<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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
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(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
November 12, 1999 was 5,887,370.
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___XXX___
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 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 - September 30, 1999 3
Condensed Consolidated Statements of Operations - Three month
periods ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Three month
periods ended September 30, 1999 and 1998 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Outlook 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
Signature Page 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash and cash equivalents $ 267,500
Accounts receivable - net 958,571
Inventory - net 468,332
Prepaid royalties 1,394,042
Prepaid expenses and other 272,791
-----------
Total current assets 3,361,236
Property and equipment - net 218,122
Other Assets 13,229
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TOTAL ASSETS $ 3,592,587
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,973,434
Accrued royalties 1,567,483
Current portion of capital lease obligations 3,689
Short term borrowings 521,000
Deferred revenue 2,311
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Total current liabilities 4,067,917
Long Term Liabilities
Capital lease - long term 7,674
Deferred revenue - long term 1,832,500
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Total Liabilities 5,908,091
Stockholder's Equity:
Common stock - $.001 par value, 20,000,000 shares
authorized, 5,887,370 shares issued and outstanding 5,879
Warrants 559,928
Additional paid-in capital 14,313,642
Accumulated deficit (17,194,953)
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Total stockholders' equity (2,315,504)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,592,587
===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1999
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<S> <C> <C>
Net revenues $ 1,294,313 $ 1,297,332
Cost of sales 737,497 562,118
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Gross profit 556,816 735,214
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Operating costs and expenses:
Marketing and sales 279,634 766,961
Other general and administrative 394,084 346,735
Research and development 329,605 420,129
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Total operating costs and expenses 1,003,323 1,533,825
Operating loss (446,507) (798,611)
Other income (expense) (15,143) 4,030
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Loss before provision for income taxes (461,650) (794,581)
Provision for income taxes 800 800
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Net loss $ (462,450) $ (795,381)
=========== ===========
Net loss per common share $ (0.08) $ (0.14)
=========== ===========
Weighted average number of common
shares outstanding 5,885,406 5,672,904
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (462,450) $ (795,381)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 38,625 43,256
Changes in operating assets and liabilities:
Accounts receivable (383,050) 1,361,012
Inventories (138,964) (21,894)
Prepaid royalties (150,152) 77,479
Prepaid expenses and other (10,505) 61,777
Accounts payable and accrued expenses (32,872) (933,468)
Accrued interest (750) 0
Accrued royalties (183,118) (298,509)
Capital leases 12,074 0
Deferred revenue 520,895 (28,890)
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Net cash used by operating activities (790,267) (534,618)
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Cash flows from investing activities:
Purchases of property and equipment (11,473) (4,560)
Other Assets 3,533 0
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Net cash used from investing activities (7,940) (4,560)
Cash flows from financing activities:
Proceeds from issuance of common stock 10,775 2,095
Payments on capital lease obligations (711) (1,190)
Short terms advances 198,500 0
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Net cash provided by (used in) financing activities 208,564 905
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Net change in cash and cash equivalents (589,643) (538,273)
Cash and cash equivalents, beginning of period 857,143 693,741
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Cash and cash equivalents, end of period $ 267,500 $ 155,468
============ ============
Supplement disclosure of cash flow information -
Cash paid during the period for:
Interest $ 9,273 $ 1,963
============ ============
Income taxes $ 0 $ 0
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 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
- ----------------------------
As of September 30, 1999, $746,558 or 73.7 percent of the net accounts
receivable balance is due from 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 which was entered into on February 5, 1999 and 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.
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 periods ended
September 30, 1999 and 1998, the Company incurred a loss from operations.
Accordingly, all potentially dilutive incremental shares are antidilutive and
are therefore excluded from the computations of EPS.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net Sales. Net sales decreased by 0.2 percent from $1,297,332 for the three
months ended September 30, 1998 to $1,294,313 for the three months ended
September 30, 1999. While total unit sales for the three months ended September
30, 1999 exceeded 124,000 units sold as compared to approximately 93,000 units
sold for the same period ended September 20, 1998, the erosion of the wholesale
prices due to increased industry consolidation and competition from the year
before resulted in relatively the same net sales figure for the two comparable
three month periods.
Cost of Sales. Cost of sales as a percentage of net sales increased to 57.0
percent from 43.3 percent during the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998. This increase is
attributable to changes in product mix and to the decrease in the wholesale
price of products sold as compared to product sales for the prior fiscal year.
Marketing and Sales. Marketing and sales expenses decreased by 63.5 percent from
$766,961 for the three months ended September 30, 1998 to $279,634 for the three
months ended September 30, 1999, and decreased as a percentage of sales from
59.1 percent to 21.6 percent, respectively. The decrease is principally related
to the signing of a master distribution agreement providing MDP a more active
role in the selling and distribution of the Company's licensed products. This
new distribution agreement between the Company and MDP, which was entered into
on February 5, 1999 and 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. Consequently, the Company has streamlined its internal sales
department to take advantage of the enhanced agreement with MDP and to reduce
operating expenses.
