<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, 2000
------------------
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
November 10, 2000 was 10,661,796.
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___XXX____
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999
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, 2000 3
Condensed Consolidated Statements of Operations - Three month
periods ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Three month
periods ended September 30, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Special Considerations 12
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 13
</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, 2000
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash and cash equivalents $ 365,562
Accounts receivable - net 974,320
Inventory - net 451,876
Prepaid royalties 627,737
Prepaid expenses and other 428,200
Software development costs 2,237,822
------------
Total current assets 5,085,517
Property and equipment - net 148,859
Other Assets 13,733
------------
TOTAL ASSETS $ 5,248,109
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 1,453,926
Accrued royalties 1,226,492
Current portion of capital lease obligations 3,019
Deferred revenue 2,253,271
------------
Total current liabilities 4,936,708
Long Term Liabilities
Capital lease - long term 4,024
Deferred revenue - long term 3,855,000
------------
Total Liabilities 8,795,732
Stockholders' Deficit:
Common stock - $.001 par value, 20,000,000 shares
authorized, 10,661,796 shares issued and
outstanding 10,662
Warrants 559,928
Additional paid-in capital 15,736,509
Accumulated deficit (19,854,722)
------------
Total stockholders' deficit (3,547,623)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,248,109
============
</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>
2000 1999
---- ----
<S> <C> <C>
Net revenues $1,235,819 $1,294,313
Cost of sales 495,943 737,497
---------- ----------
Gross profit 739,876 556,816
---------- ----------
Operating costs and expenses:
General and administrative 393,998 394,084
Research and development 249,603 329,605
Sales and Marketing 154,531 279,634
---------- ----------
Total operating costs and expenses 798,132 1,003,323
Operating loss (58,256) (446,507)
Other income (expense) 211,925 (15,143)
---------- ----------
Income (loss) before provision for income taxes 153,669 (461,650)
Provision for income taxes 0 800
---------- ----------
Net income (loss) $ 153,669 $ (462,450)
========== ==========
Basic income (loss) per common share $ 0.02 $ (0.08)
========== ==========
Diluted income (loss) per common share $ 0.02 $ (0.08)
========== ==========
Weighted average number of common
shares outstanding - Basic 6,944,405 5,885,406
========== ==========
Weighted average number of common
shares outstanding - Diluted 6,984,802 5,885,406
========== ==========
</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>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 153,669 $(462,450)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 26,741 38,625
Changes in operating assets and liabilities:
Accounts receivable (699,072) (383,050)
Inventories (242,160) (138,964)
Prepaid royalties (16,462) (150,152)
Prepaid expenses and other (347,332) (10,505)
Software development costs (921,020) -
Accounts payable and accrued expenses (331,369) (32,872)
Accrued Interest 0 (750)
Accrued royalties (69,223) (183,118)
Capital leases (1,006) 12,074
Deferred revenue 1,253,648 520,895
----------- ---------
Net cash used by operating activities (1,193,586) (790,267)
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment (31,079) (11,473)
Other Assets 0 3,533
----------- ---------
Net cash used from investing activities (31,079) (7,940)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,425,000 10,775
Payments on capital lease obligations 0 (711)
Short terms advances 0 198,500
----------- ---------
Net cash provided by financing activities 1,425,000 208,564
----------- ---------
Net change in cash and cash equivalents 200,335 (589,643)
Cash and cash equivalents, beginning of period 165,227 857,143
----------- ---------
Cash and cash equivalents, end of period $ 365,562 $ 267,500
=========== =========
Supplement disclosure of cash flow information -
Cash paid during the period for:
Interest $ 549 $ 9,273
=========== =========
Income taxes $ 0 $ 0
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
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.
Accounts Receivable
--------------------
As of September 30, 2000, $298,497 or 30.6 percent and $259,456 or 26.6 percent
of the net accounts receivable balance is due from Navarre and Toys R Us,
respectively
Determination of Earnings (Loss) Per Share Computation
------------------------------------------------------
During the three-month period ended September 30, 1999, the Company incurred a
loss from operations. Accordingly, all potentially dilutive incremental shares
are antidilutive and were therefore excluded from the computations of EPS.
