsuit was filed naming the Company as defendant for recovery of
certain bonus and salary claims by its former Vice President of Sales. The
Company believes that the claims are without merit and intends to defend its
position vigorously. Management feels that at this time, the financial exposure
is limited and inconsequential.
ITEM 5. OTHER INFORMATION
Ulrich Gottschling submitted his resignation as President/Chief Operating
Officer and as a director of the Company, effective January 8, 1999.
Subsequently, the following matters were voted upon at the Board of Directors
meeting held on January 8, 1999 and received unanimous approval as set forth
below:
1. Jeffrey Court appointed as Vice President - Finance and Acting Chief
Financial Officer
2. Lorena Billig appointed as Vice President - Operations
3. Eugene Code appointed as Corporate Secretary
On January 29, 1999 the Company received a letter from Nasdaq stating that the
Company had failed to satisfy a requirement for continued listing of its
securities on the Nasdaq Small Cap Market, because its common stock had not
maintained a closing bid price greater than or equal to $1.00 over 30
consecutive trade dates. To regain compliance with the minimum bid price
requirement, the common stock must have had a closing bid price of $1.00 for ten
consecutive trading days prior to April 29, 1999. The Company's common stock
did not satisfy this requirement, subjecting the Company's common stock and
redeemable warrants to possible delisting. Nasdaq has scheduled a hearing to be
held on July 1, 1999 to evaluate whether the common stock may continue to be
listed on the Naadaq Small Cap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/ Vincent J. Bitetti Date: May 20, 1999
------------------------- ------------
Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jeff Court Date: May 20, 1999
----------------------- ------------
Jeff Court
Vice President, Finance
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUND SOURCE
INTERACTIVE, INC AND SUBSIDIARY FOR THE PERIOD JULY 1, 1998 THROUGH MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 215,161
<SECURITIES> 0
<RECEIVABLES> 218,392
<ALLOWANCES> (22,510)
<INVENTORY> 524,032
<CURRENT-ASSETS> 2,847,553
<PP&E> 713,447
<DEPRECIATION> (434,034)
<TOTAL-ASSETS> 3,126,966
<CURRENT-LIABILITIES> 3,156,755
<BONDS> 0
0
0
<COMMON> 5,869
<OTHER-SE> (35,658)
<TOTAL-LIABILITY-AND-EQUITY> 3,126,966
<SALES> 967,769
<TOTAL-REVENUES> 967,769
<CGS> 361,457
<TOTAL-COSTS> 1,177,250
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,770
<INCOME-PRETAX> (587,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (587,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (587,708)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