Research and development. Research and Development costs decreased by 21.7
percent from $420,129 during the three months ended September 30, 1998 to
$329,084 for the three months ended September 30, 1999, and decreased as a
percentage of sales from 32.4 percent to 25.4 percent, respectively. The
decrease in costs is primarily attributable to the reduction of new products in
production as compared to that of the prior comparable period.
General and Administrative. General and administrative expenses increased by
13.7 percent from $346,735 during the three months ended September 30, 1998 to
$394,084 for the three months ended September 30, 1999, and increased as a
percentage of sales from 26.7 percent to 30.5 percent, respectively. This
increase in general and administrative expenses is primarily related to
expenditures related to increased payroll and support staff requirements,
auditing and accounting fees.
7
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had negative working capital of $706,681
in comparison to a negative working capital of $823,364 at June 30, 1999. Cash
and cash equivalents decreased $589.643 as a result of the Company necessity to
fund current operations, reduce accounts payable and the loss incurred during
the three month period ended September 30, 1999. The decrease in cash and cash
equivalents was offset by $530,000 being received from TDK representing non-
refundable contract guarantees from TDK Recording Media Europe ("TDK") as per
the Company's international republishing and distribution agreement with TDK.
These royalty advances for various future product title sales have been recorded
as deferred revenue. Once each title is produced, localized for the foreign
market and delivered to TDK for international distribution, these monies will be
recorded as product revenue.
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 is secured by all the assets of the
Company and can be terminated by either party upon 30 days notice. As of
September 30, 1999, the Company had outstanding borrowings under the agreement
totaling $521,000 plus $8,834 of accrued interest with a remaining availability
under the agreement of $979,000.
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.
8
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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
likely worst-case year 2000 scenario 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. Prior to December 31, 1999, the Company intends to make necessary
preparations 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 a timely basis.
OUTLOOK
The statements contained in this report on Form 10-QSB which 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.
Consumer Preferences. Consumers ultimately determine the success of consumer
software products. Not every product will obtain consumer acceptance and have
sell through rates sufficient to recover manufacturing, development and
marketing costs associated with the product. If consumer acceptance is not
achieved, the Company may be required to write-off capitalized development costs
and guaranteed royalty payments and may be required to destroy excess inventory.
The Company records a reserve for product returns based upon its prior
experience in the consumer software market and on current market conditions,
including sell-through information obtained from retailers. There can be no
assurance that future actual returns will not exceed the reserved amounts as of
September 30, 1999.
9
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Competition. The market for the Company's consumer software products is
intensely and increasing competitive. Existing consumer software companies have
broadened their product lines to compete with the Company's products, and
potential new competitors have entered and increased their focus on the consumer
software market, resulting in even greater competition for the Company. Many of
the companies with which the Company currently competes have greater financial,
technical, marketing and sales resources, as well as greater name recognition
and better access to consumers, than the Company. There can be no assurance that
the Company will have the resources required to respond effectively to market or
technological changes or to compete successfully in the future. In addition,
increasing competition in the consumer software market may cause prices to
continue to fall, which may materially adversely affect the Company's business,
operating results and financial condition.
Dependence on Retailers. The Company's retail customers include computer stores,
office supply stores, warehouse clubs, consumer electronic stores, bookstores,
video stores and alternative channels. The Company's customers are not
contractually required to make future purchases of the Company's products and
therefore may discontinue carrying the Company's products in favor of
competitors' products or for any other reason. Due to increased competition for
limited shelf space, retailers are increasingly in a better position to
negotiate favorable purchase terms, including price discounts, co-operative
marketing costs and product return policies. There can be no assurance that the
Company will be able to increase or sustain its current retail shelf space or
promotional resources.
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.
Fluctuations in Operating Results; Seasonality. 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, the release of new
products, consumer purchasing trends related to seasonality, and the timing of
the receipt of orders from major customers. The Company's expense levels are
based, in part, on its expectations as to future sales. Therefore, operating
results could be disproportionately affected by a reduction in sales or a
failure to meet the Company's sales expectations.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors have been, and in the future the
Company and/or its officers and directors may be involved in suits and actions
incidental to the Company's business.
ITEM 5. OTHER INFORMATION
The Company has entered into a Succession Agreement with Vincent J. Bitetti
dated as of November 12, 1999, whereby Mr. Bitetti submitted his resignation as
Chairman of the Board of the Company effective as of November 12, 1999, and
agreed to resign as Chief Executive Officer of the Company on the earlier of (i)
December 31, 2000 and (ii) the date of the appointment of a new Chief Executive
Officer. The Succession Agreement further provides that upon his resignation as
Chief Executive Officer, prior to December 31, 2000, Mr. Bitetti will be
appointed as Chairman of the Company to serve until December 31, 2000. The
Succession Agreement terminated the Bitetti Employment Agreement, the term of
which otherwise would have expired on December 31, 2000. Pursuant to the
Succession Agreement, Mr. Bitetti will remain entitled to receive substantially
the same compensation and benefits to which he would have been entitled under
his prior employment agreement until December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.1 Succession Agreement, dated November 12,
1999 between Vincent J. Bitetti and
Registrant, filed herewith
27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
None.