During the three-month period ended September 30, 2000, options to purchase
52,789 shares of common stock are included in the above diluted earnings per
share computation for the three month period ended September 30, 2000. Options
to purchase 168,931 shares of common stock were excluded from the above diluted
earnings per share computation for the three month period ended September 30,
2000 as their inclusion would have been anti-dilutive.
Stockholder Equity
------------------
On September 8, 2000, the Company and TDK USA Corporation ("TDK USA") entered
into a common stock purchase agreement (the "Purchase Agreement"), pursuant to
which TDK USA agreed to purchase, and the Company agreed to sell, a total of
16,667,000 shares of the Company's common stock for the purchase price $.30 per
share and an aggregate purchase price of $5,000,100. The Purchase Agreement
contains customary representations, warranties, covenants, and conditions. Upon
the execution of the Purchase Agreement, TDK USA acquired 4,750,000 shares of
the Company's common stock for an aggregate purchase price of $1,425,000 (the
"Initial Closing"). Pursuant to the Purchase Agreement, TDK USA has agreed to
purchase an additional 11,917,000 shares of common stock for an aggregate
purchase price of $3,575,100 (the "Subsequent Closing"). The Subsequent Closing
is subject to the satisfaction of certain conditions, including: (i) the filing
of amendments to the Company's Certificate of Incorporation (the "Charter
Amendment") to (a) change the name of the Company to "TDK Mediactive, Inc." and
(b) increase the number of shares of Common Stock the Company is authorized to
6
<PAGE>
issue from 20,000,000 to 50,000,000 and (ii) (a) the resignation of each of
Richard Azevedo, Mark A. James and Samuel L. Poole as directors of the Company
and (b) the resulting vacancies having been filled by the remaining directors
appointment of nominees designated by TDK USA. In the event that the directors
described above shall not have resigned as of the Subsequent Closing, TDK USA
may waive such condition and execute a Written Consent of Stockholders of the
Company for the purpose of removing from office those directors and electing in
their place the TDK USA nominees. There can be no assurance that all of the
conditions will be satisfied and that the Subsequent Closing will occur on the
terms set forth herein or at all.
Following the consummation of the Initial Closing, TDK USA became the Company's
largest stockholder owning approximately 45 percent of the outstanding Common
Stock. Upon the consummation of the Subsequent Closing and based upon the number
of shares of Common Stock currently outstanding, TDK will own approximately 74
percent of the outstanding Common Stock.
Simultaneous with the Initial Closing, the Company and TDK USA entered into a
registration rights agreement pursuant to which the Company granted to TDK USA
certain registration rights with respect to the Common Stock purchased and owned
by TDK USA pursuant to the Purchase Agreement.
Furthermore, simultaneous with the Initial Closing, the Company, TDK USA and
Vincent J. Bitetti entered into a lock-up agreement, whereby Mr. Bitetti agreed
to certain limitations on his rights to sell or otherwise transfer any Common
Stock that he now owns or may acquire from the Company pursuant to options that
he now holds.
Subsequent Event
----------------
On November 3, 2000, the Company entered into a Loan and Security Agreement with
TDK USA, whereby TDK USA agreed to loan to the Company up to $1,000,000 on an
as-needed basis to be utilized for working capital purposes. To secure its
obligations under the Loan and Security Agreement, the Company granted TDK USA a
security interest in certain personal property consisting primarily of amounts
advanced to the Company by TDK Europe. Borrowings under the Loan and Security
Agreement will bear interest at the prime rate, and will be due on the earlier
of March 31, 2001 and the date of the Subsequent Closing under the Purchase
Agreement between the Company and TDK USA described above. In lieu of requiring
repayment of the loan in cash, TDK USA may, at its sole option, instruct the
Company to apply the outstanding principal balance of and all accrued but unpaid
interest on the loan toward TDK USA's payment for common stock of the Company on
the date of the Subsequent Closing pursuant to the Purchase Agreement.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the unaudited
interim condensed consolidated financial statements and notes thereto included
in Item 1 of this Quarterly Report.