11
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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: November 19, 1999
---------------------- -----------------
Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Jeffrey Court Date: November 19, 1999
---------------- -----------------
Jeffrey Court
Vice President of Finance and,
Acting Chief Financial Officer
12
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EXHIBIT 10.1
SUCCESSION AGREEMENT
This SUCCESSION AGREEMENT (this "Agreement") is made as of November 12,
---------
1999 by and between Vincent J. Bitetti ("Bitetti") and SOUND SOURCE INTERACTIVE,
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INC., a Delaware corporation ("SSI/DE"), and SOUND SOURCE INTERACTIVE, INC, a
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California corporation ("SSI/CA")(SSI/DE and SSI/CA collectively, "Sound
------ -----
Source").
- ------
R E C I T A L S
A. Bitetti is employed by Sound Source as its Chairman of the Board and
Chief Executive Officer pursuant to that certain Third Amended and Restated
Employment Agreement dated as of April 24, 1998 (as amended and restated, the
"Employment Agreement");
--------------------
B. Sound Source and Bitetti have mutually agreed to terminate the
Employment Agreement, and to arrange for the orderly succession of Bitetti as
Chairman of the Board and Chief Executive Officer of Sound Source, subject to
and in accordance with the terms and conditions set forth herein;
C. Bitetti continues to posses an intimate knowledge of the business and
affairs of Sound Source, its policies, methods, personnel and opportunities; and
D. Following the termination of Bitetti's employment as Chairman of the
Board and Chief Executive Officer of Sound Source in accordance herewith, Sound
Source desires to continue to employ Bitetti as Chairman of Sound Source subject
to and in accordance with the terms and conditions set forth herein, and Bitetti
desires to accept such employment, subject to and in accordance with the terms
and conditions set forth herein.
A G R E E M E N T
In consideration of the mutual covenants and agreements contained herein
and other valuable consideration, the parties hereto hereby agree as follows:
1. Employment Agreement Termination. Subject to and in accordance with
--------------------------------
the terms and conditions set forth herein, Sound Source and Bitetti have
mutually elected to (a) terminate the Employment Agreement as of the date
hereof, (b) to terminate Bitetti's employment as Chairman of the Board of Sound
Source effective as of the date hereof and (c) to terminate Bitetti's employment
as Chief Executive Officer of Sound Source effective as of the earlier of (i)
the date of the appointment of a new Chief Executive Officer or (ii) December
31, 2000 (the "Termination Date"); and Bitetti hereby resigns as Chairman of
----------------
the Board and Chief Executive Officer of Sound Source effective as of the
Termination Date. Nothing in this Agreement or in the circumstances surrounding
its execution shall be deemed to constitute a unilateral termination of
1
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Bitetti's employment as Chairman of the Board and Chief Executive Officer by
either Sound Source or Bitetti. Neither the entering into of this Agreement nor
anything contained in this Agreement shall be construed as an admission by any
party or by anyone else of any wrongdoing or liability of any kind whatsoever,
nor shall it constitute evidence of any wrongdoing or liability of any kind
whatsoever for any purpose whatsoever.
2. Continuing Employment.
---------------------
(a) Position. Subject to and in accordance with the terms and
--------
conditions set forth herein, from the date hereof until the Termination Date,
Bitetti shall be employed as the interim Chief Executive Officer of Sound
Source, and from the Termination Date until the Final Payment Date (as defined
herein), Bitetti shall be employed as the Chairman of Sound Source. Bitetti
shall maintain the title of Executive Producer on all products regarding which
Sound Source holds a license as of the date of this Agreement.
(b) Duties. As interim Chief Executive Officer of Sound Source prior
------
to the Termination Date, and as Chairman of Sound Source subsequent to the
Termination Date, Bitetti (i) shall take all actions necessary and appropriate
to transition in the new management of Sound Source, particularly the new Chief
Executive Officer, (ii) shall not take any action that could reasonably be
expected to in any way undermine the efforts of the new management of Sound
Source, and (iii) shall be free to engage in any enterprise not inconsistent
with the specific duties enumerated in clauses (i) and (ii) hereof including but
not limited to incorporating a new company or acting as a chief executive
officer or other senior officer of an existing company, subject to Section 7
below. Bitetti hereby accepts such employment, subject to the terms and
conditions herein contained.
3. Bitetti Release of Claims.
-------------------------
(a) General Release. Bitetti agrees, on his own behalf and on behalf
---------------
of his heirs, successors, agents, executors, administrators and assigns
(collectively, the "Bitetti Releasors"), to release Sound Source and its present
-----------------
and former subsidiaries, affiliates, divisions, branches, agencies and other
offices and its and their respective present and former successors, assigns,
officers, agents, representatives, affiliates, attorneys, fiduciaries,
administrators, directors, stockholders and employees (collectively, the
"Bitetti Releasees") from any and all manner of actions, causes of action,
-----------------
suits, judgments, executions, demands, debts, dues, duties, accounts, bonds,
agreement, contracts, covenants, damages and all other claims whatsoever, both
in law and in equity, which the Bitetti Releasors ever had, now have or may in
the future have against any or all of the Bitetti Releasees for or by reason of
or in any way arising out of any cause, matter or thing existing up to the date
hereof including, without limiting the generality of the foregoing, for or by
reason of or in any way arising out of any cause, matter or thing relating to
salary, wages, monies advanced, bonuses, expenses, director's fees, retirement
or pension allowances, participation in profits or earnings or damages for
wrongful
2
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dismissal (including but not limited to any discrimination claim based on age,
sex, race, religion, color, national origin, disability, marital status,
appearance or sexual orientation under federal, state or local law, rule or
regulation, and/or any claim for wrongful termination, defamation, and any other
claim, whether in tort, contract or otherwise). This release shall not apply to
any claims the Bitetti Releasors may have relating to Sound Source's performance
of its obligations under this Agreement.
(b) ADEA Release. THE BITETTI RELEASORS SPECIFICALLY WAIVE AND RELEASE
------------
SOUND SOURCE AND ITS AFFILIATES FROM ALL CLAIMS THEY MAY HAVE AS OF THE DATE OF
THIS AGREEMENT REGARDING CLAIMS OR RIGHTS ARISING UNDER THE AGE DISCRIMINATION
IN EMPLOYMENT ACT OF 1967, AS AMENDED, 29 U.S.C. Section 621 ("ADEA"). THIS
SECTION DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE UNDER THE ADEA AFTER THE
DATE OF THIS AGREEMENT. THE BITETTI RELEASORS AGREE THAT THIS AGREEMENT PROVIDES
BENEFITS TO WHICH THEY MAY NOT OTHERWISE BE ENTITLED, THAT SOUND SOURCE HAS
ADVISED THE BITETTI RELEASORS TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS
AGREEMENT, AND THAT THE BITETTI RELEASORS HAVE CONSULTED COMPETENT COUNSEL OF
THEIR OWN SELECTION PRIOR TO SIGNING THIS AGREEMENT. THE BITETTI RELEASORS HAVE
BEEN PROVIDED TWENTY-ONE (21) DAYS WITHIN WHICH TO CONSIDER WHETHER THEY SHOULD
SIGN THIS AGREEMENT AND WAIVE AND RELEASE ALL CLAIMS AND RIGHTS ARISING UNDER
THE ADEA. THE BITETTI RELEASES SHALL HAVE SEVEN (7) DAYS WITHIN WHICH TO REVOKE
THIS AGREEMENT AND THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE
UNTIL THAT REVOCATION PERIOD HAS EXPIRED. THE BITETTI RELEASORS ACKNOWLEDGE THAT
NO REPRESENTATIVE OF SOUND SOURCE EVER STATED OR IMPLIED THAT THE BITETTI
RELEASORS HAD LESS THAN TWENTY-ONE (21) DAYS TO CONSIDER THIS AGREEMENT. THE
BITETTI RELEASORS ACKNOWLEDGE THAT, TO THE EXTENT THEY DECIDED TO SIGN THIS
AGREEMENT PRIOR TO THE EXPIRATION OF THE FULL TWENTY-ONE (21) DAY PERIOD, SUCH
DECISION WAS KNOWING AND VOLUNTARY ON THE BITETTI RELEASORS PART AND WAS IN NO
WAY COERCED BY SOUND SOURCE. THE BITETTI RELEASORS ACKNOWLEDGE THAT THEY
RECEIVED THIS AGREEMENT ON OCTOBER 8, 1999, THAT THE TWENTY-ONE (21) DAY PERIOD
REFERENCED ABOVE ENDS ON OCTOBER 28, 1999 AND THEIR RIGHT TO REVOKE THIS
AGREEMENT ENDS ON NOVEMBER 4, 1999. TO THE EXTENT ANY CHANGES WERE MADE IN THIS
AGREEMENT AS A RESULT OF NEGOTIATIONS TAKING PLACE AFTER THE DATE THIS AGREEMENT
WAS PROVIDED TO THE BITETTI RELEASORS, THE BITETTI RELEASORS AGREE THAT SUCH
CHANGES, WHETHER MATERIAL OR NOT, DID NOT RESTART THE RUNNING OF THE PERIOD OF
TWENTY-ONE (21) DAYS TO CONSIDER THIS AGREEMENT REQUIRED BY THE ADEA.
3
<PAGE>
(c) Promise Not To Sue On Claims Released. The Bitetti Releasors
-------------------------------------
promise not to initiate any court or judicial-type proceeding against any of the
Bitetti Releasees that involves any claim that the Bitetti Releasors have
released in Sections 3(a) and 3(b) of this Agreement. If a court determines that
the Bitetti Releasors or any one of them have violated this release by suing any
of the Bitetti Releasees, then the Bitetti Releasors hereby agree that they will
pay all costs and expenses of defending against the suit incurred by the Bitetti
Releasees. Nothing in this Section 3(c) shall be construed to prevent the
Bitetti Releasors or any one of them from filing a charge of discrimination
with, or participating in an investigation or proceeding conducted by, the Equal
Employment Opportunity Commission.