CAUTIONARY STATEMENTS
From time to time, in written reports and oral statements, management may
discuss its expectations regarding the Company's future performance. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies or other
actions taken or to be taken by the Company, including the impact of such plans,
strategies or actions on the Company's results of operations or components
thereof, projected or anticipated benefits from operational changes,
acquisitions or dispositions made or to be made by the Company, or projections,
involving anticipated revenues, costs, earnings or other aspects of the
Company's results of operations. The words "expect," "believe," "anticipate,"
"project," "estimate," "intend" and similar expressions, and their opposites,
are intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance but rather are based on
currently available competitive, financial, and economic data and management's
operating plans. These forward-looking statements involve risks and
uncertainties that could render actual results materially different from
management's expectations. Such risks and uncertainties include, without
limitation, the availability of capital to fund operations, including
expenditures for new equipment, risks related to the Company's ability to
successfully implement its revised business strategy, the loss of significant
customers and contracts, and other risk factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission,
including those set forth below under "Special Considerations."
All statements herein that are not statements of historical fact are forward-
looking statements. Although management believes that the expectations reflected
in such forward-looking statements are reasonable, there can be no assurance
that those expectations will prove to have been correct. Certain other important
factors that could cause actual results to differ materially from management's
expectations ("Cautionary Statements") are disclosed in this Report. All written
forward-looking statements by or attributable to management in this Report are
expressly qualified in their entirety by the Risk Factors and Cautionary
Statements. Investors must recognize that events could turn out to be
significantly different from what management currently expects.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Net Revenues. Net revenues decreased slightly by 4.5 percent from $1,294,313
for the three months ended September 30, 1999 to $1,235,819 for the three months
ended September 30, 2000. Sales for this period are largely due to revenues
generated from the Company's first release on the Sony Playstation console
platform entitled "The Land Before Time: Return to the Great Valley", accounting
for $305,242 or 24.7 percent of net sales and the continued revenue generated
from previously released CD ROM "Land Before Time" titles, totaling $373,061 or
30.19 percent of net sales for the three month period ended September 30, 2000.
8
<PAGE>
The Company's video game business has been funded largely via a series of
advances from TDK Recording Media Europe ("TDK Europe"). Net sales for the
three months ended September 30, 2000 also included revenue of $212,500 from TDK
Europe, representing a non-refundable contract guarantee against the Company's
international republishing and distribution agreement. The Company has
recognized revenue only when certain milestones and passage of time have
occurred. The Company has $6,080,000 in deferred revenue at September 30, 2000
related to these agreements. The agreement with TDK Europe extends through
February 28, 2005. The Company has established a reserve for product returns
that it believes to be adequate based upon historical return data and its
analysis of current customer inventory levels and sell through rates.
Cost of Sales. Cost of sales as a percentage of net sales decreased to 40.1
percent from 57.0 percent during the three months ended September 30, 2000 as
compared to the three months ended September 30, 1999. This decrease is
primarily due to (a) the Company's change to direct distribution and (b) the
Company's concerted effort to hold down product costs and closely monitor
related manufacturing costs. On March 14, 2000, the Company entered into a
national sales representation agreement with Strategic Marketing Partners, a
leading manufacturers product representation firm. Simultaneously, the Company's
exclusive distribution agreement with Macmillan Digital Publishing was
terminated. Macmillan's capabilities (sales and distribution) do not include the
ability to sell or distribute video game software as contemplated by the
Company. The Company's VP of National Sales will manage the Strategic Marketing
Partners sales force and the Company intends to sign up retailers and
independent (non-exclusive) distributors as necessary.
General and Administrative. General and administrative expenses remained
relatively unchanged for the three months ended September 30, 1999 as compared
to the three months ended September 30, 2000. During the current period,
expenditures related to payroll and professional fees increased slightly and
were offset by decreases in recorded depreciation expenses.
Research and Development. Research and development costs decreased by 24.3
percent from $329,605 during the three months ended September 30, 1999 to
$249,603 for the three months ended September 30, 2000, and decreased as a
percentage of sales from 25.4 percent to 20.2 percent, respectively. The
decrease in costs is primarily attributable to a reduction in the number of new
products released as compared to that of the prior comparable period.
Sales and Marketing. Sales and marketing expenses decreased by 44.7 percent
from $279,634 for the three months ended September 30, 1999 to $154,531 for the
three months ended September 30, 2000, and decreased as a percentage of sales
from 21.6 percent to 12.5 percent, respectively. This decrease is primarily
due to the transition period following the signing of Strategic Marketing
Partners as the Company's national sales representative. We anticipate
marketing and sales expenses to increase as the Company becomes more active in
the release of its new game console platform releases and related promotion
efforts.