(d) Consultation With an Attorney. Bitetti acknowledges that he has
-----------------------------
been advised to consult his own attorney prior to entering into this Agreement
and that he was afforded sufficient time to undertake such consultation.
4. Sound Source Release of Claims.
------------------------------
(a) General Release. Sound Source agrees on its own behalf and on
---------------
behalf of its present and former subsidiaries, affiliates, divisions, branches,
agencies and other offices and its and their respective present and former
successors, assigns, officers, agents, representatives, affiliates, attorneys,
fiduciaries, administrators, directors, stockholders and employees
(collectively, the "Sound Source Releasors"), to release Bitetti and his heirs,
----------------------
successors, agents, executors, administrators and assigns (the "Sound Source
------------
Releasees") from any and all manner of actions, causes of action, suits,
- ---------
judgments, executions, demands, debts, dues, duties, accounts, bonds, agreements
(other than those provided herein), contracts, covenants, damages and all other
claims whatsoever, both in law and in equity, which Sound Source Releasors ever
had, now have or may in the future have against any or all of Sound Source
Releasees for or by reason of or in any way arising out of any cause, matter or
thing existing up to the date hereof. This release shall not apply to any claims
the Sound Source Releasors may have relating to Bitetti's performance of his
obligations under this Agreement, or to any claim for recovery by Sound Source
of short-swing profits under Section 16(b) of the Securities Exchange Act of
1934, as amended.
(b) Promise Not To Sue On Claims Released. The Sound Source
-------------------------------------
Releasors promise not to initiate any court or judicial-type proceeding against
the Sound Source Releasees that involves any claim that the Sound Source
Releasors have released in Section 4(a) of this Agreement. If a court determines
that Sound Source Releasors or any one of them have violated this release by
suing any of Sound Source Releasees, then the Sound Source Releasors hereby
agree that they will pay all costs and expenses of defending against the suit
incurred by Sound Source Releasees.
5. Severance Payment; Benefits. In consideration of Bitetti's resignation
---------------------------
as Chairman of the Board of Sound Source and agreement to resign as Chief
Executive
4
<PAGE>
Officer of Sound Source as provided herein, and his employment by Sound Source,
as provided herein, Sound Source hereby covenants and agrees as follows:
(a) to pay to Bitetti, through December 31, 2000 (the "Final Payment
Date"), all compensation and other benefits to which Bitetti would have been
entitled pursuant to the Employment Agreement if it had remained in force and
effect including but not limited to those benefits set forth on Schedule 5(a);
(b) to transfer to Bitetti (or his designee), upon the Final Payment Date,
all life insurance purchased by Sound Source on behalf of Bitetti pursuant to
the Employment Agreement; provided however, that Sound Source shall have no
further obligations to pay any premiums due on such life insurance after the
Final Payment Date;
(c) to reimburse to Bitetti $12,000 for the legal fees incurred by him in
connection with certain litigation involving Sound Source in 1998, which amount
shall be paid in twelve equal semimonthly installments commencing on November
15, 1999 and continuing on the 1st and 15th day of each month thereafter until
paid in full, subject to receipt by Sound Source of evidence of the amounts due
under the invoices in connection with such legal fees;
(d) to transfer to Bitetti all right, title and interest in the digital
recording equipment listed on Schedule 1 attached hereto;
(e) to pay to Bitetti $42,000 for accrued vacation under the Employment
Agreement, which amount shall be paid in twelve equal semimonthly installments
commencing on November 15, 1999 and continuing on the 1st and 15th day of each
month thereafter until paid in full;
(f) to pay Bitetti, within fifteen days of the Final Payment Date, for any
vacation under the Employment Agreement that would have accrued from the date
hereof until the Final Payment Date;
(g) to take all actions necessary to maintain the following domain names:
(i) kidsbrands.com; (ii) kidsbrands.org and (iii) kidsbrands.net (the "Domain
Names");
(h) if the Domain Names have not been utilized by Sound Source prior to
December 31, 2000, to transfer all right, title and interest in the Domain Names
to Bitetti;
(i) to provide Bitetti with an office at Sound Source's corporate
headquarters complete with a phone, computer and access to a secretary as well
as the equipment necessary to maintain an office from his residence; and
(j) for so long as Bitetti serves a director on the Board after he ceases
to receive compensation pursuant to Section 5(a), to pay to Bitetti any
compensation,
5
<PAGE>
commission or other benefits awarded to nonemployee directors of the Company,
including but not limited to any stock or stock options.
6. No Other Payments or Benefits. Bitetti agrees that he is not entitled
-----------------------------
to receive from Sound Source any compensation, commission or other benefits
other than as set forth in Section 5.
7. Confidentiality of Private Information.
--------------------------------------
(a) Sound Source and Bitetti recognize that during the course of
Bitetti's employment with Sound Source, Bitetti has had access to and has
acquired Private Information (as defined below). Bitetti covenants and agrees
that on and after the date hereof until one year after the Final Payment Date,
he will hold in the strictest of confidence all Private Information and that he
will not at any time or in any fashion, form or manner, either directly or
indirectly, use any Private Information or reveal, disclose, disseminate,
publish, publicize, whether for profit or otherwise, any Private Information to
any person, firm, corporation, partnership, trust, or to or in the press or any
other form of media. Bitetti further covenants and agrees to take all
appropriate measures to safeguard the confidentiality of the Private
Information.
(b) Bitetti covenants and agrees that in the event that he is
requested or required in a judicial, administrative or governmental proceeding
to disclose any Private Information, he shall provide Sound Source with
immediate notice (and in any event within five business days after the receipt
of such request or requirement) of such request or requirement and all related
proceedings so that Sound Source may seek appropriate protective orders in
advance of any disclosure.
(c) Each party hereto acknowledges that the other party hereto would
be irreparably harmed in the event of any violation by such party of any of the
terms of this Agreement and that remedies at law would be inadequate. In the
event of any breach or threatened breach of this Agreement, such party shall be
entitled to obtain, without posting bond, a temporary restraining order and
temporary and permanent injunctive relief restraining and enjoining any such
breach or threatened breach of this Agreement. The remedies provided for in this
Section 7 shall be in addition to any and all other rights and remedies that may
be available to such party at law, in equity and under this Agreement, all of
which are expressly reserved by each of the parties hereto.
(d) "Private Information" shall mean any and all information relating
to any Sound Source or any of its affiliates which is not generally known to the
public relating to (i) their respective businesses, operations, business
affairs, plans, customer and supplier lists and information, pricing and costing
lists and information, research and development work, method and techniques of
business, marketing plans and objectives, patterns, compilations, programs,
devices, methods, techniques and processes, and trade secrets; and, (ii) any of
the terms, conditions, provisions or facts set forth in, or related to, this
Agreement or its negotiation.
6
<PAGE>
(e) Bitetti covenants and agrees that he will in no way disparage Sound
Source or its products, services, employees or business reputation to any person
or entity, whether or not said person or entity is a current or prospective
supplier, client or employee of Sound Source. Sound Source agrees not to make
or publish, either orally or in writing, any disparaging statement concerning
Bitetti, including his resignation as Chairman of the Board and Chief Executive
Officer of Sound Source, his services with Sound Source and matters relating to
his employment.
(f) Bitetti agrees that he will not, in any form or manner, harass,
intimidate and/or threaten reprisals against Sound Source or any of its
affiliates. Sound Source agrees that it will not, in any form or manner,
harass, intimidate and/or threaten reprisals against Bitetti.
8. Representations and Warranties.
------------------------------
(a) Certain Representations and Warranties by Bitetti. Bitetti represents
--------------------------------------------------
and warrants to Sound Source that (i) this Agreement has been duly executed and
delivered by him and constitutes his legal, valid and binding obligation,
enforceable against him in accordance with its terms, and (ii) the execution,
delivery, and performance by him of this Agreement will not violate any order,
writ, injunction, decree, statute, rule or regulation applicable to him.
(b) Certain Representations and Warranties by Sound Source. Sound Source
-------------------------------------------------------
represents and warrants to Bitetti that (i) the execution, delivery and
performance by Sound Source of this Agreement have been duly authorized by all
action required by law, its certificate of incorporation and bylaws, (ii) this
Agreement has been duly executed and delivered by Sound Source and constitutes a
legal, valid and binding obligation of Sound Source, enforceable against it in
accordance with its terms, (iii) the execution, delivery and performance by
Sound Source of this Agreement will not conflict with or result in any breach of
any provision of its certificate of incorporation or bylaws and (iv) the
execution, delivery and performance by Sound Source of this Agreement will not
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to it.
9. Civil Code Section 1542. Bitetti and Sound Source, and each of them,
------------------------
acknowledge that they may learn of circumstances bearing upon the things and
items released by this Agreement, but it is their intention by doing so and
doing the acts called for by this Agreement, that this Agreement shall be
effective as a full and final accord and satisfaction and release of each and
every thing and item released herein, whether known or unknown. In furtherance
of this intention, Bitetti and Sound Source acknowledge that they are familiar
with Section 1542 of the Civil Code of the State of California, which provides
as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
7
<PAGE>
which if known by him must have materially affected his settlement with the
debtor.
Bitetti and Sound Source hereby waive and release any right or benefit which
they have or may have under Section 1542 of the Civil Code of the State of
California to the full extent that they may lawfully waive all such rights and
benefits pertaining only and limited specifically to the things and items
released herein.