Other Income (Expense). Other income increased from an expense of $15,143 for
the three months ended September 30, 1999 to income of $211,925 for the three
months ended September 30, 2000. This increase in other income is largely due to
a settlement with Macmillan Digital Publishing (MDP) in regards to claims that
the Company owed MDP for sales returns of which the Company disputed. The
Company accrued $660,972 at June 30, 2000 for this sales returns reserve. The
Company has reached an agreement with MDP to settle the outstanding returns
claim made by MDP in the amount of $450,000, thereby recording $210,972 of other
income.
9
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Quarterly Results of Operations
The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including the size and rate of
growth of the consumer software market, market acceptance of the Company's
products and the licenses upon which they are based and those of its
competitors, development and promotional expenses relating to the introduction
of new products or new versions of existing products, product returns, changes
in pricing policies by the Company and its competitors, the accuracy of
retailers' forecasts of consumer demand, the timing of the receipt of orders
from major customers, and account cancellations or delays in shipment. The
Company's expense levels are based, in part, on its expectations as to future
sales and, as a result, operating results could be disproportionately affected
by a reduction in sales or a failure to meet the Company's sales expectations.
Seasonality
The consumer software business traditionally has been seasonal. Typically, net
sales are the highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern is
due primarily to the increased demand for consumer software during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect seasonality.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had working capital of $148,809 in
comparison to a negative working capital amount of $1,363,022 at June 30, 2000.
Cash and cash equivalents also increased by $202,335 as a result of advances
being received from TDK Europe representing non-refundable contract guarantees
pursuant to the Company's international republishing and distribution agreement
with TDK Europe.
The Company continues to search for new opportunities to obtain licenses and
develop and sell products. Additionally, the Company has expanded from the
Personal Computer Platform to embrace Dedicated Game Console Platforms such as
Sony PlayStation and is seeking new distributors and innovative ways to deliver
its products to consumers, most of which will require large up-front cash
resources. If the Company enters into agreements relating to such business
opportunities in the future, the Company will require additional financing to
fund its growth.
The Company has augmented its product offerings to include Sony Playstation and
Nintendo Game Boy to enable the Company to compete in the video game market
place and raise the level of sales to sufficiently fund operations. During the
fiscal year 2000, cash flow activity from operations show that the Company had
invested $921,020 in prepaid software development costs on newly released and
upcoming titles. In 1999, the Company signed an agreement with TDK Europe a
global electronic components manufacturer with a distribution division of
children's consumer software. TDK Europe has provided $1.475 million in the
current fiscal year in accordance with this agreement and a new contract was
signed in February 2000 for expanded future TDK Recording Media development and
distribution.
10
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On September 8, 2000, the Company and TDK USA entered into the Purchase
Agreement, pursuant to which TDK USA agreed to purchase, and the Company agreed
to sell, a total of 16,667,000 shares of the Company's common stock for the
purchase price $.30 per share and an aggregate purchase price of $5,000,100. The
Purchase Agreement contains customary representations, warranties, covenants,
and conditions. Upon the execution of the Purchase Agreement, TDK USA acquired
4,750,000 shares of the Company's common stock for an aggregate purchase price
of $1,425,000 (the "Initial Closing"). Pursuant to the Purchase Agreement, TDK
USA has agreed to purchase an additional 11,917,000 shares of common stock for
an aggregate purchase price of $3,575,100 (the "Subsequent Closing"). The
Subsequent Closing is subject to the satisfaction of certain conditions,
including (i) the filing of amendments to the Company's Certificate of
Incorporation (the "Charter Amendment") to (a) change the name of the Company to
"TDK Mediactive, Inc." and (b) increase the number of shares of Common Stock the
Company is authorized to issue from 20,000,000 to 50,000,000 and (ii) (a) the
resignation of each of Richard Azevedo, Mark A. James and Samuel L. Poole as
directors of the Company and (b) the resulting vacancies having been filled by
the remaining directors appointment of nominees designated by TDK USA. In the
event that the directors described above shall not have resigned as of the
Subsequent Closing, TDK USA may waive such condition and execute a Written
Consent of Stockholders of the Company for the purpose of removing from office
those directors and electing in their place the TDK USA nominees. There can be
no assurance that all of the conditions will be satisfied and that the
Subsequent Closing will occur on the terms set forth herein or at all.