10. Tax Indemnification. If any part of the compensation, benefits or
-------------------
property being delivered to Bitetti pursuant to the terms of this Agreement is
later determined to be subject to taxes, either federal or state, then Bitetti
understands that he is solely liable for the same and will indemnify, defend and
hold harmless Sound Source from and against any and all loss, demand, damage,
expense, cost (including, interest, penalties, court costs and reasonable
attorneys' fees), suit, action, claim, liability or obligation related to any
claim made by any state or federal agency for tax deductions not made or for
monies not withheld.
11. Cooperation. Bitetti agrees to cooperate with Sound Source in the
-----------
truthful and honest prosecution and/or defense of any claim in which the parties
hereto may have an interest (subject to reasonable limitations concerning time
and place), which may include without limitation making himself available to
participate in any proceeding involving Sound Source, allowing himself to be
interviewed by representatives of Sound Source, appearing for depositions and
testimony without requiring a subpoena, and producing and/or providing any
documents or names of other persons with relevant information.
12. Successors. This Agreement and all the terms and provisions hereof,
----------
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors and assigns.
13. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be considered an original but all of which
shall constitute one agreement.
14. Knowing and Voluntary Agreement. Bitetti acknowledges by signing this
-------------------------------
Agreement that he has read and understands this document, that he has conferred
with or had opportunity to confer with his attorneys regarding the terms and
meaning of this Agreement, that he has had sufficient time to consider the terms
provided for in this Agreement, that no representations or inducements have been
made to him except as set forth herein, and that he has signed the same
KNOWINGLY AND VOLUNTARILY.
15. Interpretation. Should any portion, word, clause, phrase, sentence or
--------------
paragraph of this Agreement be declared void or unenforceable, such portion
shall be considered independent and severable from the remainder, the validity
of which shall remain unaffected. Whenever required by the context, as used in
this Agreement the singular number shall include the plural, and the masculine
gender shall include the
8
<PAGE>
feminine and neuter. All titles are for general reference purposes only and
shall not be considered part of this Agreement. This Agreement shall be
construed as though it were drafted jointly by the parties.
16. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties who have executed it and supersedes any and all other
agreements (including the Employment Agreement), understandings, negotiations,
or discussions, either oral or in writing, express or implied between the
parties. The parties to this Agreement each acknowledge (i) that no
representations, inducements, promises, agreements or warranties, oral or
otherwise, have been made by them, or anyone acting on their behalf, which are
not embodied in this Agreement; (ii) that they have not executed this Agreement
in reliance on any such representations, inducements, promise, agreement or
warranty; and (iii) that no representation, inducement, promise, agreement or
warranty not contained in this Agreement, including, but not limited to, any
purported supplements, modifications, waivers or terminations of this Agreement,
shall be valid or binding, unless executed in writing by all of the parties to
this Agreement.
17. No Waiver. Failure to insist on compliance of any term, covenant or
---------
condition contained in this Agreement shall not be deemed a waiver of that term,
covenant or condition, nor shall any waiver or relinquishment of any right or
power contained in this Agreement at any one time or more times be deemed a
waiver or relinquishment of any right or power at any other time or times.
18. California Law. This Agreement is made and entered into in the State
--------------
of California and shall in all respects be interpreted, enforced and governed
under the laws of such State.
19. Disputes. Any dispute arising out of, relating to or in connection
--------
with this Agreement shall be resolved by binding arbitration. The arbitration
shall consist of a single arbitrator (the "Arbitrator") and shall take place in
Los Angeles County, California at a place designated by the parties (or, failing
agreement, by the Arbitrator) and shall commence as soon as practicable on a
date mutually agreed upon by counsel for the parties (or the party if a party
does not have counsel) and the Arbitrator. The arbitration proceeding shall be
conducted confidentially and the parties shall take the necessary actions to
assure the confidentiality of the arbitration proceeding. The arbitration
proceeding shall be governed by the provisions of the California Code of Civil
Procedures Sections 1280 et seq. The party desiring to institute arbitration
-- ---
shall serve written notice to the other party (with copies to all parties to
this Agreement). Such notice shall briefly describe the dispute. Sound Source
shall name one arbitrator and Bitetti shall name one arbitrator and the two
arbitrators so named shall name the Arbitrator. The names of the two
arbitrators named shall be submitted within 45 days of the notice instituting
arbitration. When the two arbitrators have chosen the Arbitrator, the
Arbitrator shall proceed with the arbitration. Any award rendered in such an
arbitration proceeding shall be final and binding on the parties and may be
entered in any court having jurisdiction over the parties and/or the subject
matter thereof and shall include the costs and expenses in connection with the
arbitration of the prevailing party. The
9
<PAGE>
Arbitrator shall have no jurisdiction or authority to add to, detract from, or
alter in any way the provisions of this Agreement, but shall limit its
considerations and decision to the interpretation and application of this
Agreement to the subject matter presented to them. Nothing contained in this
Section 19 shall restrict Sound Source's right to institute and prosecute any
legal or equitable action in court for temporary restraining orders and
temporary and permanent injunctive relief or otherwise as deemed appropriate by
Sound Source.
20. Notices. All notices or demands by any party relating to this
-------
Agreement shall be in writing and shall be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested, at
their addresses set forth below:
To Bitetti: Mr. Vincent J. Bitetti
776 Emerson Street
Thousand Oaks, CA 91362
With a copy to: Michael D. Morin, Esq.
Margolis & Morin, LLP
444 South Flower Street
Sixth Floor
Los Angeles, CA 90071
To Sound Source: Sound Source Interactive, Inc.
26115 Mureau Road
Suite B
Calabasas, CA 91302
Facsimile: (818) 878-0007
Attn: President
With a copy to: Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W.
Suite 300
Washington, DC 20007
Attn: Sean P. McGuinness, Esq.
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other
parties. All notices or demands sent in accordance with this Section 20, shall
be deemed to have been duly given (i) on the date of service if served
personally on the party to whom notice is to be given, or (ii) three calendar
days if mailed to the party to whom notice is to be given by first class or air
mail, postage prepaid.
21. Legal Representation. Bitetti acknowledges that Bitetti has been
--------------------
represented by independent legal counsel of Bitetti's own choice in connection
with the preparation, review and execution of this Agreement, and that this
Agreement has been executed by Bitetti with the consent of and on advice of such
counsel. Bitetti represents
10
<PAGE>
and warrants that in executing this Agreement, Bitetti does so with full
knowledge of all rights which Bitetti may have and with the understanding that
Bitetti may be waiving legal rights and claims and that Bitetti is hereby
entering into this Agreement voluntarily with the intent to be legally bound by
its terms.
22. Mediation Precondition to Formal Assertion of Claims. The parties
----------------------------------------------------
hereto, and each of them, agree that, in the event a dispute arises out of or
concerning this Agreement, he/it will not commence any litigation or demand for
arbitration without first submitting a formal demand to the other party for a
mediation of the dispute. If such a demand is made, the dispute will be
submitted to mediation before a neutral mediator in accordance with the
mediation rules of the American Arbitration Association. The party opposing
the asserted claim must agree to submit to mediation within ten days after
demand is made or this precondition shall be deemed waived. The cost of the
mediation shall be borne equally by the parties.
23. No Third Party Beneficiaries. This Agreement is not intended to
----------------------------
confer any rights or remedies on any person not a party to this Agreement.
24. Settlement Agreement. The parties hereto acknowledge that the
--------------------
Settlement Agreement dated April 24, 1998, as may be amended, by and among the
Company, ASSI, Inc., NCD, Inc., the Boston Group, L.P., Vincent J. Bitetti,
Ulrich E. Gottschling, Mark A. James, and Robert Kalik (the "Settlement
Agreement") and all documents related to the Settlement Agreement (except for
the Employment Agreement, which shall be terminated as provided herein) remain
in full force and effect.
[Signature Page Follows]
11
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Separation Agreement
on the date set forth herein.
Sound Source Interactive, Inc.,
a Delaware corporation
By:
Eugene Code, Secretary
Sound Source Interactive, Inc.
a California corporation
By:
Eugene Code, Secretary
Vincent J. Bitetti
12
<PAGE>
Schedule 5(a)
Benefits
1. AUTOMOBILE as set forth in Section 3(c) of the Employment Agreement.
2. LIFE INSURANCE as set forth in Section 3(d) of the Employment Agreement.
3. EXPENSES as set forth in Section 3(e) of the Employment Agreement.
4. BENEFIT PLANS as set forth in Section 3(f) of the Employment Agreement.
5. VACATIONS, HOLIDAYS AND SICK LEAVE as set forth in Section 3(g) of the
Employment Agreement.
6. KEY MAN LIFE INSURANCE as set forth in Section 3(i) of the Employment
Agreement.
7. ADDITIONAL CASH COMPENSATION as set forth in Section 3(b) of the Employment
Agreement. Any calculation of revenue, gross profits or pre-tax profitability
pursuant to Section 3(b) of the Employment Agreement shall not include revenue,
gross profits or pre-tax profitability realized by the Company arising out of
assets acquired pursuant to any stock or asset purchase.
8. COST OF LIVING ADJUSTMENT to Base Salary as set forth in Section 3(a) of the
Employment Agreement.
13
<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, 1999 THROUGH SEPTEMBER
30, 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 267,500
<SECURITIES> 0
<RECEIVABLES> 974,443
<ALLOWANCES> (15,872)
<INVENTORY> 468,332
<CURRENT-ASSETS> 3,361,236
<PP&E> 727,579
<DEPRECIATION> (509,457)
<TOTAL-ASSETS> 3,592,587
<CURRENT-LIABILITIES> 4,067,917
<BONDS> 0
0
0
<COMMON> 5,879
<OTHER-SE> (2,321,383)
<TOTAL-LIABILITY-AND-EQUITY> 3,592,587
<SALES> 1,294,313
<TOTAL-REVENUES> 1,294,313
<CGS> 737,497
<TOTAL-COSTS> 1,003,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,143
<INCOME-PRETAX> (461,650)
<INCOME-TAX> 800
<INCOME-CONTINUING> (462,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (462,450)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