Following the consummation of the Initial Closing, TDK USA became the Company's
largest stockholder owning approximately 45 percent of the outstanding Common
Stock. Upon the consummation of the Subsequent Closing and based upon the number
of shares of Common Stock currently outstanding, TDK will own approximately 74
percent of the outstanding Common Stock.
Simultaneous with the Initial Closing, the Company and TDK USA entered into a
registration rights agreement (the "Registration Rights Agreement") pursuant to
which the Company granted to TDK USA certain registration rights with respect to
the Common Stock purchased and owned by TDK USA pursuant to the Purchase
Agreement.
Furthermore, simultaneous with the Initial Closing, the Company, TDK USA and
Vincent J. Bitetti entered into a lock-up agreement, whereby Mr. Bitetti agreed
to certain limitations on his rights to sell or otherwise transfer any Common
Stock that he now owns or may acquire from the Company pursuant to options that
he now holds.
The Company has relied substantially on TDK Europe advances within the current
year in order to meet its cash obligations. TDK USA has agreed to fund all cash
shortfalls during the current fiscal year.
On November 3, 2000, the Company entered into a Loan and Security Agreement with
TDK USA, whereby TDK USA agreed to loan to the Company up to $1,000,000 on an
as-needed basis to be utilized for working capital purposes. To secure its
obligations under the Loan and Security Agreement, the Company granted TDK USA a
security interest in certain personal property consisting primarily of amounts
advanced to the Company by TDK Europe. Borrowings under the Loan and Security
Agreement will bear interest at the prime rate, and will be due on the earlier
of March 31, 2001 and the date of the Subsequent Closing under the Purchase
Agreement between the Company and TDK USA described above. In lieu of requiring
repayment of the loan in cash, TDK USA may, at its sole option, instruct the
Company to apply the outstanding principal balance of and all accrued but unpaid
interest on the loan toward TDK USA's payment for common stock of the Company on
the date of the Subsequent Closing pursuant to the Purchase Agreement.
11
<PAGE>
The Company's factoring agreement with Silicon Valley Financial Services, a
division of Silicon Valley Bank, provides the Company with borrowing
availability of up to 85 percent of the Company's qualified gross domestic
accounts receivable, not to exceed $1,500,000 in the aggregate, at a rate of
1.75 percent per month of the average gross daily factoring account balance. The
credit agreement is renewed annually and is secured by all the assets of the
Company. The agreement expired on September 30, 2000. The Company had no
outstanding borrowings under the agreement and is in the process of obtaining a
renewal through September 30, 2001.
SPECIAL CONSIDERATIONS
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 abandon 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 at
September 30, 2000.
Competition. The market for the Company's consumer software products is
intensely and increasingly 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 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 amount of 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.
12
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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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Purchase Agreement, dated as of September 8, 2000, by and
between Sound Source Interactive, Inc. and TDK USA Corporation
(incorporated by reference to Exhibit 10.1 to the Form 8-K
report of Sound Source Interactive, Inc., dated September 8,
2000, filed with the SEC on September 15, 2000 (the "September
8, 2000 8-K).
10.2 Lock-Up Agreement, dated as of September 8, 2000, by and among
Sound Source Interactive, Inc., TDK USA Corporation and Vincent
J. Bitetti (incorporated by reference to Exhibit 10.2 to the
September 8 2000 8-K).
10.3 Registration Rights Agreement, dated as of September 8, 2000, by
and between Sound Source Interactive, Inc. and TDK USA
Corporation (incorporated by reference to Exhibit 10.3 to the
September 8, 2000 Fork 8-K).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly period
ended September 30, 2000:
Current Report on Form 8-K, dated September 8, 2000 and filed September 15, 2000
to report that the Company had entered into a stock purchase agreement with TDK
USA, pursuant to which TDK USA agreed to purchase 16,667,000 shares of the
Company's common stock.
13
<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: November 13, 2000
---------------------- -----------------
Vincent J. Bitetti
Chairman and Interim Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jeffrey Court Date: November 13, 2000
---------------- -----------------
Jeffrey Court
Vice President of Finance and,
Acting Chief Financial Officer
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